Knowing which assessment criteria are being applied to grade your firm’s CSR performance will help it achieve a higher rating. As well, knowing which firms your company is being compared against will help it achieve a higher ranking. These authors describe how to translate good intentions into real results and improve your firm’s CSR performance.
Everyone judges companies. Whether you invest in them, buy from them, work for them, or just live near them, it is difficult not to form an opinion. The most visceral of all judgments pertain to the firm’s moral actions – the kind that either do great good or great harm to people. For example, Wal-Mart and The Gap both occupy the “low price” retail space, but earn two very different grades for their social responsibility.
Wal-Mart has been criticized vociferously for paying its employees just enough to keep them out of welfare line-ups, but not enough to keep them out of poverty. As well, the company has been accused of destroying the heart and soul of small communities by putting small retailers out of business. The list goes on to include blocking unionization, squeezing suppliers, and outsourcing jobs. Wal-Mart is estimated to have lost about 8 percent of its market share because of reactions to such practices from consumers. Maclean’s magazine recently published findings by Jantzi Research, one of Canada’s leading CSR research firms, that gave the retail giant only a “C+” on its social responsibility report card (Corporate Social Responsibility Report, Maclean’s, December 10, 2007).
The Gap, on the other hand, has taken the opposite approach, earning an “A” in the Maclean’s report. This retailer has been applauded for its corporate citizenship, through such actions as supporting African women and children with HIV/AIDS, monitoring the labour standards in its suppliers’ factories, and adopting progressive social and environmental initiatives including the donation of damaged clothing to be used as hospital rags.
Wal-Mart’s CSR picture, however, may not be all that bleak. Lee Scott, Wal-Mart’s CEO, is committed to ambitious environmental goals, including zero waste, 100% renewable energy, and environmentally friendly products. In 2007, the company released its first Sustainability Report and soon expects to launch a Supply Chain Sustainability Scorecard. So, why did Wal-Mart receive such low CSR grade if it was taking such environmental leadership among retailers?
Part of the answer lies in the calculation of the CSR ratings. Even if Wal-Mart was at the top of the environmental game, it would still rank below its competitors, with stronger records on social issues. Had Wal-Mart placed greater emphasis on its treatment of employees, it would have likely seen larger gains in its CSR ratings. For example, Jantzi Research assigned a weight of 87 percent to social and governance issues and only 13 percent to environmental issues for retailers in 2007.
The list of economic, social, governance, and environmental demands imposed on firms may seem relentless and confusing. Yet, turning a blind eye is not an option, as every firm’s social and environmental actions are scrutinized. A growing number of investors and members of the community are holding firms to higher CSR standards. There is, however, good news: you can do a lot to manage your CSR ratings.
We deliver two key messages in this article: first, knowing the assessment criteria applied to your firm is important if you are seeking higher CSR ratings; second, for higher CSR rankings, you need to know to whom you are being compared. Only by managing both your rating (your CSR activities) and your ranking (relative to your peers), will your firm earn the gold star you think it deserves. Before we provide our recommendations, we will take a quick tour of the CSR terrain.
The growing importance of CSR
Corporate social responsibility has been propelled into the limelight in recent years because of the increasing influence and power of corporations. Corporations are now involved in all aspects of public and private life.
CSR pertains to the overall impact of corporations on society at large. It extends beyond the interests of shareholders to the interests and needs of diverse stakeholders. It includes environmental, social, and governance (ESG) issues.
The issues that matter to socially responsible investors are numerous, inconsistent, and complex. The range of issues usually includes positive community involvement, environmental protection, safe products, ethical marketing, high employee diversity, and non-controversial labor practices in a firm’s international market. All this often leaves many firms paralyzed as to which issues they should consider, especially given the difficulty in managing all of these issues simultaneously.
