CSR has been around for a long time now, at least thirty years. That’s longer than many of you who are reading this article have been in business; longer than some readers have been in life.It has made some significant progress in that time, going from a questionable business practice (at least according to some, especially in terms of return on investment) to being accepted by many as good for business, including the bottom line.
In this CSR-influenced world, companies in their thousands voluntarily report on the wide array of Global Reporting Initiative metrics. Perhaps that number is much greater – the official numbers don’t record all the companies using the framework. Tens of thousands of companies have not only signed up to the Global Compact, but also started to improve business practice as a result.
The EU ensured that the number of CSR reporters will increase, having passed legislation that will require at least 6,000 of Europe’s largest companies to report on CSR issues, to the extent the issues are relevant to each particular business. It’s likely that suppliers to those 6,000 will in turn be required to increase what they know about CSR, and their CSR reporting activities.
But with all of that progress, and there has been much, there is still a yawning gap between mainstream businesses (that tend to issue long CSR reports) and those that do CSR well. For the companies that do it well, much has been learned about how to make CSR happen, including from positive and painful experiences. For those that don’t do it well, it’s not too late to learn.
Leading companies, like Marks and Spencer and SAP, have learnt that chasing after the next social media storm (and trying to prevent it when it is negative) isn’t a productive way to strategically pursue CSR. They have learnt that trying to publish everything that anyone might be interested in has a very high cost base, and leaves the company not really knowing who cares about which aspects of CSR and why. And they have learnt that if CSR is to work, Executives must understand it and know how it connects to business.
A Brief History of CSR Reporting
CSR Reporting arguably started in 1972 with Abt & Associates, which included an environmental profit and loss report in their annual report. That strategy wasn’t quickly imitated, although some companies included various aspects of the CSR agenda, mostly environmental concerns. Presumably the motivation was to show that Abt & Associates understood the impact of their operations on the environment, and managed them responsibly. The environmental activism at the time largely focussed on damage being done by companies, who could be more profitable by leaving the clean-up costs of harm to someone else.
In 1989, Shell and Ben & Jerrys released reports that resemble the CSR reports we see now. The Global Reporting Initiative commenced in 1997, and the following year, a small number of companies used their framework to shape their CSR report. All sorts of groups have since jumped on the CSR reporting gravy train by issuing their own reporting frameworks or guides. All of which led companies (particularly the largest and most international ones) to keep adding to their CSR reports in order to try to respond to all of the voices that they thought were stakeholders of their business, or try to prevent a PR disaster. So as GRI’s reporting framework expanded, so too did the number of pages and disclosures in corporate CSR reports.
Not that companies were entirely happy with this state of affairs, but they didn’t see too many options other than to respond to the legitimate pressure from NGOs and activists around the world.
Fast forward to now, and we have literally thousands of CSR issues to consider. Some companies have embraced ever-expanding levels of transparency – and the evidence now seems to show that transparency on a wide range of metrics is linked to better financial performance. But other companies have grown frustrated at having to disclose things in their CSR reports that really aren’t relevant to their day to day operations.
Whatever the case, it seems that the CSR reporting ‘tail’ is set to stop wagging the CSR strategy ‘dog’ as companies finally start to come to terms with which issues they should approach and why. That’s partly because companies and stakeholders have become tired of the lack of overlap on CSR issues. But it’s also because all of the major CSR reporting players have shifted their focus to helping companies determine the most relevant CSR issues as a primary input to the process of CSR reporting.
Global Reporting Initiative - GRI
In 2013, GRI announced that companies could report on less CSR if they committed to reporting in more detail (and further into the supply chain) on the most relevant CSR issues. Much of the changes to GRI’s ubiquitous reporting framework were dealt with in the last issue of this magazine, but in short it means that companies need to have a clear and reportable process that helps them to identify CSR issues that are important for the business to manage well.
International Integrated Reporting Council - IIRC
The IIRC also issued its guidance on reporting in late 2013, and it also included a process for determining the most relevant CSR issues. In many ways, its framework is much looser than that of GRI, but with a focus on the value creation process wherever it occurs, it could be a deeper dive into the most relevant issues.
Sustainability Advisory Standards Board - SASB
SASB has taken a slightly different approach by trying to identify industry specific CSR issues for all companies in those industries. While their framework explicitly recommends companies have a process that helps them to determine the most relevant issues, they plan to produce 5-10 metrics for each industry that are most relevant to investors, and companies aren’t required to have their own processes for determining relevant issues.
With two out of three of the main frameworks focussing on a materiality process, it’s going to be very important to have a robust and defensible process in place.
Materiality, and Why it Matters
The adopted term for relevance in the CSR world is materiality. It has come to be shorthand for the most relevant and important CSR issues for any given company. Most materiality processes try to identify a company’s CSR impact from two perspectives; that of the company and those of external stakeholders. The most relevant issues are usually identified as those that are important to both.
Materiality matters because it is where the interests of the business and the interests of stakeholders intersect. Which is why it’s surprising that so few companies do it at all, or do it effectively. Only 23% of companies in the recent KPMG Survey of Corporate Responsibility Reporting (December 2013) indicated that they have any regular materiality assessment. That research was for some of the world’s largest companies, and there is little reason to suspect that smaller companies are even reaching that height.
