Lecture two of ten, looking at the strategic, financial and operational business case for corporate responsibility and sustainability.

1. Corporate
Responsibility
Module
Lecture
Two:
The
Business
Case
January
21st
2015
Lecturer:
Tobias
Webb
Tobiaswebb.blogspot.com

2. The
business
case
for
corporate
responsibility
The
business
case
for
sustainability
• Sounds
a
bit
crazy
doesn't
it?
• Why
should
you
need
a
business
case
to
be
sustainable
or
responsible?
• Surely
everyone
would
want
to....

3. The
need
for
a
business
case
exists
because
• The
model
we
see
in
Anglo
Saxon
style
capitalism
(dominant
global
model)
is
highly
short
termist.
• Long
term
is
oMen
regarded
as
three
to
five
years.
• CEO
tenure
is
usually/oMen
five
years
or
less
in
PLCs.
• In
large
non-­‐listed/private/state
owned
companies
CEO
tenure
is
oMen
longer.
• BUT
firms
are
less
accountable
to
shareholders
or
the
public
due
to
opacity
and
a
quieter
set
of
shareholders.

4. Other
reasons
companies
need
a
business
case
• Managers
don't
understand
what
social/green
issues
have
to
do
with
them.
• Ethics/responsibility
always
become
"diffused"
in
large
organisaXons
(Dan
Ariely).
• Companies
have
had
a
long
standing
culture
of
"purpose
is
profit
maximisa9on”
(This
is
not
true
anywhere
but
the
percepXon
exists
across
business
and
invesXng).
• Not
every
sustainability/corporate
responsibility
change/
investment
has
an
obvious
payback
or
9mescale.
• Some/many
of
the
benefits
of
CR
are
very
hard
to
measure:
ReputaXon,
employee
saXsfacXon,
License
to
Operate.

5. So
what
are
the
key
components
of
a
business
case?
(1)
• The
tradiXonal
business
case:
• Energy
and
general
business
efficiency
and
cost
savings
(energy,
recycling).
• Employee
a^racXon,
recruitment,
retenXon,
moXvaXon
and
innovaXon.
• Enhancing/protecXng
basic
reputa9on
with
stakeholders:
CommuniXes,
NGOs,
Media,
InsXtuXons,
Governments,
Trade
Unions.

6. So
what
are
the
key
components
of
a
business
case?
(2)
The
more
modern
business
case:
(including
previous
slide)
• Ge?ng
ahead
of
forthcoming
regulaXon
or
regulaXon
trends
(climate
change,
polluXon).
• ProtecXng/enhancing
online
and
social
media
reputa9on.
• Finding
new
operaXng
market
opportuni9es
via
innovaXon
(geographically
or
changing
demographics).
• Opening
new
markets
with
enhanced
reputa9on.
• Using
sustainability
reputaXon
to
protect
exisXng
posiXons
and
disadvantage
compeXtors
(The
"Level
playing
field"
argument).

7. So
what
does
the
academic/investor
research
say?
“Corporate
social
responsibility
and
access
to
finance”
BeiXng
Cheng,
Ioannis
Ioannou
and
George
Serafeim
Researchers
found
be^er
access
to
finance
can
be
a^ributed
to:
(1) reduced
agency
costs
due
to
enhanced
stakeholder
engagement.
(2) reduced
informa9onal
asymmetry
due
to
increased
transparency.
(3) Using
a
large
cross-­‐secXon
of
firms,
they
find
that
firms
with
be^er
CSR
performance
face
significantly
lower
capital
constraints.

8. The
Impact
of
Corporate
Sustainability
on
Organiza9onal
Processes
and
Performance
Robert
G.
Eccles,
Ioannis
Ioannou,
George
Serafeim
• Matched
sample
of
180
US
companies.
• Found
that
corporaXons
that
voluntarily
adopted
sustainability
policies
by
1993
-­‐
termed
as
High
Sustainability
companies
-­‐
exhibit
by
2009
dis9nct
organiza9onal
processes
compared
to
a
matched
sample
of
companies
that
adopted
almost
none
of
these
policies
-­‐
termed
as
Low
Sustainability
companies.

9. The
Impact
of
Corporate
Sustainability
on
Organiza9onal
Processes
and
Performance
• The
boards
of
directors
of
High
Sustainability
companies
are
more
likely
to
be
formally
responsible
for
sustainability
and
top
execuXve
compensaXon
incenXves
are
more
likely
to
be
a
funcXon
of
sustainability
metrics.
• High
Sustainability
companies
are
more
likely
to
have
established
processes
for
stakeholder
engagement,
to
be
more
long-­‐term
oriented,
and
to
exhibit
higher
measurement
and
disclosure
of
nonfinancial
informaXon.
• Finally,
High
Sustainability
companies
significantly
outperform
their
counterparts
over
the
long-­‐term,
both
in
terms
of
stock
market
and
accounXng
performance.

