From Deepwater Horizon to ISO 26000, it’s been a year of big events
The world entered 2010 with optimism as the global credit crisis had eased and the economic recovery was in sight.
However, the recovery in the US and Europe has been sluggish; more of the global economic power has rolled over towards China, India and a few other rapidly developing countries; and inflation is planting new fears of bubbles forming in various pockets of the global economy. Also in the mix have been currency wars making multinational companies reconfigure their financial projections and countries mulling new measures to protect their markets.
Twelve months ago, corporate responsibility commentators were obviously conservative in predicting their outlook for the year. Companies recovering from recession were, it seemed, more likely to continue cutting budgets on corporate responsibility initiatives.
But a couple of incidents may have changed the mood. First, the embarrassing recall by Toyota Motors, which started towards the end of 2009, leapt up to disastrous levels, bringing the reputational risk back in focus in boardrooms. Second, and more defining, a jolt came in April when BP became the poster child of bad business after the oil leak following an explosion on the Deepwater Horizon rig in the Gulf of Mexico.
The BP oil leak, the worst environmental disaster in US history, is certainly the biggest corporate responsibility disaster of the year. BP executives have been accused of first neglecting the safety aspects in operating the rig, then underplaying the potential damage caused by the spill and acting slowly in plugging the leak. BP chief executive Tony Hayward lost his job for failing to contain the leak and then the ensuing crisis.
BP has lost reputation, and loads of money. On the New York Stock Exchange, BP shares dropped 52% in 50 days following the spill, falling from $60.57 on April 20, to $29.50 on June 9. The stock price has since recovered and was trading at around $48 in mid-November, still about a third down from the pre-spill price, representing a loss in market capitalisation of more than $60bn.
The company faces potential liability from a number of legal claims including a class action lawsuit arising from those affected by the spill. BP has estimated the likely cost of the spill will be more than $40bn. The cost may be twice as much if gross negligence is proven on the part of the company.
Other events that attracted wide attention and controversy during the year included Cadbury’s acquisition by Kraft Foods, Google’s threat to leave China over censorship issues, and Vedanta Resources’ controversial plans to mine bauxite on tribal land in afforested area in Orissa, India.
Global supply chains had a few refreshing moments. Riding high on the success of its sustainability initiative Plan A, the UK retailer Marks & Spencer announced an ambitious target to become the world’s most sustainable retailer by 2015. The company also added 80 new pledges to the previous 100 commitments under Plan A and extended the programme to more than 2,000 suppliers and 10,000 farmers.
Supply chains good and bad
Wal-Mart continued to up its sustainability benchmarks by pledging to cut 20m tonnes of carbon from its supply chain by 2015. And Unilever announced its ambitious new sustainability plans – Sustainable Living – in November.
California’s new supply chain transparency laws mean that any company with a turnover above $100m operating in the sate will have to disclose its efforts to eradicate forced labour in its supply chain. The influence this will have is as yet unclear. But certainly pressure groups will monitor what companies disclose and incorporate this into future campaigns.
In 2010, activists kept up the pressure. Dirty Clothes, a report by the National Labour Committee, a US-based rights group, accused a Wal-Mart and JC Penney supplier in Jordan of human trafficking and abusing young women migrant workers from Sri Lanka, Bangladesh and India.
Apple set a new benchmark in supply chain reporting when it included disclosure of labour standards violations in supplier factories this year. However, the iconic IT brand soon found itself under attack after a series of tragic cases of suicides by workers employed by the company’s largest supplier Foxconn in China.
Notorious for shunning responsibility, the palm oil industry uncannily managed to come under the spotlight this year as Greenpeace continued its campaign against unsustainable practices.
Major companies that found themselves at the receiving end of high-profile campaigns were Nestlé, HSBC and Burger King for their connections with the Sinar Mas group, one of the largest palm oil producers in Indonesia with dubious credentials.
Greenpeace’s attack on Nestlé’s use of unsustainable palm oil, with a spoofed Kit-Kat video clip on YouTube, was perhaps one of the most talked about campaign of the year, and became an example of how social media can be used effectively by pressure groups. Nestlé retaliated by asking YouTube to remove the clip and in the process attracted even greater criticism by activists.
Eventually, Nestlé cut ties with palm oil producer Sinar Mas and said it would use only certified sustainable palm oil by 2015 in its products.
A number of other brands have stopped sourcing from Sinar Mas including Unilever and Burger King. Greenpeace had alleged that the palm oil producer was responsible for destroying rain forests, threatening the endangered orangutan and the livelihood of the local people.
Macro-level developments
However, the year was more remarkable for macro-level initiatives. The most significant event was the final passing of the much awaited ISO 26000 guidance standards on social responsibility.
