The Sustainability Imperative: Moving Beyond CSR
Climate change mitigation and calls for social change has remained high on the public agenda during the COVID-19 crisis, despite the global health emergency and economic recession. But what is the role of organisations in getting the economy restarted in a responsible way? And is it worth it?
CO2 emissions declined during the global lockdown while stories about rapidly declining pollution in megacities and animals entering lockdown-emptied urban spaces took central pages on news bulletins. The lower emission levels was a short-term development, as we have already returned to the pre-COVID-19 emissions trajectory¹. Nevertheless, the economic crisis sparked by the COVID-19 pandemic has been met with calls for a green reboot of the global economic system, including calls for legislation to promote more sustainable business models that reduce negative environmental and social footprints.
“Every action (and inaction) is being closely scrutinised to reduce opacity in business activities. Organisations can no longer hide in the crowd but need to be proactive and take a stance.”
Meanwhile, the call for social change has been reinforced by the Black Lives Matter movement spreading from the internet to the streets, first in the US and since, around the world. Yet, the continued push for social change, fuelled by the internet, appears to have a far more long-lasting impact. Every action (and inaction) is being closely scrutinised to reduce opacity in business activities. Organisations can no longer hide in the crowd but need to be proactive and take a stance.
The ‘sustainability imperative’ is a key trend shaping our future. In short, the sustainability imperative concerns how environmental and social sustainability is becoming a necessity for business on the same level as economic sustainability (and often a key foundation for creating exactly that). This development is largely based on increasingly value-driven citizen-consumers placing more focus on transparency, accountability, and the positive impact of the products and services they buy. While intentions do not always lead to action, the intention definitely exists, and organisations do feel the pressure of becoming more sustainable. However, corporations are also faced with difficulties and dilemmas to meet these demands: How to measure Corporate Social Responsibility’s (CSR) impact on the bottom line and society? And does it work?
MOTIVATIONS BEHIND CSR. One dilemma for corporations is that consumers often point to big corporations and demand a change in their way of doing business. When businesses then actually succumb to the pressure, consumers do not always want to pay the added cost. The dilemma for companies is that CSR can easily just be another expression of a loser’s deal. If cost cannot be recovered in the market, companies must cover the cost themselves, which can destroy margins and Total Shareholder Return (TSR) for publicly traded corporations. In the long run, reducing TSR will not be tolerated by the owners of the company — the shareholders. Management can end up being replaced lest the company be outcompeted by less CSR-focused and more margin-focused companies. In the end, this can offset some of the positive results created by the CSR initiatives. But it does not have to be this way.
There are at least three ways in which CSR can contribute to improving performance, create growth, and align an organisation’s social and environmental activities with its values and overall purpose².
LIMIT RISKS. CSR can be a risk mitigation tool to serve as a defence against consumer backlash. By ensuring compliance, building in auditing processes, and maintaining high standards, a company can protect itself against misconduct.
IMPROVE REPUTATION. A good, sustainability-focused reputation can help the company reach new customers and avoid boycotts. However, companies with a strong CSR profile paradoxically may be particularly exposed to bad publicity as well. Also, organisations join initiatives such as sustainability certifications or networks, where new partnerships can be forged and legitimacy in the public eye can be gained.
IMPACT OUTCOMES. With the help of CSR, companies can find new ways of doing business, optimise production and supply chains, and recover costs through greater efficiency. Examples include the environmental benefits of energy savings recovering the cost of installing energy-saving technologies many times over, the use of recycled materials, and the social aspects of improving conditions for workers, which can boost employee morale and attract and retain talent. Acting responsibly can also be a beneficial innovation challenge, where, for example, using circular economy concepts can lead to the reimagination of products and services. However, the million-dollar question is whether CSR actually provides positive net results.
Risks: Protect against boycotts and misconduct
One of the greatest risks to companies not practicing CSR or not living up to claimed actions is consumer boycotts. Boycotts of businesses may sound like a new practice, but it took place as early as 1791, where the Quaker-led free-produce movement, an international boycott of slave-produced goods, protested against ‘slave sugar’ (slave-produced sugar)³. Following the British Parliament’s refusal to abolish slavery, a boycott was launched targeting Britain’s largest slave-produced sugar importers, which led to a steep decline in the sales of slave sugar of up to 50 percent⁴. Meanwhile, sales of slave-free sugar from the West Indies increased by tenfold in only two years.
As with today’s boycotts, consumers back then understood that it was the demand for rum, cotton, tobacco, coffee, and sugar that kept the slave trade going, and that change could happen by affecting demand. Naturally, there was opposition as well since the abolishment of slavery caused prices to increase substantially. According to the Walk Free Foundation, 40 million people lived in modern slavery in 2016⁵. Many of the principles of achieving social change by way of boycott are the same today as it was in 1791. It involves raising moral indignation against an unjust circumstance and applying a boycott to pressure a company’s or a group of companies’ reputations in order to force a change, eventually, on their bottom line.