Today’s stakeholders are demanding CSR information, and many corporations are responding by routinely issuing CSR reports along with their annual reports. Initially, such demands were largely based on community stakeholders imposing moral claims on corporations. Lately, individual and institutional investors have been using ESG information as a sign of good management, which is also tied to improved financial performance.
Because global standards for measuring and reporting a firm’s socially responsible activities are just beginning to emerge, a firm’s CSR report is subject to greenwashing – the practice of reporting favorable information and hiding negativeinformation. Therefore, investors have come to rely on the services of independent research firms whose job it is to ferret out difficult-to-acquire information.
The growing number and influence of independent research firms rating CSR
The number of independent research firms that rate publicly listed companies’ ESG performance has been growing globally. Such firms include KLD Research & Analytics in the US, Jantzi Research in Canada, Dutch Sustainability Research in The Netherlands, Centre Info in Switzerland, SIRIS in Australia, Scoris in Germany, and Analistas Internationales en Sostenibilidad in Spain.
In addition, there are a growing number of indices and indexed mutual funds that track the prices of socially responsible firms relative to the broader set of firms. For example, the Dow Jones World Sustainability Index is comprised of the 300 sustainability leaders in the Dow Jones World Index. In Canada, Jantzi launched the Jantzi Social Index (JSI) in 2000, a socially screened, market capitalization-weighted common stock index modeled on the S&P/TSX 60.
These research firms have influence. For example, Innovest Strategic Value Advisors, headquartered in New York, has over $U.S. 900M under direct sub-advisory mandates. As well, U.S.-based KLD Research & Analytics has over 400 clients worldwide, including institutional and retail money managers, investment consultants, and institutional investors.
Further, the demand for these services is growing rapidly: socially responsible assets were worth $2.29 trillion in the U.S. in 2005, representing almost 10 percent of the total assets under management. This is over 2.5 times more than in 1995. Canada is experiencing an even more dramatic surge in socially responsible investing. Assets managed according to ESG criteria jumped from $65.46 billion in 2004 to $503.61 billion in 2006 – a 7.5 fold increase in just 2 years.
Managing your CSR Impressions
We use the examples of Canadian Tire and the Royal Bank to illustrate how these CSR ratings work, based on the ratings of Jantzi Research. Canadian Tire earned a CSR score of 5.9 and the Royal Bank earned a score of 7.1.
Table 1 shows that these scores were based on assessments of corporate activities in six different areas: Community and Society, Corporate Governance, Customers, Employees, Natural Environment, and Human Rights. The data used for assigning these ratings were drawn from a number of sources including the media, company reports, questionnaires, stakeholder organizations, and government sources.
Table 1: CSR Ratings for Canadian Tire Corporation and the Royal Bank of Canada
|Royal Bank of Canada|
|Community and Society||7.3||7.7|
Source: Jantzi Research
At face value, it would seem that the Royal Bank’s CSR record is stronger than Canadian Tire’s. However, this is not necessarily true. Canadian Tire was ranked the highest among all Canadian retailers. Furthermore, if the Royal Bank had earned a 5.9 in its rating, it would have been among the lowest performers in the banking industry. There is much that we can learn from this example.
Best Practices in managing CSR ratings
1. Understand each dimension of the CSR ranking.
CSR ratings are comprised of several dimensions, such as employee relations, governance practices, and the environment. However, the rating agencies usually use even more fine-grained criteria. For example, the employee category includes work-life balance programs and diversity policies. As well, your firm must show actual progress, such as a relatively high number of women on your board or in the ranks of senior officers. A list of the more detailed criteria used by Jantzi Research is provided in Table 2, and further information on the company is available on its website (www.jantziresearch.com).