“The publication of IS0 26000 is truly historic. It provides what is the most comprehensive and authoritative definition of what being ‘socially responsible’ means in the age of globalisation,” says Paul Hohnen, an Amsterdam-based sustainability consultant and an expert participant in the ISO working group on social responsibility since 2004.
The guidance standard, which is voluntary and not certifiable, covers seven core subjects: organisational governance, human rights, labour practices, environment, fair operating practices, consumer issues, and community involvement and development.
“The big question now will be to see how well it is received by the market and how it is used,” Hohnen says.
ISO’s decision to charge 192 Swiss francs (about $198) for the ISO 26000 standards document, instead of making it available for free, may discourage small and medium-sized enterprises from accessing the standards.
And corporate responsibility observers say ISO 26000 can potentially become more than voluntary. For example, some governments may want to pass domestic legislations to adopt and implement standards contained in ISO 26000.
Another possibility, which sounds more immediate and real, is that NGOs are likely to identify and target companies which do not live up to the ISO 26000 standards. This will force multinational companies in particular to demonstrate that they have embedded ISO 26000 guidance standards in their corporate responsibility strategy.
Higher uptake of ISO 26000 may see a rise in annual corporate responsibility reports and more companies opting for independent assurance of their reports as the guidance standards emphasise the value of social responsibility reports and independent verification of information contained in the reports.
Corporate responsibility reporting itself saw important developments.
A landmark initiative during the year included the formation of the International Integrated Reporting Committee (IIRC), led by Global Reporting Initiative and the Prince of Wales’s Accounting for Sustainability Project. This aims to create a globally accepted framework for integrated reporting by 2020, an ambitious goal with potentially far-reaching implications for how companies report.
An integrated reporting framework would enable companies to produce a single report that includes information about their financial performance alongside the information about their environmental, social and governance performance.
“The decision by GRI to move towards integrated reporting is a risky move when corporate responsibility is still emergent as a management function,” says Leeora Black, founder and managing director of Australian Centre for Corporate Social Responsibility, a consulting and training firm.
“But if it pays off as I think GRI intends, it will be a huge step forward as it brings the muscle and know-how of the accounting profession to bear on the subject of management information – a potential ‘fast’ route to mainstreaming,” Black adds.
Reporting rules
GRI is also advocating that environment, social and governance reporting should be made mandatory for all large and medium-sized companies by 2015 in the OECD countries.
In another significant move, GRI and the United Nations Global Compact decided to work together to include the Global Compact adopting the GRI guidelines as the recommended reporting framework for its more than 5,800 signatories.
“The debate on reporting moved in 2010 from whether to report to how to report, and this includes fundamental questions about presentation of CR reports – online or print/download – versus integrated and frequency of update,” says Elaine Cohen, head of consulting firm Beyond Business (and a regular report reviewer for Ethical Corporation).
Cohen says the other trends to watch for in 2011 include non-profit reporting, online engagement around reporting, increasing use of social media tools, more robust online formats, issue-based reports, and better reporting on materiality and stakeholder engagement.
Badly bruised from the recent financial crisis and suffering from depleting public trust, financial institutions appeared more open to embracing responsible investment principles.
The number of investment institutions signing up to the Principles for Responsible Investment (PRI), an initiative by the United Nations Environment Programme and the Global Compact, jumped to more than 835 in 2010 representing $22bn assets under management, up from about 600 in 2009. The initiative had only 50 signatories when it was launched in 2006.
PRI signatory companies are obliged to complete an annual survey on their progress on responsible investment activities. This year, 40% of them decided to make their survey answers public, up from 25% last year.
In the UK, the Financial Reporting Council, the independent regulator responsible for promoting corporate governance and reporting, published the Stewardship Code for institutional investors.
The code, which will mainly apply to asset managers, institutional investors, pension funds, insurance companies, investment trusts and foreign investors, is aimed at improving transparency on how institutional investors manage their investments in the investee companies.
The code, based on a comply-or-explain approach, expects institutional investors to publicly disclose how they discharge their stewardship responsibilities, have a publicly stated conflict management policy, actively monitor investee companies, be willing to act collectively with other investors, have a clear voting policy and disclose voting activity, and periodically report on their stewardship.
“High quality stewardship supports and protects value creation over the long term. By meeting the broader interests of society, it also protects the continuing ‘licence to operate’ of pension funds and other asset owners and of the investment managers who are their agents,” says Penny Shepherd, chief executive of UK Sustainable Investment and Finance.
Shepherd says increasing numbers of pension funds are requiring their investment managers to demonstrate their commitment to the UN-backed Principles for Responsible Investment. “Use of the UK Stewardship Code can form an important part of this commitment.”
