Sustainable development used to be the least of a company’s concerns when making investments. Now it is one of the most important issues. Companies, and even countries, that get corporate social responsibility wrong pay a huge price. Ashleigh Lezard reports.

Multinational corporations are pulling out of Cambodia because of the country’s sweatshop image. Their own operations may be fine but they fear that such negative associations could bring a slew of bad publicity and cause them headaches with social action groups and shareholders around the world. If Cambodia cannot improve the situation, it will lose FDI to China.

This case illustrates how far things have come in the world of multinational investment. At one time multinationals – or at least some of them – did scour the world looking for countries without proper labour standards, without environmental restrictions and where problems could be solved by paying off government officials. These days, the risk of a major fallout from being caught doing something dubious, or even that just appears dubious, are far greater than the short-term gains of a lower wage bill or a quick environmental fix.

Image protection

Things have now gone to the other extreme: multinationals shy away from anything that could feasibly damage their image and cause loss of markets and profits. They take all possible steps to be regarded as responsible players making a contribution to their host country.

While environmental concerns used to be the major issue for them, the idea of corporate social responsibility (CSR) is now what occupies many hours of meetings by the board of directors.

“If we review the history of the sustainable development concept, we can see that the simple financial or economic case was merged in the last decades of the 20th century with the case for environmental and ecological concerns. The challenge now is to integrate the social dimension into these models so that all three legs of the sustainability concept are addressed,” says Barry Stickings, president of BASF Europe, a German chemicals company.

Socio-eco-efficiency

BASF Europe is developing indicators for the social dimension of sustainable development that can then be integrated into its socio-eco-efficiency model.

The company’s social performance assessment unit will then seek to evaluate and foster continuous improvement of the social performance at its sites with criteria including assessments of workplace conditions such as health and safety and core labour rights.

While some executives such as Egil Myklebust, chairman of Norsk Hydro, an energy and materials multi-national, continue to argue that “government is still responsible for social development, not business”, the majority fear the consequences of not being engaged.

Power & responsibility

Today, the multinationals are under attack from every side, and there is huge pressure on them to use their power responsibly and give something back to the community. They must also demonstrate that their relationship with government is transparent. Companies involved in mining are particularly vulnerable to criticism, not all from anti-globalisation protesters.

Recently none other than George Soros, billionaire investor and philanthropist, called for multinationals involved in the mining and minerals sector to disclose the breakdown of payments, such as taxes and royalties, to individual governments.

Mr Soros sees a “close connection between the exploitation of natural resources and the prevalence of corrupt and oppressive regimes”. Angola is a prime example, with Ł1bn of its revenue from oil disappearing a year. It receives the third largest proportion of inward investment in Africa but remains one of the poorest countries in the world. Mining and oil companies have, according to Mr Soros, a responsibility for what happens in the countries in which they operate.

Social programmes

Multinationals are countering their critics by devising far-reaching social programmes. In South Africa this August, the world’s business community will focus its attention on the World Summit for Sustainable Development, where ideas will be shared.

Some of these ideas have been developed in the South African environment. International companies such as DaimlerChrysler have developed strategies to monitor and support HIV-infected employees.

A recent report by Deloitte & Touche warned that the business community should be administering drugs to prolong the productivity of workers. With the HIV virus threatening to wipe 0.4% off South Africa’s economic growth each year over the next 15 years, it is in a company’s own interest to so. It has been left up to the business community to assume responsibility for treatment, as the government is not supplying the necessary drugs through the health service.

New ventures

But CSR is still virgin territory for many companies, and their efforts can backfire. Recently, sportswear manufacturer Nike has been taken to court in the US over its code of conduct and the improvement of working conditions in Indonesian factories. The California Supreme Court ruled that Nike’s code had no legitimacy and is “little more than a public relations exercise”. If a business tries to promote its CSR policy, it should ensure that it stands up to close scrutiny.

CSR accountability

To prevent this type of scenario, there have been calls for some sort of accountability measures in CSR. “The need for a commonly accepted set of indicators for measurement of progress, for benchmarking and for ranking is clear”, argues Mr Stickings.

The Global Reporting Initiative (GRI), an international coalition of companies, accountants, non-government organisations and trade unions, has been developing a framework of guidelines for companies to follow when reporting on environmental, social and economic policy.

“When we first started we were very strong on the environmental side but weak on social and economic indicators. Social guidelines are the most difficult to define but we have had a good response from the new draft of working guidelines released in April,” says Mark Brownlie, the GRI’s communications director.

The GRI has also released guidelines for different sectors, acknowledging that varying sectors have different priorities. These include mining, automotive, tour companies and financial services. The organisation is at present working with the oil and gas sector. This addresses the doubts of many executives over whether widely different sectors can be comparable.

Mr Brownlie emphasises that GRI is a neutral organisation and disclosure is voluntary. “Mandatory standards are up to governments to decide,” he says.

Although voluntary, many companies see it in their best interests to follow the recommendations. These include Ford, South African Breweries and Shell, among others.

Whether there are more regulations introduced or reporting remains voluntary, “companies still need help when they invest abroad”, says Mahmud Nawez, director of Emerging Market Economics, a consultancy in London. His company has helped Nestlé, Nike and Tesco to develop socially-responsible programmes. “Tesco had a problem with untrained staff when it invested in the Czech Republic, we helped the company train and invest in people near the site.”

Best practice

Likewise, it is also up to larger companies to show the way to smaller enterprises. “Just like you would share best business practice, you have to share knowledge of best practice in health and safety issues and HR,” said Robert Brullo, managing director of 3M in the UK. Mr Brullo accepts that it is in the interest of every business to act responsibly.

Such responsibility can only bring benefits according to Hanna-Leena Pesonen, professor of corporate environmental management at the University of Jyvaskyla in Finland. “Management of sustainability issues is good risk management. Both environmental and social issues include possible business risks, which can mean huge economic responsibilities for the company, if they are not to result in huge losses, as in the case of Shell.” (Shell received a huge amount of bad publicity for both its involvement in Nigeria at the time when environmental campaigner Ken Saro-Wiwa was executed, and over the disposal of the Brent Spar oil platform in the North Sea.)

Ms Pesonen continues: “Image improvement can have several positive impacts including improved motivation of the staff, increased sales and market share and ultimately higher profitability”.

Clearly, multinationals cannot afford to ignore CSR.

GRI Guidelines

The GRI’s Sustainability Reporting Guidelines encompass the three linked elements of sustainability as they apply to an organisation.

Economic sustainability: including wages and benefits, labour productivity, job creation, expenditures on outsourcing, expenditures on research and development, and investments in training and other forms of human capital. The economic element includes, but is not limited to, financial information.

Environmental sustainability: including impacts of processes, products, and services on air, water, land, biodiversity, and human health.

Social sustainability: including workplace health and safety, employee retention, labour rights, human rights, and wages and working conditions at outsourced operations.