Abbreviations and initialisms – don’t you just love them?
In our jargon buster this week, let’s look at a few well-known initialisms: CSR, ESG & GRI.
“The idea that a company should be interested in and willing to help society and the environment as well as be concerned about the products and profits it makes” – Cambridge Dictionary
The concept of CSR or Corporate Social Responsibility has been around for many years. Since (and probably before) Milton Friedman wrote his famous essay proclaiming that “The Social Responsibility of Business is to Increase Its Profits” – there has been an ongoing discussion about what exactly the role and responsibility of business is and should be in society.
The role of CSR in today’s society
A lot has happened over the past decades, but, much to the frustration of many CSR and sustainability professionals nowadays (us included), the responsibility of business is often still considered to be limited to compliance to environmental regulations to do-no-harm, combined with some additional doing-good with increased brand reputation in return.
But as we’ve gained more understanding of the wicked problems our world is facing, such as climate change and wealth inequality to name but a few, so has our understanding of the key role that businesses and their core operations play. And thankfully, the idea that a business serves not just its shareholders, but a variety of stakeholders, is gaining traction.
Originally, CSR developed from the recognition that on top of providing products and services, the activities of businesses have other effects on society and as such, a business should aim to be a good ‘corporate citizen’.
That said, the “on top of” is the interesting part of that sentence. Thanks to Friedman and free-market capitalism, for a long time it’s been generally accepted that a business first needed to be in a (financial) position that would then allow them to give back to society.
CSR a side or the main dish?
Even now, CSR efforts are often associated with larger companies involved with charity and giving donations, or setting up employee programs like volunteering or adopting recycling programs in the office.
But nowadays, how businesses engage and practice Corporate Social Responsibility varies immensely. At its best, we can celebrate businesses aligning sustainability with their business strategy, like Unilever’s Sustainable Living Plan. At its worst, it’s greenwashing (we’ll dive into that in a later blog).
Given that any activity a business engages in will have some sort of effect on the environment, society and in the economy, shouldn’t a business be responsible for those effects by default? If we can agree on that, it naturally follows that it should be concerning itself with operating in ways that don’t have a negative impact, and preferably a positive, regenerative impact in all three domains. Call it CSR or not.
Although the discussion continues and the idea of what Corporate Responsibility is has grown and matured, there currently isn’t just one way to practice CSR. As such, it has become a bit of an empty term. On top of that, CSR activities are usually self-monitored.
Talking about self-monitoring: in comes ESG, short for Environmental and Social Governance.
Where CSR is about making a business responsible and accountable for its activities, ESG makes this measurable and (to an extent) quantifiable through a set of standardized criteria, with KPI’s and metrics.
“Environmental, social, and governance; a way of judging a company by things other than its financial performance, for example its policies relating to the environment and how happy its employees are” – Cambridge Dictionary
ESG criteria actually developed from the investor side of business, to help better assess risks and potential returns in three non-financial categories.
E for Environmental
Environmental criteria include things like a company’s use of renewable energy, waste management, how it handles potential problems of air or water pollution arising from its operations, deforestation issues, and the company’s attitude and actions in relation to climate change issues.
S for Social
Social criteria cover a lot of ground, but in essence, they are about relationships. The criteria reflect a company’s policies, practices and impact with regard to the people with whom it interacts. Think fair pay, employee development, health & safety regulations, and retirement plans, diversity and inclusion policies, as well as customer service, and supplier-vendor relations.
G for Governance
Governance is about how the business is led and managed in the C-suite. Is information shared transparently and fully, are there board members that have conflicts of interest, and what about high compensations and bonuses for execs?
ESG seeks to measure and report on all of this. Measuring and reporting on ESG criteria is still quite a young field, and there are several frameworks for doing so.
The most well-known framework is the GRI standards, (Global Reporting Initiative – yay, another abbreviation), which offers comprehensive disclosure guidelines for sustainability reporting.
Sometimes it’s easy to forget but investors are often also actual humans, just like you and me (It really is an amazing discovery). And better yet, not all humans care solely about maximizing profits.
There have always been investors that would not put their money in weapons or tobacco, or in companies that support some political regime. Instead, they would seek out socially responsible businesses that were in line with their personal ethics and values. And with more millennials investing, this group only appears to be growing.
The business case for CSR
These socially conscious investors were, for a long time, considered to be accepting a lower return on their investment as a trade-off for their ethics, as they broke with Friedman’s widely accepted argument that social responsibility would have a negative effect on financial performance. But, actually, around the 2000s, research was starting to indicate otherwise, demonstrating that businesses that actively engaged in CSR practices, had more satisfied employees, leading to higher productivity and efficiency, and thus a better financial performance.
And although it may not be as shiny as those intrinsically driven, socially conscious investors – topics like climate change, human rights issues and data handling are now – unfortunately – quite simply also risk factors that impact the future financial performance of a business. Altogether, more and more investors are expecting businesses to behave and act responsible, and assess this by taking ESG criteria into account when assigning their assets for the longer term.
Future Proof Businesses communicate transparently
The growing demand for transparency, as well as the call to report and communicate about what a business is doing to manage and improve on ESG topics from investors, consumers and other stakeholders, are a powerful external driver that help push sustainability and CSR into many a boardroom, mitigating risks but also looking for opportunities that can come from embedding sustainability into the core business strategy, operations and products and services.
And you know what? That’s some pretty good news.