CSR: The Conundrum Of Standards

Corporate Social Responsibility (CSR) has become a recurring buzzword in sustainable business economics. In the transition towards more ethical business practices, companies are supposed to account for their negative impact on local communities, the environment and society at large. Thus, CSR is a useful marketing instrument to promote one’s positive operations and sensitise the masses to imminent issues.

A Matter Of Convenience

The champions of CSR are well-known international companies that pioneered innovative initiatives aimed at doing good, solving problems and engaging with fringe stakeholders. Remarkable first-timers include SalesForce’s volunteering week for employees or Unilever’s crowdsourced platform for reducing environmental impact. Asides from fostering reputation and stakeholder sentiment, these projects set the company out of the pack and ensure long-term positive branding and recognition.

But to what extent can investments in sustainability aid the average company improve its financial performance? What is the threshold beyond which businesses have no longer incentives to invest in CSR? The obvious premise is, due to savvy customers and national regulations, unsustainable businesses will have a hard time gaining the trust of their target clients. Nevertheless, CSR can be easily overdone and result in non-optimal gains or even losses.

A Small Business Perspective

For those businesses who cannot stand out from the crowd, CSR often translates in modest improvements to operational efficiency, waste management, corporate communications and investments in stakeholder-specific assets. Once a stakeholder receives attention, they will both increase the contributions to the organisation’s well-functioning and raise the expectations of future returns. Conversely, if a stakeholder perceives disparities and favouritism, he or she will withdraw support and funds from the company.

From these arguments, albeit businesses should invest the right amount of resources in every stakeholder, mistakes in allocation can result in deluded stakeholders due to envy or unfulfilled expectations. Further, if every firm in the industry raised its CSR standards, sustainability would not earn any competitive advantage as stakeholder expectations would rise beyond the achievable level. Therefore, from the organisational perspective, it is of utmost importance to differentiate one’s sustainable promises from those of competitors and minimise unnecessary and dangerous expenses.

Who Rates The Rating Company?

For resource-constrained small businesses, one of the easiest ways to adhere to sustainability standards and promote CSR is obtaining certifications from accredited agencies and communicating those through business channels. Companies can signal their positive impact and assess the sustainable value of their proposition through a comparison with their competitors. Unfortunately, contrasting standards and inconsistencies create easy to exploit loopholes.

Prominent institutions in economics and finance regularly rate businesses according to criteria of economic, social and environmental sustainability. Dow Jones, Financial Times and asset-management companies all have their own scales and metrics, with radical differences among indexes. In practice, not only can a single company’s ratings significantly vary across rating agencies, but also year-on-year evaluations of a certain agency can show considerable fluctuations. Further, sustainability ratings are unreliable and unrelated to each other: highly-rated companies have often been at the centre of public scandals, and rating differences persist even within the single dimensions of CSR.

The Many Options

Given the appealing opportunity of building a certified reputation and the need to avoid expenses that do not yield returns, inconsistent standards offer an easy way out of CSR. The plurality of rating companies and the marked differences between them allow companies to claim sustainable excellence without making substantial investments or actively modifying their practices. In other words, a late-mover willing to gain public favour could simply find a rating agency whose standards are compatible with its current business practices.

Since certifications are easily accessible, in the eyes of the final customer they are worth more than hard facts and proven evidence, even though most customers are not aware of the diffused subjectivity and unreliability. Businesses who truly wish to embrace CSR should pioneer innovative sustainable formulas, transparently explain how they enrich society and bear the burden of increasing stakeholder expectations.

Guidelines

Rating companies play the hard role of providing trusted signals for investors and the public. Several steps should be taken to guarantee integrity and solidity of standards. First, measures and ratings should be adapted specifically for small enterprises and provide opportunities for recognising their efforts. Small companies cannot invest in pricey sustainable initiatives, and for that, they should not suffer penalties against international competitors.

Second, as the market for certifications is fragmented and hardly comprehensible, rating companies should agree on common procedures, definitions and metrics to evaluate best and worst performers. The recent mergers and acquisitions going on in the rating industry might help establish uniform standards and warn against malfunctioning.

Third, an ideal rating system should, once the champions identified, use their sustainability scores to raise global standards. For sustainability purposes, rating companies should push businesses to do more and spread best practices. A system that rates based on easy-to-accomplish does nothing more than encourage greenwashing and disincentivizing investments in CSR.

Originally published on The Market Mogul

Luca Castellanza is a postgraduate student at IIM Ahmedabad and journalist at The Market Mogul. After some years in startup advisory and consulting, his keen interest for sustainability issues, clean technologies and impact of business on society have brought him to write thought-provoking articles about the challenges faced by our world.