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Miles, Hammond and Friedman, 2002

Executive summary

Introduction

This report examines socially responsible investment (SRI), corporate social and environmental reporting (SER) and stakeholder management in UK corporations. It comes at a time of unprecedented change in the corporate social responsibility (CSR) field as CSR becomes a key board-level issue. This change is underpinned by:

• the Pensions Law Amendment, which requires trustees to consider social, ethical and environmental matters in their investment decisions
  
  
• the Companies Act Review, which makes it clear that directors are responsible for the long-term health of the company rather than mere short-term goals, and which is likely to recognise social responsibilities explicitly
  
  
• stock market regulations (via the Turnbull Report), which specify that all listed companies must include in their annual report and accounts a section on their approach to managing and exploiting risks, including reputational risks
  
  
• the launch of the FTSE4Good Index
  
  and
  
  
• a growing recognition of the business case for CSR (ABI 2001).

This report presents findings derived from expert opinion on both sides of the SRI/corporate relationship and professional assessors of SER quality. It also includes case material relating to The Co-operative Bank, a pioneer in UK stakeholder management practices.

Although this report looks at a range of corporate stakeholders, one is identified as being of particular interest: the socially responsible investment sector. It is argued that, in order for SER to advance further in terms of quality and quantity, and consequently for corporations to take it seriously, socially responsible investment must be widespread. This may be directly by the SRI sector, or indirectly by mainstream analysts incorporating SRI decision criteria into investment decisions.

The SRI sector is well placed to influence corporate behaviour, especially in regard to CSR disclosure. The SRI sector utilises SER, yet is critical of the SER currently presented. Demands for better quality disclosure in the past have been largely unmet by corporations owing to the perceived marginality of the sector. The SRI sector has grown rapidly since 1996, however, and appears to be set for further expansion. Where SRI funds were previously considered minor (EIRIS 1998), most company respondents (71%) now consider actual and potential SRI to be important to their organisation.

The SRI interviews confirmed that an anticipated change in methods of SRI engagement is occurring. Predominantly 'negative' screening against companies judged to be engaged in socially undesirable activities, is moving towards judging companies based on their positive initiatives towards social and environmental issues (positive screening). In addition more active methods of engagement are being pursued, such as constructive dialogue and shareholder activism. Mainly as a result of the Turnbull Report and the Pensions Law Amendment, SRI concerns are beginning to penetrate mainstream City institutions, though this process is still at a very early stage.

Data on corporate motivation and pressure to disclose voluntarily or not disclose social and environmental information were sought from 58 respondents representing 30 UK organisations. Companies were stratified according to size, industry and whether they were considered socially, ethically or environmentally acceptable for investment by two ‘deliberative’ UK SRI funds (i.e. who are choosing their criteria on the basis of reasoning about the ethics of corporate practices rather than their perception of market demand).

Corporate respondents expressed their motivation for SER in terms of business relevance rather than on altruistic or ethical grounds. Overall, respondents were more likely to identify the pressures to report rather than the benefits of reporting. The mainstream financial investment community (the City) was the most frequently identified source of pressure to report, although this pressure was indirect via the Pensions Law Amendment, the Turnbull Report and the Company Law Review. There was some evidence, however, that pioneers of SER and those identified by the SRI sector as best in terms of social and/or environmental responsibility are more likely to express an ethical motivation and are also more likely to identify the positive benefits of reporting.

The research identified two key drivers for the initial decision to include social issues in the annual report and accounts (AR&A). These were transparency (reporting on CSR isuues in an open and honest fashion) and corporate governance pressure to show how environmental risk is being internally managed.

In contrast, the main driver for initially producing stand-alone reports was stakeholder pressure. This suggests that CSR report producers see very different audiences for the AR&A and the stand-alone reports, with the latter serving a much wider interest group. The motivation for continuing to report came mainly from pressures within the City and from government. Fewer respondents were motivated by the benefits that result from reporting. The key motivating benefit perceived was enhancement of reputation, particularly as evidenced by awards and ranking exercises. A minority mentioned cost reduction.

For established reporters, the incentive was in winning awards or in achieving successful benchmarking scores. This not only motivates managers personally by raising internal and external status, but also contributes to brand, strengthening the business case for SER. A company can acquire 'green' credentials on the basis of good SER. In turn, the mere process of producing a good report necessitates improvements in internal management systems if not in actual corporate social performance (CSP).

A key aspect of CSR is the recognition that corporations need to address the needs and expectations of stakeholders other than the shareholders to whom the company is officially accountable. Stakeholder management is currently fashionable. Although all companies surveyed had historically managed these relationships, explicit efforts, such as conducting a stakeholder mapping exercise, were recent activities for most respondents. Such an exercise helps in the identification and assessment of key stakeholder groups and the critical issues on which those stakeholders are most likely to engage, as well as issues on which the company should proactively engage with the stakeholders. Larger companies on average identified more stakeholder groups than smaller ones, the investment community, customers and employees being the most frequently cited stakeholders.

The majority of respondents considered shareholders and the investment community to be the most important stakeholders. On average customers were listed second and employees third. A third of respondents viewed shareholders as the most demanding and also the most powerful stakeholders in terms of company time and resources devoted to managing this relationship. Second most demanding were customers and regulators. Surprisingly, only three respondents thought that non-government organisations (NGOs) exerted a considerable amount of pressure on their companies. The rankings were very similar in regard to the criteria of legitimacy: (1) investors, (2) customers, and (3) employees, in that order.

Stakeholder management activity was analysed according to Arnstein's ladder of participation (Arnstein 1969). This model specifies eight levels of participation according to the degree of stakeholder power present in the process in question. Most activity observed in this study would be classed on the lower rungs of Arnstein's ladder, representing a powerless form of participation. Arnstein classifies these powerless forms as 'tokenism' or 'non-participation' characterised by activity undertaken to manipulate stakeholder perceptions. Corporate stakeholder management activity identified would be characterised as responsive, but not involving active participation in decision-making. There were, however, infrequent instances of approaches to stakeholder management using participation methods that were at the top of Arnstein's ladder and which thereby allowed active or 'true' participation. In particular, the partnership approach to stakeholder management developed by the case study organisation, The Co-operative Bank, falls into this category.

Another aim of the research was to assess the quality of the reporting by the sample companies. This issue was addressed in order to assess the links between good CSP, as recognised by SRI screens, and good SER. The difficulties in achieving a sophisticated, reliable and replicable assessment, even when using existing methodologies, led us to examine the SER quality assessment process in greater detail. Expert opinion confirms these difficulties, indicating the need to develop this area via future research. Most importantly, the examination highlighted the need to distinguish between SER quality and CSP.

Research Report No. 77 – Social and Environmental Reporting and Ethical Investment by Dr. Samantha Miles, Kim Hammond and Professor Andrew L. Friedman, (ISBN: 185908 379 X) has been published in electronic format using Adobe Acrobat PDF.

It is available from the ACCA website at: www.accaglobal.com/research

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