“A lot of the emphasis on corporate social responsibility (CSR) obviously stems from the rash of corporate scandals that we’ve all been through the last four or five years,” Geoffrey M. Heal, the Paul Garrett Professor of Public Policy and Business Responsibility, told students during January orientation. He was introducing a panel discussion on “Corporate Social Responsibility and the Bottom Line,” one of the year’s first special sessions in the Individual, Business and Society: Tradeoffs, Choices and Accountability curriculum.
“But I think the interest in [CSR] goes deeper than that,” said Heal, who researches ways of controlling the impact of economic activity on the environment and of valuing the economic services provided by environmental assets, and who recently chaired a report called “Valuing Ecosystem Services: Toward Better Environmental Decision-Making” for the National Academy of Sciences. “A lot of the interest . . . comes from the fact that a number of people are beginning to realize that behaving in a socially responsible manner actually adds to a firm’s profits.”
An example of a profitable socially-responsible company, Heal said, is BP, whose group chief executive, Lord John Browne, received this year’s Botwinick Prize in Business Ethics for his efforts over the last 10 years to reduce BP’s greenhouse gas emissions. In his acceptance speech, Lord Browne said that BP made an extra $630 million by capturing associated gases and selling them rather than burning and flaring them into the atmosphere. Dow Chemical is another example, having made profits while cutting pollution. “Interestingly enough, there are a lot of examples like that,” Heal said.
The Equator Principles Structure Bank Financing
In 2003, 10 investment banks convened in London to draft the Equator Principles, an accord based on policies of the International Finance Corporation (IFC) — the for-profit, hard-money, long-term commercial arm of the World Bank. Equator provides a framework for financial institutions to manage environmental and social issues in project financing.
“This is a big issue for banks,” said Chris Beale, a managing director of Citigroup Global Markets, Inc., and a founder of the accord. Many large banks lend to companies that invest in oilfields, mines, roads and other major infrastructure projects around the world. “There’s a good way to do these projects, and there’s a bad way,” Beale said.
Equator calls for companies to follow the IFC’s environmental-impact review process for high-, medium- and low-risk projects and to release those results publicly. The 27 banks that had adopted Equator by the end of 2004 arranged about $53 billion, or 75 percent, of bank-provided finance for project development that year, Beale said. Because banks syndicate deals to spread political, timing, performance and operating risk, most major projects around the world must follow Equator.
“Even if you’re not an adopter of Equator, you have to go and find a big pool of banks willing to lend to you,” Beale said, “and now we’ve captured that pool.”
Investments Affect Reputation and Profits
This step in the project-finance division of the banking industry grew out of its recognition that banks’ reputations were affected by the projects their money financed. “We have an opportunity,” Beale said. “We have a global responsibility, but we have an opportunity — to actually do good and to make sure that clients adopt a high standard in the things that they do with our money.”
Banks and companies came to this realization from both experience and exposure to high-profile conflicts. In 1997, European NGOs used widespread boycotts to force Shell Oil Corp. to abandon plans to dispose of an old oil-drilling rig in the North Sea. In the 1990s, NGOs led boycotts of McDonald’s for its use of nonbiodegradable product packaging and of Nike for allegedly mistreating its employees in developing countries.
“The negative publicity that comes from that kind of boycott is very harmful indeed and has an impact on their bottom line,” Heal said. CSR is, therefore, especially important for companies whose goals may not be fully aligned with the goals of society as a whole, such as oil, auto and tobacco companies, whose normal operations conflict with society’s goals of clean air and good health, Heal said.
“CSR, behaving responsibly, enables companies to avoid or at least reduce the risks of conflicts with outside groups, such as environmental groups,” Heal said. And that affects profits.
Industry Response to Scrutiny
According to Beale, many large companies were fairly well advanced in institutionalizing their own environmental and social planning before Equator. The International Council on Mining and Metals, for example, forced the mining industry to develop benign ways of extracting minerals in remote areas and to embrace environmental and social planning years ago. And some of the major oil companies, even ones that grumble about the new rules, actually do things as well as anyone in the world, Beale said.
