CSR: Spreading the benefits and shortcomings towards economic development

Introduction

1. Background

Corporate social responsibility (CSR) is not a recent development or trend, it has been around for centuries, but due to recent events such as globalisation spreading both benefits and shortcomings to economic development it has become a hot topic.

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CSR is a broad area of discussion and could include many areas like, the community; the environment; and the workplace. This can then be further broken down into international; national; country; industry sector or company. Thus instead of looking at the whole of CSR, it is best to extrapolate it into key areas, of which the rest of this paper will focus on the environmental aspect of CSR. In order for this to be done an overview of CSR with its early beginnings along with why it has been developed needs to first be analysed. This would include the early work of individuals such as the Cadbury family. Based on the nature of CSR, there are several definitions of it and these will be looked at explaining the different areas of it. People are becoming more aware of their surroundings and are beginning to question the decisions being taken by companies, if it is the ethically correct decisions or just the most profitable.

The environment again is a large area of research with plenty of legislature and regulations. The next section will look into the key bodies involved with the environment, what protocols and policies are set into practice, and how this affects the general public company. The reason for the public company is because they are more regulated than a private company. Another reason is in a private company, the director and the owner could be the same person, therefore they are acting in their own self-interest.

A coin has two sides, as does CSR; those fore and those against it. Academics such as Friedman and Samuelson’s work are discussed as well as recent history showing corporate failure. With the current talks of global warming and climate changes, it is necessary to mention these in any CSR report. This paper then tackles the question of climate financing. The research goes on to explain the what; how and why climate finance is done. This is then evidenced through a case study illustrating a company that practices CSR from within the company. The case study then explains several different climate financing opportunities that have been recognised through partnerships across the world.

There is only one planet earth, and the time is now for each to take responsibility for their actions and give back some small portion towards restoration and healing for what has been taken for granted over the centuries. A small sacrifice today will save tomorrow; if everyone keeps to this thought.

2. Thoughts on CSR

Over the years, CSR has been defined in many ways each according to the author; however the underlying essence is always the same that is to take responsibility, and act in an ethically expected manner. A broad definition of CSR is a company taking responsibility for its actions from its course of business. This action is in terms of society and the environment, the larger portion of the stakeholders. CSR is a very broad subject and can include human resources; environment issues; sustainable development; waste management and health and safety practices (www.cbi.org.uk). CSR can be voluntary or legislative bound, depending on the country and their laws.

Hopkins definition of CSR is that it is concerned with treating the stakeholders of a business ethically and in a responsible manner in a civilised society. This definition looks at social as both economic and environmental responsibility. He goes on to state that stakeholders form within the organisation as well as out; this would include the community. The bottom line is to create a better and higher standard of living for the stakeholders whilst still maintaining a profitable organisation (Hopkins, 2009).

3.OVERVIEW

Early days to csr

CSR has been around for many centuries, some citing’s from as early as the 1800’s include the work of Robert Owen; the Cadbury family and Sir Titus Salt (Hoskins, 2008). The philosophy laid down by them is still in practice in today’s business world. Robert Owen believed that an individual’s environment has a direct impact on their personality, thus he created a community for his employees of the textile factory. This included houses and schools. He also set certain standards regarding a working day that it should be 12 hours long; young children were to attend nursery and infant schooling, while the other children including those that worked at the factory, had to attend secondary schooling (Hoskins, 2008).

George Cadbury, two decades later added to Owen’s philosophy, by providing housing, education, training, pension and medical schemes for his then 2,500 employees in the factory (Hoskins, 2008). Their decisions came about either through religion, the Cadbury’s being Quakers, or from the simple business frame of mind, that workers that were happy on the home front, with less burdens, will be more productive workers, which entails better profit margins. Owen’s work influenced politicians and later Parliament, where in 1832, the law for children under the age of 18 years was amended to a maximum working day of 10 hours, and in 1870 the Education Act made it compulsory for all children in the UK to have access to education (Hoskins, 2008).

why

Due to things such as climate change; global warming; rights of an individual; people are becoming more aware and conscience of what they are doing. The power of people such as directors has also come into the public eye; the directors are the minority people but with the mass power and are they doing the moral and ethically correct thing when it comes to the running of a business. There are several reasons as to why CSR has come about; the most important are highlighted below.