Table 2: Jantzi Research’s Fine-Grained Criteria for each CSR Dimension
|Categories||Areas of Concern||Areas of Strength|
|Community and Society||
|Controversial Business Activities||
Source: Jantzi Research
2. Understand the weights of each CSR dimension that apply to your firm.
CSR is not well defined, and few people agree on which specific criteria and weightings should be applied to generate the overall score. There is, however, growing consensus in practice on what broad areas should be examined. Indeed, there is a high degree of similarity in the frameworks of different CSR research firms. There is also general agreement on the need to tailor dimensions and their weights by industry. To illustrate, we show the dimensions for the retail industry and the banking industry in Figure 1. The category of human rights (which includes labour rights and conditions at supplier factories), for example, carries a weight of 28 percent in retailing, but is not included at all in banking. Table 3 shows how the weight for each category varies considerably across industries. Therefore, you need to understand the dimensions and their weights for your industry in order to know which activities will have the greatest impact on the ratings.
Figure 1: Jantzi Research’s Weights for Each CSR Dimension for the Banking and Retailing Industries
Source: Jantzi Research
Table 3: Ranges in the Jantzi Weights of Each CSR Dimension across Industries
|Categories||Range in Weights|
|Community & Society||11.11% – 30.77%|
|Corporate Governance||8.33% – 22.22%|
|Customers||0% – 22.22%|
|Employees||16.67% – 33.33%|
|Environment||11.11% – 32.00%|
|Human Rights||0% – 26.67%|
Source: Jantzi Research
3. Not only should you do good, but also do no harm.
Most independent research firms collect information on the firm’s positive activities, the information that is easy to report, and they look deep for the activities that cause damage, such as human rights abuses and environmental failures. You need not only tout the good and manage the upside, but also manage your risks. As long as Wal-Mart continues to perform poorly in its employee relations, its CSR rating will be low, no matter what it does on the environmental front.
4. Know your CSR peer group.
As there is no absolute measure of CSR, your rating is implicitly based on the ESG activities of your peers. These activities should be used as your minimum standard. By following your peers across a common set of activities, you will manage your downside risk in the CSR rankings.
5. Show leadership among your peers by learning from non-peers
If you want to rise to the top of the CSR rankings, then you can’t only follow your peers, you need to do more. The best place to learn best practices may be from firms in other peer groups, especially those who are scoring high in the categories in which you want your firm to improve. For example, if Wal-Mart really wants to make gains in the area of employee relations, where such issues are weighted only 20 percent, it can leap frog ahead of its peers by looking to the practices of the highest ranking firms in the banking sector where employee relations are considered even more critical (i.e. 30 percent).
6. Be specific and transparent
With the rise in the number of research firms, investors and other stakeholders are interested in your CSR activities. It is unlikely that your skeletons will remain in the closet as information is becoming more easily accessible through the internet. Wal-Mart, for example, was recently accused of providing more anecdotes than facts in its sustainability report. This sort of behavior will make your firm appear less credible and can affect your ratings. It is important to report accurately and honestly, using hard data rather than motherhood statements.
7. Develop a long term CSR strategy and be patient
The outcomes associated with CSR programs and policies take time. For example, the diversity policy that you employ today will take time before the targeted groups move into the senior ranks of your organization. So, keep your eye on the vision and outcomes. Your performance will be rewarded if you are stalwart in your commitment. This means that CSR cannot be merely a public relations activity; it needs to be a strategic priority that weaves throughout the entire organization. Employees must know that their firm cares about them, so that they can care for the community. Only then can you mitigate the risks and see new opportunities.
There is no universal measure of CSR. However, there is growing consensus on what constitutes good CSR performance as reflected in a growing number of international standards and common expectations. International research firms are shaping the CSR landscape by influencing what is considered to be morally acceptable and reprehensible. We are not suggesting that firms should act responsibly only to manage their CSR ratings, but we do acknowledge that these ratings contain important and influential information. The astute manager will use these ratings as a compass for their own CSR strategy, mindful of when they are merely following their peers and when they are genuinely showing leadership. The mechanisms described here should help you demystify the challenges facing you in the cornucopia of CSR criteria, ratings, programs, policies, and outcomes. These practices will help turn your good intentions into real results.
* All three authors contributed equally to the preparation of this article