More than 55 asset managers, including big names such as Aviva, Aberdeen, Axa, Goldman Sachs, HSBC, JP Morgan and UBS and about a dozen pension funds have already signed up to the code.
Biodiversity politics
The Economics of Ecosystems and Biodiversity (Teeb) study, an initiative supported by the G8 countries and Brazil, India, China, Mexico and South Africa, published its final report this year making progress towards understanding the global economic benefit of biological diversity, and the costs of the loss of biodiversity.
An international agreement on the economic value of biodiversity could have far-reaching implications for companies in biodiversity sensitive industries such as mining.
Shepherd of UKSIF says the Teeb report could facilitate the development of regulatory and public policy measures to make usage and replenishment of natural resources material to the bottom line for many industry sectors.
“Managing their use of ‘ecosystem services’ may soon be business as usual for companies not just in natural resources but in a range of industry sectors,” Shepherd says.
Though the timing of the Teeb report was just right – it came out a week before 193 governments got together for the Convention on Biological Diversity (CBD) in Nagoya, Japan, in October to hammer out a global deal for conservation – the summit participants don’t seem to have allowed the report to guide their approach.
The CBD eventually succeeded in reaching a last-minute agreement on 20 objectives for 2020, but analysts warn it is too early to celebrate the deal, as its long-term implications will take some time to become apparent. Commentators have even criticised the CBD for declaring the summit a success while failing to publish the agreement.
Observers say the goals adopted are weak, unclear, lack the sense of urgency needed to halt nature’s destruction, and are largely unbinding.
While the global community failed to arrive at any deal on climate change in Copenhagen in 2009, a number of businesses continued their own initiatives to reduce carbon emissions from their operations.
The number of companies disclosing their carbon emission data through the non-profit Carbon Disclosure Project (CDP) has climbed to more than 3,000 this year – a major leap from just 235 companies in 2003.
A number of companies including PepsiCo, Dell, Juniper Networks and Reckitt Benckiser have started asking their suppliers to disclose emission data by participating in the CDP supply chain programme.
In the US, a number of consumer companies including Starbucks, Nike, Levi Strauss and Timberland continued lobbying for a strong climate change law through their association Business for Innovative Climate and Energy Policy.
The first CDP Water Disclosure report, based on responses from 147 companies, which are among the world’s largest, this year indicated that water security was already high on the corporate agenda. Of the companies, 67% are reporting responsibility for water-related issues at the board or executive committee level while 89% have already developed specific water policies, strategies and plans.
The flipside is that only 50% companies that were sent the CDP questionnaire chose to respond.
The year ahead
So, at the end of 2010, environmental impacts remain in the spotlight. We will report next issue the outcome of this year’s climate change summit in Cancun. In the run up, there has been little hope that the Cancun meeting will produce any substantial global deal to cut greenhouse gas emissions, much like Copenhagen a year earlier.
A lingering recessionary hangover in the US and limping economies in several European countries would discourage these nations from making any meaningful commitment to cut carbon. China and India have not changed their outlook on climate change, either, since the Copenhagen summit: both of them still refuse binding targets.
Otherwise, the year 2011 may well be partly shaped by some of the macro-events of 2010, such as the extent to which companies apply ISO 26000, use biodiversity agreements and the Teeb report to realign their strategies.
Corporate leaders will continue to improve their carbon emissions reduction performance – even in the absence of a global political deal – and take their corporate responsibility reporting to the next level.
2010’s ups and downs
January
The credibility of the 4th assessment report of the Intergovernmental Panel on Climate Change is challenged after several embarrassing errors are discovered.
February
Wal-Mart announces a huge target of removing 20m tonnes of carbon emissions from its supply chain by 2015.
The Environmental Justice Foundation released a new report – Slave Nation – exposing how cotton production in Uzbekistan continues to violate human rights.
April
Marks & Spencer announces target to become the world’s most sustainable retailer by 2015.
Explosion on
May
GRI and Global Compact announce collaboration to align their work.
June
An Indian court convicts seven former Union Carbide officials of criminal negligence in the 1994 Bhopal gas tragedy.
July
IFC/World Bank releases a draft framework for engagement with palm oil sector.
UK Stewardship Code published.
US Congress passes the Dodd-Frank Bill that bars banks from risky and speculative investments such as proprietary trading, operating hedge funds and private equity fund.
August
International Integrated Reporting Committee launched by GRI and A4S.
Indian government halts Vedanta Resources mining project in Orissa due to serious violations of environmental rules.
October
The Convention on Biological Diversity produces a global agreement on 20 goals by 2020.
The final Teeb (The Economics of Ecosystems and Biodiversity) report issued
November
First CDP Water Disclosure Project report launched.
ISO 26000 guidance standard on social responsibility launched.