Corporate social responsibility and shareholder value

Dr Craig Mackenzie


Posted in: Guest Writers, Speaking Out, Sustainable Investment

Corporate social responsibility and shareholder value

August 01, 2000

There is a wave of change afoot in the investment community. Some of the City’s largest institutions have announced policies to address the corporate social responsibility (CSR) of the companies they invest in. Companies might start to find their biggest shareholders pushing them to improve their CSR performance. Why is this? What are the consequences, particularly for the CSR_professional?

Drivers of change

Investors are only just beginning to understand that CSR issues influence shareholder value. In a speech at this year’s National Association of Pension Funds investment conference, I asked how many members of the audience had read a corporate environmental report in the last year. From several hundred representatives of Britain’s largest investment institutions, only one hand went up.

In one sense this should come as no surprise. When did you last read a corporate report that detailed how environmental initiatives affect company earnings? Not recently, I’d guess. (Actually there are one or two – Baxter International ‘s is exemplary).

Yet whilst they may be ignorant about CSR, investors are not stupid. They pay attention to a serious ethical or environmental issue, with dramatic impact on the share price. When Perrier announced that its water was polluted with benzene, its share price fell by a third because investors judged that this would affect earnings. They were right. Perrier later estimated the incident cost $260 million.

Some investors are beginning to look at the relationship between CSR and shareholder value rather harder. In April, Friends Provident announced that it would adopt a CSR policy for all of its £30 billion investment funds. Why? As Keith Satchell, the CEO put it: ‘Good corporate practice on human rights, child labour and environmental pollution is good for society but it’s also good for shareholders. As a large investor it is right that we use our influence with companies to encourage responsible business practices while serving the financial interests of our customers.’

FP is not alone. In July a new regulation was introduced requiring some 10,000 occupational pension funds with a total of £800 billion of assets to state the extent to which they take account of CSR issues in investment. This is only a disclosure measure. Pension funds can continue to ignore CSR issues, if they choose. But a welcome number of the largest pension funds – including USS, BT and Sainsbury’s , have already announced positive initiatives. A recent study of the top 25 pension funds by the consultancy ERM, found that 21 are going to implement some kind of positive SRI policy. This is having fairly dramatic effects on the asset management houses that manage their money – Phillips & Drew and Schroders have announced intriguing policies on CSR issues and their investments.

Why are pension funds responding like this? First, surveys indicate that the vast majority of pension scheme members want their pension funds to address CSR issues. Second, the pressure groups have become interested: both Friends of the Earth and Amnesty International have launched campaigns. So some companies may prefer that their pension fund adopts a positive CSR policy to take them out of the firing line. Of course pension funds are legally separate entities from the companies that sponsor them, so sponsoring companies shouldn’t be in the firing line anyway. Unfortunately this is unlikely to deflect pressure group interest.


The most popular approach to CSR issues among investors is ‘engagement’. The new Friends Provident policy, for example, is based on the Responsible _ continued on page 26

Engagement Overlay (REO) service developed by Friends Ivory & Sime (FIS), FP’s asset management arm. REO is quite different to the ‘ethical investment’ funds that Friends Provident pioneered in the UK. Ethical investment funds avoid investment in companies involved in controversial ethical and environmental issues. REO will, instead, engage with such companies to support and encourage them in their efforts to respond to these challenges.

REO activity is conducted by a dedicated nine-person team of CSR specialists at FIS. They meet companies, trade associations, NGO’s and others to identify best practice models, and to assess the business case for their adoption. (Remember, FP is first and foremost a shareholder, and wants to see both CSR and earnings growth!) Once they have identified sensible best practice models, the REO team works with the companies FIS invests in to encourage progress towards best practice. For example, the REO team has met a number of UK clothing companies to discuss how they manage labour standards in their supply chain. FIS has been pleased with the positive and constructive response from most companies, one of which has introduced new policies as a result.

This approach should lead to much greater interaction between companies and their largest investors on these issues. This will not be universally welcome. Some corporate affairs executives tell me they would prefer rather less ‘engagement’ from the investment community. They are sick of filling in lengthy, obscure, sometimes bizarre questionnaires from ethical investor research organisations. There is a genuine problem here that needs to be addressed. We all want CSR staff to spend their time improving CSR performance, not filling out forms.

Fortunately the new engagement is not about ticking boxes, but about holding practical, forward-looking discussions about how individual companies are improving their management of difficult social and environmental issues.

The Turnbull effect

An important emerging area for discussion concerns the new Turnbull corporate governance requirements. Turnbull requires listed companies to establish systems to identify, evaluate and manage all of their major risks, not just their narrow financial risks. Turnbull is part of the corporate governance ‘Combined Code’. This makes it particularly relevant to investors who are supposed to be a primary driver of corporate governance compliance.

What has this got to do with CSR? Turnbull explicitly refers to the need to manage risks arising from environmental, health and safety, reputation and business probity issues. So for the first time, CSR issues are placed squarely on the corporate governance agenda of institutional investors, and become a focal point of their engagement activity in the medium term. I think this is both a powerful challenge and a huge opportunity for the CSR community. Why? Because one of the most effective ways to manage environmental, business probity and reputational risks is to have a strong CSR policy and management framework. For example, if you are a clothing retailer one of your biggest risks arises from the labour practices of your third world suppliers and their impact on your reputation and brand – as some sporting goods manufacturers have discovered. One of the best ways to manage these risks is to establish best practice CSR codes and management systems for your supply chain.

I think that in a post-Turnbull world CSR professionals become the guardians and managers of some of the biggest risks companies face today. This is a challenge because few CSR professionals are yet fluent in the language of risk management, and most companies have a long way to go to really understand the link between CSR issues and business risks, or how the CSR function creates long term value for shareholders.

But there is a huge opportunity for CSR professionals as well. When boards realise that their CSR managers are actually responsible for mitigating some of their biggest and nastiest risks, they may be more prepared to allocate the corresponding resources and authority to the CSR function. In this they may find unexpectedly strong support from the shareholders.

Corporate Citizenship Briefing, issue no: 53 – August, 2000