CSR done right can be an effective method to avoid boycotts, although boisterous statements of good societal behaviour can also backfire when misconduct is found. Furthermore, CSR initiatives can bolster processes and through internal auditing, issues can be flagged before they reach the public eye. Sometimes new regulation arises from measures such as sustainability certifications or other voluntary commitments. Therefore, a strong focus on CSR can prepare companies for potential future regulation and allow them to shift direction in due time, while knowledge sharing is also prevalent in these networks, such as the national Global Compact Networks⁶.
An example of this comes from Ferrero’s Nutella. In 2015, the French environmental minister, Segolene Royal, urged the public to stop eating the hazelnut-cocoa spread, claiming its production was destroying the environment. In fact, Nutella uses 100 percent sustainably sourced palm oil and is committed to no deforestation. This protected the company from a public and political firestorm and prompted an apology from the French minister⁷. By complying with the sustainability palm oil certification RSPO and making sure their supply chain was in order, Nutella mitigated potential risks and avoided damaging consumer backlash.
Reputation: Boost brand perception through financial performance
When a boycott campaign is accompanied by a social media firestorm (also known as a ‘shitstorm’), it can have profound negative impacts on the public perception of a brand, both in the short term and in the long term. Hansen, Kupfer, and Hennig-Thurau found that across 78 firestorm cases examined, 58.3 percent suffer from a decrease in short-term brand perceptions, and 40 percent face long-term negative effects. In fact, 24 percent of consumers remember the respective firestorm two years after the occurrence⁸.
The power of the consumers’ wallets matter and brand perception affects how the consumers’ money is spent. An international study by Unilever showed that a third of consumers prefer sustainable brands based on perception of good social or environmental behaviour. The vital difference between this survey and many other surveys asking consumers the same was that Unilever then mapped these claims against actual purchases. The result showed a lower degree of ‘sustainable brand’ purchases than claimed, but still as high as 30 percent⁹. Meanwhile, an overall conclusion from RepTrak’s 2020 edition of their Global Trends in Reputation report is that consumers want brands to be authentic, well-behaved, and to take a stand. Their findings showed that corporate reputation can be a driver for competitive advantage and brand differentiation for global consumers when they decide where to spend their money¹⁰.
In a study from 2004, Rose and Thomsen investigated the relationship between a firm’s financial performance and its reputation, finding that corporate reputation does not impact firm value besides being vital for the firm’s long-term survival. Rather, corporate financial performance serves to improve corporate reputation¹¹. Therefore, an important thing to note when discussing CSR and reputation is the question of causality related to CSR, reputation, and performance. Through being successful, a well-performing organisation might have more leeway for investing in CSR initiatives. Thereby, an improved reputation could originate from the good financial performance and not due to CSR.
Another critical element is that sometimes organisational actions end up offsetting each other, for instance when good behaviour is offset by harmful behaviour. This is known as ‘moral self-licensing’ and concerns how, for example, social initiatives sponsored by a company can lead to unethical employee performances later¹². As a form of ‘pre-emptive indulgence’, a good deed is paid forward for sins to be committed later, which is not ideal when dealing with CSR.
Results: Measuring CSR’s impact on the bottom line and society
So how does risk mitigation and a positive reputation translate into results? We are seeing an increasing trend towards sustainable investing, where concerns about sustainability are translating into action — what Eccles and Klimenko dubbed ‘The Investor Revolution’¹³. Quality of the board, cybersecurity, climate risks, and other key factors are increasingly being catalysed into an integrative approach, where the factors are analysed for how they impact financial value positively or negatively.
Even with an increasing focus on sustainability in society, we are still seeing socially irresponsible or so-called ‘sin stock’ investments in vice industries seeing experience returns. The Vitium Global Fund (formerly Vice Fund) invests in industries ranging from alcohol and tobacco to casinos and defence equipment manufacturers, usually seeking divided-paying stocks.
“As an ideal to strive for, TBL holds plenty of promise for the future… However, a key challenge of putting TBL into practice is still how to measure the social and environmental or ecological categories and the impact of those related to the financial bottom line.”
In recent decades, the triple bottom line (TBL) accounting framework has gained prominence as a way to measure organisational performance in a broader perspective. Standing on the shoulders of full cost accounting, the basic idea is to perform a full societal cost-benefit analysis instead of strictly considering ‘profit’ and ‘loss’. A corporation might be able to maintain a profit, but if their tankers leak oil into oceans and destroy natural habitats and people’s livelihoods, there is something more at stake. Also referred to as ‘People, Planet, and Profit’, TBL is about assessing not only the direct financial performance (profit) but instead to create greater business value through including a social (people) and an environmental / ecological (planet) metrics to more fully evaluate the organisation’s performance¹⁴.