Stakeholders, and Why They Matter
Marks and Spencer (M&S) has a relatively wide-ranging stakeholder engagement process in place, which they use to identify CSR issues that stakeholders care about. Their stakeholders include customers, employees, suppliers, investors, government and third sector organizations. Importantly, the relationships with stakeholders are owned by the people in the business who are closest to them. The CSR or ‘Plan A’ team usually just acts as a coordinator of the process. Each year, the Plan A team publishes the results of stakeholder engagement. Marks and Spencer believe that stakeholders matter for several reasons:
• They help to identify the CSR issues of the future.
• Stakeholders often have good ideas on how to solve some of the CSR issues that the business faces.
• Stakeholders can identify risks or opportunities that the business hasn’t thought about. Stakeholders have directly participated in several CSR innovations.
• Direct conversation about the issues creates trust, and can flag pain points for stakeholders that aren’t as sharply identified in other processes.
SAP engages with stakeholders for similar reasons, although SAP are more active in seeking challenging stakeholders as a way to include critical voices. They have also taken the unusual step of letting stakeholders (in their thousands) register their ‘vote’ on the issues they think are most important.
Stakeholders matter for all the reasons identified by SAP and M&S, but mostly stakeholders matter because they can have a very significant impact on reputation, trust, sales and the operating regulatory environment. Companies that don’t include stakeholders are potentially throwing away lots of benefits.
The key to getting the most value from stakeholder relationships is to understand the importance of CSR issues to such stakeholders. So the thousands of CSR issues can sensible be put on something of a spectrum of importance to stakeholders.
The Business Perspective and Why That Matters
Companies also need to look at CSR issues from a business perspective. By understanding their importance to the business, companies go a long way toward identifying the business case for CSR for their company, which will in turn change attitudes to CSR.
In order to achieve a realistic assessment of the impact of CSR issues, companies need to apply some of the same tools and methods that they already use to drive corporate behaviour, from risk frameworks to value creation analyses (including SWOT and PESTEL). Some of the CSR-specific business tools like Life Cycle Analysis or the emerging Value Chain analysis (central to IIRC’s process) are also very useful in determining the importance of issues to the business.
Understanding the Business Case for CSR has helped SAP to understand the internal relationships between line items on their profit and loss statement and various aspects of CSR. Their internal researchers have, for example, made direct connections between SAP improving its Environmental Management to increased Employee satisfaction scores, employee engagement and revenue.
That is something of an unusual approach to CSR, but it does highlight the importance of understanding not just the costs of CSR, but also the benefits associated. For SAP, it has utterly transformed things like the payback period required for investments in CSR, because for environmental projects they can add additional savings beyond direct cost benefits.
M&S’s understanding of its business case is virtually unparalleled. By tracking its investment in a very similar way to other projects within their operations, they have been able to calculate a very significant return on investment since their Plan A program began. By investing £40 million for each of five years in CSR, they now return more than 3 times that amount to the business annually, with many projects expected to have very long tail returns.
Though their numbers are already large, M&S haven’t included some soft benefits like increased employee motivation, explicitly stating that it isn’t the smartest thing to do. Telling your employees that you care about their motivation only because of productivity may destroy some of the goodwill that was created by behaving responsibly in the first place.
Over time, SAP has realised that stakeholder and business perspectives are more usefully considered together, which is why it no longer maintains separate registers of issues according to stakeholders and issues according to the business. Instead all issues are mapped on the same register.
Materiality – How to Make it a Game Changer
By targeting the CSR issues that are both important to the business and important to stakeholders, companies can leapfrog years in the CSR reporting wilderness. That’s not to say that by picking the top three issues that they can avoid expanding the number of issues they will ultimately need to manage. But it does recognise that using limited resources smartly by applying them to the most important issues first is a good way to succeed in CSR.
Have a Robust Process
In order to make Materiality a game changer, companies need to have a robust process, like the one identified in the next page. There needs to be reanalysis of the CSR landscape that leads to the prioritisation process. Embedding the priorities in the business takes lots of effort, but is a vital step if CSR is to pervade business as usual. Once it’s embedded then ongoing management becomes important, as does communicating what the company is doing on CSR. Many companies fail to communicate why they are tackling the CSR issues identified in reports, and that is one of the main sources of dull, irrelevant CSR reports.
Embed it inside the Business
Particular thought needs to be given on how to embed CSR issues into the business.M&S, by focussing on its stakeholders and connecting them directly to people in the business and maintaining ongoing conversations about CSR, have de-mystified and humanised the face of CSR. They also have a raft of KPIs and over 180 CSR-specific targets which are written into hundreds of performance review criteria for specific jobs.
Connect it Outside the Business
Connecting the outputs from the Materiality process, as shown in the diagram, will help the business to see value from CSR processes.SAP directly connect their materiality processes to external reporting, corporate governance, strategy setting, Board reporting and KPI setting. They are also using disciplines such as behavioural economics to measure their CSR initiatives and understand how much impact they have on things like employee motivation, capability building and the financial bottom line.
One of the key ways to use the process outside the business is to ensure that CSR reports deal with the most important issues, and don’t waste time talking about things that don’t matter.
By understanding the most relevant CSR issues – their materiality – companies can skip a generation of CSR professionals who got lost in the wasteland of wide disclosure on issues that weren’t particularly relevant.
Source: Responsible Business Magazine