The shareholder

The shareholder started noticing the amount of power the directors of the companies hold and that direct relationship to their remuneration packages. The shareholder is the ultimate owner of the company, but the director is managing the company, the question to whose benefit has been raised. The shareholders having seen situations where the directors have acted in their self-interest and not the company, decided to take action, by forming several committees within a company, so that no one individual has monopoly over decisions. It is due to this that companies now have a remuneration committee; audit committee; and corporate governance committee. Company failures such as Enron, have made shareholders more aware of the power directors hold.

Globalisation

There have been large co-operations that have been dominating in the developing countries. Through their power they have been exploiting these countries, and taking no responsibility for their actions. It has been through activists demonstrating at World Summits that have brought attention to this. These companies exploited developing countries and economies through cheaper labour; degradation on land and in some instances toxic waste polluting the water.

Political initiatives

Things such as the Kyoto protocols and REACH (Research, Evaluation and Authorisation of Chemicals) have made countries more aware of the environment, and the damage being done. Government have changed their outlook on businesses understanding that without businesses taking ownership for their part of it, and with no legislature expectations, this is the only way to get positive outcomes.

The Kyoto protocols have made countries aware of the development of environmental and global warming. Even if countries are not part of the Kyoto, they are making the companies aware of their responsibilities. REACH is an organisation that protects the environment from new chemicals; their outlook is that if a new product is considered to have a long-term hazardous effect on the environment, it is best to not put this product into the market, this includes pesticides and rodenticides (Hoskins, 2008).

4. CSR – How: The environment

A statement including the environment or regarding the environment is a very broad area of discussion, but this can be narrowed by the companies environment, government, state and even individual’s environment. CSR is a global practice, however legislature over CSR varies from country to country, where only some parts to it are being practiced or is expected by law. Therefore it has been left up to organisations to decide if they wish to engage in CSR and to what extent. The government cannot force the area as it is not law to conform to CSR; however companies are asked if they are in compliance with such protocols as mentioned below.

Some countries don’t consider CSR as important as Corporate Social Investment (CSI), that it is more important to invest in the community that will reap the rewards than to consider it a responsibility. Such is the case in South Africa where CSI by definition is the outreach to the community and social development without the intention of generating business income (Brown). The saying of ‘take it with a pinch of salt’, is appropriate here, if adopting a Friedman approach. However as Samuelson stated this is the way forward of business. If a business, whose sole purpose is to gain in profits, is doing something with no intention of gaining in business income, it defeats the purpose of a business. What this definition lacks to point out is that businesses do generate income from this sort of ‘advertising’, in an indirect manner. The business is not out in the community advertising its business and its products, but what it is doing is advertising its business doing well in a community. This makes the community feel happy and appreciative of the act being done, and so subconsciously that community will take its business towards that company playing its part in CSI. For example if this company is a bank, this community might decide to move their accounts to this particular bank, or if it was an insurance company, and people in the community were thinking about taking out life, disability or any sort of insurance, they will most probably use this company. Therefore even though these companies are investing into these communities, without the intention of business income, they reap the rewards of indirect business.

Over the years there has been considerable damage to the environment through the advancement of the individuals’ needs; with the first major issue being advertised was the hole in the ozone layer. Since then becoming ‘environmentally friendly’ has become a serious issue, with people changing their habits; trying to reduce their carbon footprint, and doing good by the environment.

Businesses are now taking responsibility for their actions in several ways; those organisations that have been operating in developing countries, and making use of the cheaper resources there, have now started giving back to these countries through building schools and development centres in these locations, some even go as far as building hospitals. They are giving these communities education and health care. Some companies have a policy for recycling and rebuilding forests. These are just a few aspects that have been done, in the chapter to follow a more detailed look of climate financing and its impact.

Due to the degradation of the environment over the centuries, organisations with the best interest of the environment have become more vocal about the needs and wants of the environment. This can be viewed from an aerial view of the world, the continents and then the countries within. At each level there are environmental legislature, regulations and protocols; policies and certifications that need to be adhered to.

