Specific regulatory interventions can improve corporate responsibility performance

In the wake of the global financial crisis, the challenges facing many governments – globalisation, liberalisation and an increasingly acute awareness of the competitive implications of many policy interventions targeted at business – have limited their capacity or willingness to introduce new regulatory requirements for companies.

The rationale is that these external governance pressures will reinforce internal governance mechanisms (specifically voluntary commitments to corporate responsibility and corporate governance processes) and, thereby, maximise the contribution that companies make in the transition to a more sustainable economy.

The question, of course, is whether, and under what conditions, this governance by markets and civil society will actually be effective.

Over the past three years, our research into the climate change performance of the supermarket/retail sector has provided some important insights into the extent to which different governance interventions might influence corporate responsibility practice and performance.

The first insight is that the majority of the actions taken by companies on climate change – in particular, those actions that involve significant capital investment or significant organisational resources – can be explained simply by considering the costs and the benefits of the actions taken.

This does not mean that companies do not realise other benefits from these actions (eg the PR benefits that can accrue from badging energy saving programmes as climate change initiatives), but rather that these benefits are frequently ancillary to the primary driver for action.

The second insight is that the options available to individual companies reflect their own internal knowledge, skills and capacities. Companies that have experimented with energy saving technologies and have tested different approaches to energy saving and emissions management are likely to have a much greater range of tested and proven options available to them.

This is very clear in the case of the UK supermarket sector, where a number of the large supermarkets have dedicated significant time and resources to developing green stores and intensively testing a wide range of energy saving technologies. This testing and pursuit of efficiency has seen them develop significant competence and knowledge in energy management, as well as detailed cost curves for a whole variety of technologies and approaches.

This also has significant knock-on effects in terms of companies’ willingness to broaden and deepen their search for energy and efficiency savings.

For example, a number of supermarkets have started to engage with their supply chains on climate change and energy issues. In interviews, a number of the companies noted that one of the key motivations was that they had previously made significant reductions in the energy consumption and greenhouse gas emissions of their facilities, and that they expected similar reductions to be achievable through their supply chains, thus providing benefits to them in terms of reduced costs and reduced risk.

The third insight is that while it can be very difficult to predict the influence or impact of specific governance interventions or pressures, it is clear that the alignment of different governance pressures can be hugely important.

While it may be easy for companies to ignore individual pressures (eg a specific NGO campaign), different forms of external governance tend to have a greater impact when they reinforce one another, eg where NGOs and business leaders work together to call for legislation in a particular area or where investors engage with companies on issues that have also been raised by NGOs or the media.

The corollary is also true; a lack of alignment can weaken the effectiveness of governance interventions. For example, while the media has played an important role in raising the profile of climate change, it has concurrently given significant attention to the scientific controversies around climate change and has encouraged consumption patterns and lifestyles that run counter to those that might be implied by a low carbon, low impact world.

The fourth insight is that the actions of competitors are important. In the case of the UK supermarket sector, the decisions by Marks & Spencer and Tesco in 2007 to take a leadership position on climate change were cited by many other retailers as an important reason for their decision to take action on climate change.

This insight must be qualified by noting that the importance of peer pressure depends on the individual company’s business strategy and market position. For example, companies who see themselves primarily as being low cost businesses may pay much greater attention to competitor efforts on pricing but pay relatively little attention to their competitors’ efforts on sustainability-related issues.

While this analysis does not provide a definitive answer on how best to design public policy in every context, it provides valuable pointers to the manner in which policy makers need to think about encouraging or incentivising corporate responsibility.

It suggests that policy makers need to consider governance interventions that alter the economics of corporate responsibility-related investment decisions, that they need to encourage pilot programmes and other initiatives that build capacity within companies, that they need to consider multiple rather than single interventions (eg economic incentives and disclosure initiatives), and that need to work with leaders to encourage others to take action.

Professor Andy Gouldson is director of the centre for climate change economics and policy at the University of Leeds.

Dr Rory Sullivan is a senior research fellow at the University of Leeds, chair of the Ethix SRI Advisers advisory council and a member of the Ethical Corporation editorial advisory board.

Dr Stavros Afionis is a postdoctoral research fellow at the sustainability research institute at the University of Leeds.

This article is based on the Centre for Climate Change Economics and Policy (CCCEP) Working Paper Number 137: The Governance of Corporate Responsibility by Andy Gouldson, Rory Sullivan and Stavros Afionis.