“Where I think [Equator] will have some sticker shock will be with the smaller U.S. and Western companies that do international business, and also, some of the emerging-market oil and gas, mining, power and construction companies,” which previously had little scrutiny and have limited internal capacity, Beale said. The difference, in his view, between applying Equator in Western and emerging markets is that laws and regulations addressing social and environmental issues in developed markets are both more highly developed and better enforced.
The Global Environment Fund: Do Good, Do Well “If behaving responsibly is good for profits, then investing primarily in companies that behave responsibly should get you an above-average rate of return,” Heal said. “Unfortunately, the statistical jury is still out on this issue.” But the tentative conclusion is that socially responsible investment funds — which invest in companies that have above-average ratings for environmental and social responsibility — offer above-average rates of return.
“The implication,” Heal said, “is that acting responsibly on the part of corporations certainly doesn’t harm their profitability and may actually be somewhat improving their profitability.”
One fund that aims both to do good and do well, the Global Environment Fund, invests in companies that make a positive contribution to the environment and produce superior returns for investors. “We look to exploit environmental trends worldwide that we think will yield for us attractive investment opportunities,” said Scott McLeod,a managing director at the fund. “We select the areas in which we concentrate our investment not only because we think it’s the right thing to do, but also, more importantly, because we feel that they are good investment opportunities.”
McLeod said opportunities grow out of a combination of public demand — in OECD countries for higher standards of sustainable resource management and in emerging markets for improved quality of life — and industrial demand for more efficient use of energy and raw materials. Increasingly, major retail chains such as the Home Depot, which consumes 10 percent of the world’s lumber, are buying only Forestry Stewardship Council–certified lumber and lumber products, which ensures those standards are met. Middle-class populations in emerging-market countries now demand cleaner drinking water, better waste management and greater pollution reduction. “All of these provide investment opportunities for firms such as ours,” McLeod said.
Global Forest Products: Cash Flows, Community and Conservation
The Global Environment Fund’s investment style is proactive and top down, targeting investments in specific countries and sectors. It has invested $250 million in emerging-markets’ environmental infrastructure, such as natural gas, water supply, mass transit, waste management and health care, and a smaller amount in expanding clean energy in North America.
One company in the Global Environment Fund’s portfolio is Global Forest Products, a South Africa–based lumber company that capitalizes on increasing demand for environmentally sustainable forestry-resource management.
The Global Environment Fund’s business plan addresses “the three C’s,” McLeod said: cash flows, community and conservation. The company pledged to invest in its employees, to uplift and develop the communities surrounding its forests and to manage the forestry asset along Forestry Stewardship Council principles.
It aimed to be a model of sustainable development, working to address the needs and interests of all its different constituencies, including employees, customers, shareholders, governments and local communities. “This approach, where we have taken into account the interests of all of the various parties, has generated substantial improvements in financial terms,” McLeod said.
“Where we find more environmentally focused practices, less raw material is required, less energy is needed, less pollution is generated, the environment is better served, but the bottom line, where the company is concerned, also benefits.”
Short-Term Costs, Long-Term Benefits
Although there may be some short-term costs in behaving responsibly, proponents of CSR argue that in the long term the benefits generated by socially responsible behavior will greatly outweigh these costs.
The banks knew, going into Equator, that there would be short-term irritation. But Beale said he sees long-term strategic value for banks in being able to offer higher-quality advice to clients on how to get through the regulatory processes, as well as on financial markets, country risk and industry knowledge.
“The business case to clients is that, if you do this right the first time, if you understand what the rules are and if you do the work according to the standard, you will sail through the process more quickly.”
“I think there are reputation benefits for us as well,” he said. “From the corporation’s point of view, in terms of the image value to depositors, to our shareholders, to our customers, to the communities in which we operate, that’s publicity we can’t — we can’t buy that publicity for $10 or 5 or 2 million, or however much this thing might have cost us to date.”
Another long-term benefit of corporate social responsibility is that people can be proud of the companies they work for. “I don’t know how to quantify that,” Beale said. “But I think there is a value in people coming to work knowing that they’re not doing harm: in fact, they’re doing good.”