A summary of the most important protocols are mentioned in the Table below. This is broken down into the world governed by the United Nations (UN); then the continent or area, in this case the European Union (EU), and finally country specific which here is the United Kingdom (UK). These rules and regulations generally have more of an impact on public companies because they are governed by the Securities and Exchange Commission (SEC). The bottom line to climate change and its impact to a business are on its profit. Businesses and its stakeholders have to weigh out the cost benefit analysis of climate change on development and growth of the organisation.

These companies will have to now comply with emission control systems regulating the amount of greenhouse gases (GHG) they let out into the atmosphere, which will have a direct impact on the company’s capital expenditure in order to have the correct equipment, and hence its profit. Such companies will include refineries and power plants (Fontinelle). The amount of GHG let out into the atmosphere will be noted in a database and monitored. According to EU ETS, companies will be given a limit of these gases, they are allowed to release, and once the company has reached its limit, it will have to pay for credits from other countries in order to release anymore gases. This credit based system can be bought and sold amongst countries, allowing countries with a low emission level a chance to boost its economy through selling its extra credits. Even in a situation concerning the environment, everything has a price to it.

Companies that need to purchase extra credits will want to minimise its effects on the profit margin therefore, they would most probably increase their prices of the goods and services it offers. These goods and services could be used by those same countries that sold their extra credits, which then cancels off their profits from selling the credits. Weather patterns are another area of climate change that affects businesses. There could be severe storms in certain areas, and then extreme to that, droughts in other parts of the world, both effecting agricultural life. Countries that are exporters of these goods might not have crops to harvest, and then if they do have smaller crops due to weather changes, they could increase that price in order to make up for the shortfall. Insurance companies could be facing major losses due to climate change, and could possibly be thinking of relooking at their current policies. Things that were covered as natural disasters and the ‘act of God’, which was not frequent events, is now becoming more frequent with global warming, and insurance companies have to pay out on many insurance policies.

The effect of both the climate change and the price increase of the products can leave consumers seeking alternatives or even not needing such items anymore. If temperatures have increased and countries are not facing sever winters anymore, then the industry supplying items such as heaters, and winter clothing might not be required to the same degree, and thus could face closure. A company’s reputation is also at risk. If a company so chooses not to go ahead with these policies, for a ‘greener, eco-friendly’ option, its clients as well as its business partners could be jeopardised. The image portrayed will be that of deliberately damaging the environment instead of preserving it. In any organisation there is a lot of competition and clients or consumers in these organisations can easily more from one competitor to another, thus each business needs to have a sound business plan if it does not want to lose consumers to its competitors.

Table 1 (Hoskins, 2008)

Companies have taken these above protocols into account, and have begun projects throughout the world to reduce the negative impact it has had on the environment. One of the ways of this being implemented is through climate financing, which is discussed in the following section.

5. The other side of the coin

The forerunners on CSR have been Milton Friedman and Paul A Samuelson, with Friedman against and Samuelson for CSR. According to Davies, in his approach of weighing out the advantages and disadvantages of CSR, the approach taken by business cannot end where the law ends, if a company does not do any more than the minimum, then society breaks away from that company and associates with companies that are doing more for the community (Davis, 1973). His case for CSR includes long run self-interest; viability of business; avoidance of government regulation and sociocultural norms. He continues to add that there are reasons why CSR is not a good policy to adopt, he points out Friedman’s profit maximization, where mangers are acting on behalf of shareholders just to maximise profits; that cost of social investment could drive out many medium size business and the lack of accountability the business has on the community, therefore it really is not wise to give them such power with no accountability.

According to Karnani, CSR can only work efficiently if it is government imposed and regulated (Karnani, 2010). Karnani points out that the firms are only interested in profit maximization and it only appears that they are interested in social responsibility. This is carried through in the example of fast food restaurants, that now also offer healthier options on fast foods, but this is just done to gain a wider part of the market, and ultimately increase profits, it is not done for the greater good on human kind. Another example is of the motor industry; developing energy efficient models. This does have a positive impact on the environment, but according to Karnani, the only reason for such production is profit maximisation (Karnani, 2010). If CSR was government imposed, firms will not have a choice and will have to sacrifice that portion of profits towards social responsibility. It will also be streamlined across the industry that is if government impose a percentage on profit as the proportion to social responsibility, all firms in that market sector and size will be reaching out to the community and environment in the same monetary value. This will then not leave one firm at a disadvantage to the next, and allowing it to lose its competitive advantage.