10. Employees
and
business
value:
Alex
Edmans
London
Business
School
and
Wharton
researcher
Alex
Edmans
Three
key
points
to
remember
about
the
latest
research
on
the
business
case
for
CSR:
1.
Employee
welfare
is
posi9vely
related
to
firm
value.
While
the
idea
that
“companies
do
be^er
if
their
workers
are
happier”
is
seemingly
intuiXve,
this
idea
is
contrary
to
tradiXonal
ways
of
managing
workers,
which
holds
that
a
dollar
paid
to
workers
is
a
dollar
taken
away
from
shareholders.
Human
resource
departments
are
not
just
cost
centres,
but
a
posiXve
source
of
value
creaXon.

11. Employees
and
business
value:
Alex
Edmans
2.
CSR
can
improve
firm
value.
TradiXonal
thought
is
that
considering
other
stakeholders
(e.g.
employees,
customers,
the
environment)
is
at
the
expense
of
shareholders.
Thus,
socially
responsible
invesXng
should
underperform
tradiXonal
invesXng,
since
responsible
companies
are
distracted
from
the
bo^om
line.
My
paper
suggests
that
there
need
be
no
tension
between
CSR
and
profit.
3.
The
market
does
not
fully
value
intangibles
such
as
stakeholder
capital.
Results
suggest
that
the
market
doesn’t
immediately
recognise
the
benefits
of
stakeholder
capital.
As
a
result,
we
need
to
move
beyond
evaluaXng
managers
according
to
short-­‐term
performance
to
encourage
them
to
consider
the
long-­‐run
health
of
their
firms
–
and
society.

12. Other
academic
research
on
the
business
case
“From
the
Stockholder
to
the
Stakeholder:
How
Sustainability
can
drive
Financial
Outperformance”
(
University
of
Oxford
/
Arabesque
Asset
Management
2013)
• “Meta
study”
analysis
of
190
papers
and
significant
sources
• Report
"examines
the
relaXonship
between
sustainability
and
corporate
operaXonal
performance,
sustainability
and
the
cost
of
capital
(both
equity
and
debt),
and
sustainability
and
stock
prices.
In
all
three
cases,
the
paper
summarizes
findings
from
the
literature
in
terms
of
the
usual
three
dimensions
of
sustainability:
environmental,
social,
and
governance."

13. “From
the
Stockholder
to
the
Stakeholder”
research
study
findings
In
brief,
the
report
writers
conclude
that:
• Companies
with
strong
sustainability
scores
show
beSer
operaXonal
performance
and
are
less
risky.
• Investment
strategies
that
incorporate
ESG
issues
outperform
comparable
non-­‐ESG
strategies.
• AcXve
ownership
creates
value
for
companies
and
investors.

14. Eight
further
key
findings
1.
Sustainability
is
one
of
the
most
significant
trends
in
financial
markets
for
decades.
2.
The
report
represents
the
most
comprehensive
knowledge
base
on
sustainability
to
date.
It
is
based
on
more
than
190
academic
studies,
industry
reports,
newspaper
arXcles,
and
books.
3.
90%
of
the
studies
on
the
cost
of
capital
show
that
sound
sustainability
standards
lower
the
cost
of
capital
of
companies.
4. 88%
of
the
research
shows
that
solid
ESG
pracXces
result
in
be^er
operaXonal
performance
of
firms.

15. Eight
further
key
findings
5.
80%
of
the
studies
show
that
stock
price
performance
of
companies
is
posi9vely
influenced
by
good
sustainability
pracXces.
6.
Based
on
the
economic
impact,
it
is
in
the
best
interest
of
investors
and
corporate
managers
to
incorporate
sustainability
consideraXons
into
their
decision
making
processes.
7.
Ac9ve
ownership
allows
investors
to
influence
corporate
behavior
and
benefit
from
improvements
in
sustainable
business
pracXces.
8.
The
future
of
sustainable
invesXng
is
likely
to
be
acXve
ownership
by
mul9ple
stakeholder
groups
including
investors
and
consumers.

