Joaquín Garralda. Professor. Instituto de Empresa
20 April 2004
In the debate concerning Corporate Social Responsibility (CSR), one side views the subject as a glass that stands half-full while the other calls it half-empty. The author highlights forces at work pushing the business world toward one side or the other.
Some people feel that companies’ response to CSR issues must be governed by clear rules. Otherwise, they say, firms will not adopt self-regulation, succumb to incentives to opt for opportunism, and continue developing initiatives that go against sustainability (in its broadest sense) of the planet.
Other viewpoints believe companies, in efficient markets, will tend to move voluntarily in the direction established by CSR directives, regulating themselves without need to increase the weight of the rules.
To a large extent, these two behavioral hypotheses stem from the values of the person who proposes them. As a result, it is not a question of affirming that one is mistaken or not, but rather of considering where the business world is heading. This is something that undoubtedly conditions one’s behavior.
Simplifying the analysis somewhat, we can group companies moving towards CSR into two categories: those that do so through fear, and those that do so out of interest.
By fear, we mean those whose major concern is the risk of running into scandals arising from actions against the environment or human rights, or as a result of debatable decisions taken for being excessively in favor of the company’s managers or directors. Both NGOs and activist shareholders are pushing these organizations down the road of forced self-regulation, since on some issues they exceed existing rules, or apply ones that, in principle, they should not have to fulfill, given their size or circumstances (e.g. not listed on the stock exchange).
Looking closer at loans
Among those that act out of interest, we could include enterprises that traditionally are aware of consumer concerns and the motivating capacity for their employees. Nonetheless, a change is taking place, and certain forces are going to greatly boost interest in many more firms. The financial sector is initiating a forceful drive on two fronts. On one hand, banks are starting to consider applying environmental and social filters when it comes to granting loans. They are examining the use to which funds are going to be put, in line with international initiatives driven by the Ecuador Principles that demonstrate great capacity for affiliating major financial organizations.
On the other hand, fund managers are beginning to consider more aspects than the merely economic when it comes to evaluating long-term prospects of companies in which they invest. The success in licenses and the volume of funds associated with the DJSI and FTSE4good indices are good examples of this trend. What is more, recent studies demonstrate that pledging commitment to sustainability does no harm to a company’s profitability and valuation.
Another force driving the process is competitive dynamics. Companies are beginning to perceive the benefit of strategically positioning themselves with regard to CSR when it can be a differentiating factor, and not when it is a minimum fulfilled by all. In this sense, the influence of rankings is reinforcing interest of companies in moving toward areas closer to CSR, to capitalize on the sensitivity of consumers and employees mentioned above.
In short, companies are starting to shift away from reasons for avoiding risks, toward arguments based on taking advantage of opportunities. This, to position themselves within a context toward which the laws and their own interest are clearly pointing them.