Corporate responsibility cannot be complete without a mention of Enron. This was one of the single largest failures in United States of America’s history. This organisation once promoted its core values of respect, integrity and excellence, was ultimately brought down through its weak financial foundations and a web of deceit (Enron, The Ultimate lesson in Irresponsibility, 2003). The poor business decisions through failed deals and projects that accounted to billions of dollars in debt were falsely hidden in special purpose vehicles. Enron was audited by Arthur Anderson auditing firm, and they too allowed this to continue, or were pressured to ignoring it, with citing on them shredding documentation (Baker, 2007).

6. how crs: CLIMATE FINANCING

Definition

Climate change is something that is impacting on every individual throughout the world, and thus countries and stakeholders are seeing the importance of establishing long term goals and plans to offset some of the damage already done on the environment (Halsnaes & Shukla, 2007). Countries and stakeholders are not just following protocols and policies set by for example the UN, Kyoto or Copenhagen; they are in fact doing what they can when and where possible, understanding that this needs to be a wide spread participation. This is discussed later through the case study on Standard Bank Global and their projects throughout Africa and the partnership with Australia and Germany.

The Christian Aid defined climate financing as part of a compensation for the damage done by the rich countries over the past 2 centuries through industrialisation and economic growth (The Christian Aid, 2009). By definition a developing country is lagging in technology and resources hence making it a developing country. Climate financing is to assist these developing countries to continue developing and growing their economies, but with a lower carbon emission, by using more natural gases and solar energy.

Ways to Climate Financing

Climate financing can be done in several ways, most depending on the government and stakeholders opinions on what is most needed. This question will be answered from a business point of view, that is with cost benefit analysis done and the impact on profit margins both in the short and long term as these financing options should have long term goal strategies to them. Financing could occur in the most direct form through reduction of GHG or indirectly through water and sanitation of villages; restoration of shorelines, forest conservation and agriculture, to name just a few.

7. CASE STUDIES

The best way to understand and illustrate the work of CSR and of climate finance is through actual examples. Through this both the benefits and costs will be shown. The case study selected is Standard Bank of South Africa (SBSA), which is one of the largest banks in South Africa, with interests in Africa; South America and the United Kingdom. SBSA being part of the financial services have both direct and indirect impacts on society and the environment. This is managed indirectly through screening corporate loans, ensuring their customers manage the social and environmental risks associated with their activities, and directly through business activities that are more energy efficient and carbon footprint reducing (Standard Bank, 2010). They have become members of World Wildlife Fund South Africa (WWF-SA) and of the United Nations Environment Programme Finance Initiative (UNEP FI). These global partnerships occurred in 2010. SBSA promotes environment responsibility from within.

Carbon Financing

SBSA recognise that through global advancement and development, the environment may not have always been a high level priority however with climate changes; it has now become an important part on the agenda. The African continent as well as other emerging markets is more likely to cause more damage unto the environment for the sake of development, than the developed nations, and it is through this reason that SBSA are in constant discussions regarding ways to best assist African nations to adapt with climate changes, without forsaking their economic development. These discussions are with governments to these countries as well as external parties interested in becoming partners on such campaigns.

These campaigns include managing water stress and the degradation of agricultural land. On a broader aspect, SBSA are participating on initiatives to internalise the cost of climate change and generate carbon prices through the Clean Development Mechanism (CDM) and financing energy efficient projects in Africa to overcome energy shortages and generate tradable carbon credits (Standard Bank, 2010). CDM is part of the Kyoto Protocol, which allows countries to develop emission reduction projects in developing countries, thereby allowing these countries to sell these credits which can be counted towards their Kyoto target (United Nations Framework Convention on Climate Change). An indirect effect of CDM is the creation of new revenue, access to energy, job creation and technology transfer, all areas of importance in the African continent for growth and development.