A key difference from traditional accounting frameworks and a reason why it can be tricky for all organisations to turn to TBL is the fact that inherent in TBL is a demand that the organisation’s responsibility lies with the broad notion of stakeholders instead of shareholders. For instance, as a publicly traded company, it can be challenging to divert from maximising shareholder value, most famously promoted by General Electric CEO Jack Welch to be the key and sometimes sole reason for a company’s existence. Stakeholders encompass a broader base of actors, consisting of anyone who is either directly or indirectly influenced by the actions of an organisation. As an ideal to strive for, TBL holds plenty of promise for the future, where pure financial performance not accounting for increasing externalities could increase risks in the financial market — especially considering the trend towards sustainable investing.
However, a key challenge of putting TBL into practice is still how to measure the social and environmental or ecological categories and the impact of those related to the financial bottom line. How much weight should each carry, and how do you measure the protection of a native tribe’s land versus conversion to solar energy versus increased sales? Despite this conundrum, applying the TBL framework can enable organisations to move towards a more long-term-oriented approach and perspective, thereby making it possible to better evaluate the future consequences of today’s decisions. In other words, the goal is to internalise externalities into an accounting framework to assess the true outcomes of current performance more reliably.
DOES IT WORK THEN? If the SDGs and future global sustainability initiatives are to be achieved, organisations need to intensify their focus on CSR and contribute to improving the societies around them, committing to what Porter and Kramer referred to as creating ‘shared value’¹⁵. There is no way around it. If the goals set forth in the Paris Agreement are to be reached, governmental action is not enough. We need to see a great deal of organisations undergo radical business transformations that go beyond and above the traditional understanding of CSR. Regulators need to push for change, but still responsibility is going to fall on citizen-consumers and organisations to strive for reaching these goals.
Herein lies a problem. Even though we are seeing more and more consumers demanding brands to be sustainable, across industries, we have also been witnessing the escalation of ‘winner-takes-all’ markets. Starting in the last 50 years and accelerating in the age of the internet, the winner-takes-all refers to the phenomenon of a tremendous consolidation of businesses. In many industries, there are now only one or two dominant players, maintaining near monopoly-like market power. This does not bode well for consumers’ ability to push for change, since boycotts and thereby buying substitute products is rendered ineffective or even impossible.
This development falls back on governments and their ability to break up markets through regulation, a difficult thing to do in a world with multinational corporations. We saw a clear example in July 2020, when the heads of tech giants Google, Amazon, Facebook, and Apple stood in front of Congress for a hearing on antitrust, monopoly, and political bias, among other things. The idea of CSR needs to evolve. We all have a stake in the world we live in, and the sum of the parts is a result of how we live and the decisions we make. The questions need to change from whether CSR works on an individual company level in terms of profit and instead, whether it works for the planet and people and the global ecosystem.
Consumers, at least in some parts of the world, seem to be increasingly willing to put their money where their mouth is and buy sustainable. Simultaneously, measuring CSR could change in the future — we could experience increased transparency and accountability through Distributed Ledger Technologies (DLT) and new generations of demanding stakeholders. Also, better tools to evaluate CSR are easily imaginable as big data analytics, sensors, and AI develop. But this is just one part of the puzzle. Recently, calls for a renewal of TBL has been suggested, for example by replacing Profit with Prosperity, shifting the focus towards economic impact while raising the question of whether profit is a legitimate goal at all¹⁶.
Economic impact covers a broader scope of creating employment and innovation and paying taxes. While profit is necessary to keep organisations alive for the long term, it should be considered a means and not an end goal. This change could bring us closer to the core of the framework — maximising the positive impacts and minimising the negative impacts. The outcome of CSR is based on what is deemed desirable. It can help mitigate risks and improve reputations when done right, while mishaps can lead to boycotts and firestorms.
In terms of improving results, the intentions behind CSR have a big impact on how to evaluate the outcome. If the goal is to improve society and create better conditions for People, Planet, and Prosperity, the TBL can be used and create a competitive advantage. If financial performance is the only goal, CSR can be considered a matter of compliance and a license to operate.
The article was originally published in the Copenhagen Institute for Futures Studies’ SCENARIO Report “CSR in the Age of Compounded Crisis” (09/2020), which can be downloaded here: https://cifs.dk/p/csr-in-the-age-of-compounded-crises
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[4] Clare Carlile: “History of Successful Boycotts”. Ethical Consumer. bit.ly/2DsBdm9.
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[7] Stephanie Kirchgaessner: “Nutella spat: French minister says sorry over call to stop eating spread”. The Guardian. bit.ly/2XNdTq6.
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[12] Alina Dizik: “Why corporate social responsibility can backfire”. Chicago Booth Review. bit.ly/30I8Ith.
[13] Robert Eccles, Svetlana Klimenko: “The Investor Revolution”. Harvard Business Review. bit.ly/2DGc2MN.
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[15] Michael E. Porter, Mark R. Kramer: “Creating Shared Value”. Harvard Business Review. bit.ly/3kEWOsi.
[16] Jeroen Kraaijebrink: “What the 3Ps Of The Triple Bottom Line Really Mean”. Forbes. bit.ly/31ASaCR.
