After decades of evolution, CSR now plays a central role in corporate strategy and wealth management in a post-coronavirus world. We examine what this means for everyone.
Corporate social responsibility (CSR) assumes different interpretations and standards depending on culture and economy. It’s ultimately driven by groups of people with diverse social values. The interaction and conict among companies and investors ultimately determines the direction and development of global corporate governance and CSR practices – especially during this time of immense challenge. Sustainability, investment returns and business progress are equally demanded in stakeholder areas from environmental causes to artificial intelligence. How investors and family offices develop and practice CSR in managing their wealth is more relevant than ever to making investment decisions and dealing with investment professionals.
One way for wealthy individuals and family oces to understand the complexities of CS is to examine their own social consciousness. Charity and philanthropy are often confused together. Charity is simply giving money to a charitable organisation and letting their managers decide how to manage it. Philanthropy is like standing on the street by yourself and deciding who to hand out money to – it requires much more determination and effort, the kind of strategy and execution needed to solve a problem. Practising CS requires a much more conscious effort to understand its importance and origins.
A major shift in business culture and thinking demands that corporate executives must look beyond profits to meet broader stakeholder interests. Today, policies must extend beyond shareholder and company relationships. Emerging and fast-changing technologies, such as big data and artificial intelligence, require expanding corporate accountability and even new definitions for all stakeholders. How they affect the development of policies is still being debated. The historical and traditional definition of CSR doesn’t easily lend itself to be clearly or consistently applied.
It’s no longer enough to give to charities to demonstrate social conscience and awareness. CSR has risen from obscurity to become a driver of policy decisions at the corporate and investment levels. It broadly describes the policies and activities of companies, which reect their overall responsibilities to both public and private shareholders. When a company donates expertise or technical support to a cause, it’s not only trying to promote the organisation. It’s trying to advance social wellbeing beyond furthering the interests of its managers and owners.
Historically, a company’s CSR activities have focussed on charitable donations and assisting local communities. Today, CSR is becoming an integrated part of how a company operates. Besides achieving corporate and financial performance, they need to demonstrate how their business impacts customers, employees and society. CSR is becoming a more prominent issue for investors because they’re more concerned about how their money impacts the world.
CSR decisions are no longer only a public- relations or marketing issue. Decisions and policy making are now occurring at the capital allocation and C-suite level. At press conferences and annual meetings, questions and challenges from investors and the general public are more detailed and demanding these days.
CSR has grown into a wide concept for all the ways in which a company and individual investor should understand their impact on the world beyond profits. CS used to be a benign marketing section to fill out an annual report. However, a new generation of millennial consumers and investors demand authentic action. Many more investment funds and companies are identifying CSR as impactful and important to the way they do business.
How CSR came into existence
Over the last 20 years, CSR has become fully integrated into business strategy and compliant with regulations. It requires covering how business relates to the environment and society more broadly. It goes further than a mere description of a company’s activities. CSR goes beyond the legal and compliance obligations of good governance, putting social and environmental concerns equally at the heart of their businesses for long-term sustainable gains.
The entire trend began in the 1970s. It was known as “socially responsible investing” (SRI). Investors largely employed negative screening tools to filter out investments in industries engaged in harmful activities, such as tobacco and gambling. They believed capital should be used for morally good industries. However, the parochial definition of companies under SI limited its usefulness in establishing a diversified, optimal investment portfolio.
Environmental, social and governance (ESG) investing overlaps with CSR. ESG consolidates environmental, social and governance factors into investment-management decision-making. Companies practising ESG drive high-quality environmental, social and governance standards to try to outperform their peers.
Impact investing demands that companies be able to measure and generate environmental and social impact alongside financial performance. It’s challenging for managers, because profit and impact may create conflicting outcomes with financial profitability, a positive environmental and social impact.
CSR can mean many different things to different investors. Some think that paying taxes discharges their CSR responsibility – that social and environmental issues are too abstract to distil into actionable plans. No standard approach to CSR is practised. What relates to the core activities of the business and its industry context may be important for managers but, not for investors.
It pays to be good
Today, non-financial and operational elements such as staff morale and environmental concerns can help management determine whether a business becomes a long-term, sustainable success. Companies need to evolve high standards of CSR reporting to demonstrate competent risk management to investors. Those that fail to recognise and act upon their social responsibilities are increasingly regarded as a bad investment by the market.
A company that develops and enforces strong CSR values is likely to make an attractive investment, because it tries to display a high degree of transparency. It will seek to communicate its CS efforts to an enlightened and more appreciative shareholder and stakeholder base. Investors, especially funds, like a transparent ow of information, as it helps determine if the company can actually accomplish its objectives. Robust CSR policies suggest that a senior management team recognises the significance of non-financial issues to a company’s valuation and prospects.
For example, consumer companies are publicly held to account for product-safety standards throughout their supply chain. Energy companies need to pursue new renewable sources, as investors closely scrutinise their activities. The rising popularity of electric vehicles has seen CSR supporters demand that battery producers provide detailed information concerning the safety of their production methods.
Ethical investment funds have now evolved to manage under strict mandated rules that help determine who they can invest in. Their managers must file detailed and regular reports about their investee’s CSR policies. Investors and the public also expect good business behaviour and have demonstrated they’re willing to use social media to penalise companies that conduct themselves irresponsibly.
Practising sustainability and CSR will impact investment returns. Acceptance of CSR by money-management professionals is proving itself to be a strong foundation for managing wealth in the post-coronavirus world. And it will fundamentally reshape the financial world by forcing investors to profoundly evaluate their perceptions of risk and return.