Carbon financing and trading

SBSA is a financial institution and through this has financed carbon markets in Africa and South East Asia totalling 20m tonnes of GHG’s, 2010. They have now partnered with the United Nations Environment Programme and the German government’s climate initiative to form the African Carbon Asset Development Facility (ACAD), which provides financial and technical assistance to developers committed to low carbon development as well as education and training to institutions in order to bring Africa as a key member of the carbon market.

Carbon Financing Deals

SBSA have been involved in several carbon financing deals, these include partnerships with Australian and African companies. A few of the most recent transactions have been highlighted below.

COOL NRG

The Australian based Cool nrg is a company known for its resources to reduce energy consumption on a large scale. Cool nrg has developed and managed a programme in Mexico, with energy efficient light bulbs; this is the first of such programmes under the Kyoto Protocols. SBSA have partnered with Cool nrg in 2010, with funding and will purchase up to 19% of carbon credits. SBSA also intend on using the Mexican model in Africa, on low income households, reducing the cost of energy on them. The by-product of this is CO2 emissions reduction and creating energy security (Standard Bank, 2010).

HAND-HELD LED LIGHTS – TANZANIA

SBSA ventured into Tanzania on another carbon financing deal. This deal was replacing kerosene lamps with hand held light emitting diode (LED) lights. The deal was funded through buying the carbon credits that were generated through the large scale replacement of fossil fuel lighting. This was introduced to 1.5 million homes in Tanzania, which not only increased the average household annual income by $150, but is much safer than using kerosene, both to the environment and the individuals who suffer from severe burns, and respiratory problems from inhalation of the gas. The expected national savings was $200 million and Tanzania’s GHG’s emissions reduced by 700 000 metric tonnes (Standard Bank, 2010).

KENYA POWER AND LIGHTING COMPANY

In 2010, SBSA and Kenya Power and Lighting Company (KPLC) have gone into a five year partnership. This is part of the clean energy projects from the UN’s CDM. A total of 1.3 million free energy saving light bulbs were distributed across East Africa, this initiative have reduced their electricity demand by 45 megawatts (Standard Bank, 2010).

ZOOMLION GHANA

SBSA and Ghana’s leading waste management company, Zoomlion Ghana, have signed agreements for the forward sale of carbon credits. This is through the emission reductions of methane gas from the decomposition of organic waste. Refuse will no longer be dumped in a waste dump, but will be moved to a solid waste sorting and composting facility, located in Greater Accra. The anticipation of this agreement is that in 2011, an average of 300 tonnes of daily waste will be processed, with this doubling by 2013 (Standard Bank, 2010).

SOLAR WATER HEATING

In South Africa, there is only one provider of electricity, that is Eskom, therefore the people of South Africa have no choice but to give a large portion of their daily income towards their electricity bills. Due to the ever increasing price of electricity, and low income households unable to continue paying these bills, the South African government have committed to installing 1 million solar water heaters in low income households, by the end of 2014. This will allow these people to no longer be cold, the pressure of the national electricity grid will be reduced, and CO2 emissions will also be reduced. In 2010 SABA along with The Solar Academy of Sub-Saharan Africa and International Carbon came together to have 230 000 solar water heaters installed in various municipalities. SBSA are providing the finance; funding the CDM registration and underwriting the carbon purchase until 2020 (Standard Bank, 2010).

SBSA is an example of an organisation that practices CSR within its business framework as well as external. It expects the same standard from its partners in business, which is a good standing for other organisations to follow.

8. SUMMARY

CSR is viewed in many ways as the various definitions and academics haven proven. It is through this that the debate on CSR will continue to grow. The essence of the recent development of CSR has come about due to mistrust in the directors of major companies, as well as more climate awareness amongst individuals. The stakeholders of these companies have started to question the directors long term plans, and to whose benefit these plans are for, whether the plans of the business; the director the environment are all in sync, or with such power; has these long term plans become more skewed towards self-fulfilment.

The ultimate goal for these companies is to be creating as much value as possible. By companies doing more than just complying with regulations, and taking the initiatives to pledge to community and environmental upgrading, they will be winning back the trust of their stakeholders, and this will ultimately lead to a successful business.

Different countries have different business and cultural approaches, and CSR will never be practiced the same in each country. The principal behind CSR however should be universal, just the same as the reason for a business to exist, is to make a profit.

References

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