16. So
what
does
the
business
case
look
like
in
pracXce?
(1)
• Unilever:
Nearly
halved
energy
use
in
15
years.
• SAB
Miller:
Using
sustainable
innovaXon
to
create
new
markets/products
in
Mozambique,
Tanzania,
Uganda
and
Ghana.
• Solazyme:
Finding
new
sources
of
energy/oils
via
low
impact
Algae.
• New
Britain
Palm
Oil:
Pioneering
change
in
the
palm
oil
/
agribusiness
industry.

17. So
what
does
the
business
case
look
like
in
pracXce?
(2)
• Siemens/GE:
Bemng
a
big
part
of
their
futures
on
lower
carbon
economies.
• Phillips:
Pioneering
Circular
Economy
products.
• Marks
&
Spencer
/
Alliance
Boots
/
Waitrose:
Building
lower
carbon
stores,
minimising
waste
to
landfill.
• Nike:
ReposiXoning
sustainability
as
innovaXon
in
products
and
helping
suppliers
go
lean
• Video:
Ray
Anderson
• Video:
Steve
Howard

18. So
this
all
sounds
great:
what's
the
problem?
• Accenture/PRI
study
shows
the
corporate/
investor
gap.
• Big
investors
don't
understand
how
to
measure
and
value
sustainability.
• ESG
engaged
money
is
sXll
a
small
proporXon
of
the
total
money
invested
globally.
• CEOs
are
delusional
about
many
of
the
challenges
and
talk
more
than
they
deliver.

19. So
this
all
sounds
great:
what's
the
problem?
The
companies
taking
serious
acXon
are
either:
• Lead
by
a
visionary
(oMen
founder)
board
or
CEO
and
are
small
with
limited
impact
(Interface).
• Big
and
have
been
hit
by
a
big
scandal
or
many,
which
drove
them
to
change
(McDonald's,
APP).
• Those
who
really
understand
how
exposed
they
are
to
future
risks
(Mars,
Mondelez,
Nestle).
• Suppliers
who
see
a
serious
future
market
opportunity
(Produce
World
/
Golden
Agri,
Nike
apparel
factories)
or
who
are
under
serious
pressure
from
buyers.

20. So
this
all
sounds
great:
what's
the
problem?
(2)
This
leaves:
1)
Lots
of
big
companies
(thousands)
outside
the
top
500
in
the
world
who
just
don't
feel
pressure
or
see
opportunity
(many
large
private
companies!).
2)
Most
SMEs,
all
over
the
world,
which
lack
knowledge,
resources
and
incenXve
as
above.
3)
Lots
of
big
powerful
state
owned
companies
who
lack
similar
incenXves
(CNOOC,
ONGC,
Russian/Indian
Railways,
Etc).

21. So
what
does
the
future
hold
for
the
business
case?
(1)
• Pressure
is
growing,
faster
than
ever,
across
many
issues,
for
most
large
companies,
parXcularly
those
with
valuable
brands.
• Global
access
to
informaXon,
oMen
in
real
Xme,
is
increasing
exponen9ally.
• Community
groups
and
NGOs
are
increasingly
able
to
use
media
channels
and
technology
to
show
the
impacts
of
large
companies.
Media
are
happy
to
report
on
this!
• Regulatory
requirements
(environment,
reporXng)
and
voluntarism
pressure
are
growing
in
OECD
naXons.

22. So
what
does
the
future
hold
for
the
business
case?
(2)
• Emerging
market
legal
enforcement
is
improving
as
ins9tu9ons
develop
AND
• "Emerging"
market
naXons
are
becoming
more
aggressive
towards
MNCs:
demonstraXng
holisXc
societal
value
is
key
(impact
studies
are
an
example).
• "Millennials"
say
they
want
sustainability
from
employers.
• Despite
mainstream
investors
being
slow
to
act,
pace
of
change
increasing,
some
acXvist
investors
have
driven
a
lot
of
progress
in
last
15/20
years.
(Aviva,
Calpers,
PGGM,
F&C,
State
Street,
First
State)

23. So
what
does
the
future
hold
for
the
business
case?
(3)
• Governments
are
increasingly
aware
of
their
own
shortcomings
so
seek
both
greater
investment
and
great
voluntarism
from
companies
on
social
and
environmental
issues.
• CEOs
are
increasingly
concerned
about
the
trust
gap
and
widening
inequality
in
socieXes.
• Company
managers,
entrepreneurs
and
angel/VC
investors
are
becoming
excited
about
the
opportuni9es
around
innovaXon,
technology
and
global
access
that
sustainability
represents.
• (Innova9ons
range
from
healthcare
to
energy
to
communicaXons
technology
to
smart
ciXes,
cleaning
up
polluXon,
or
protecXng
forests
or
workers/human
rights).