Ethical Corporation starts to make sense of the key developments in a turbulent year for responsible business, and looks at what might happen in 2009
What a year. It may have taken until September to sink in, but now everyone working in corporate responsibility accepts that it will not be responsible business-as-usual for the next 12 months.
Here we look back on a momentous year for business by considering what impact the financial crisis and economic downturn will have on corporate sustainability efforts. We ask what progress companies are making to tackle climate change. And we make some tentative predictions of what companies can expect in 2009.
It may have been a year of shocks, but 2008 has seen some encouraging signs in the areas of green marketing, business and human rights, and – of course – the change in American leadership.
But as the slowdown starts to bite, companies will need much more than good intentions to keep up their sustainability efforts. Expect another bumpy ride in 2009.
The R-word
John Russell, managing editor: Is the coming recession a threat or an opportunity for responsible business?
Toby Webb, founder: It’s definitely both. Initially many will see it as a threat, as the debate about the value of corporate responsibility in some media has already shown. Companies are under pressure to cut spending and corporate responsibility is far from immune.
Some corporate responsibility departments expect big budget cuts. Medium- and longer-term projects, such as supply chain capacity partnerships, or climate change plans that involve major spending, are under threat for sure. The feeling across many companies is that spending will need to be more focused on the basics, such as compliance, for quite a while.
On the other hand, those firms that are smart about their responsible business plans will be able to take the opportunity that lower spending by others represents. Companies do not have to spend vast sums to win greater trust, so clever managers will realise they can get ahead of the competition by using what money they have wisely and with care.
Mallen Baker, advisory board member: Both. At a time of rapid change, there is always space for the fleet of foot. Particularly there are opportunities if some of the larger companies retreat behind the barricades in response to the difficulties and seek to play safe. Calculated risk takers may enjoy a real bonanza if they can hit the right mark.
The big danger is that some investors or commentators will criticise companies that retain their commitment for, in their eyes, not focusing sufficiently on core business. That hasn’t really happened yet, and hopefully it won’t.
Paul Hohnen, advisory board member: The corporate responses to the financial meltdown will certainly be mixed. Companies that see corporate responsibility as PR will tend to cut anything that doesn’t look like core business. This might be termed the “jettison the babies and bathwater” strategy.
However, those that understand that corporate responsibility is actually all about “corporate strategic radar” will continue to use stakeholder inputs to map risks and opportunities, increase energy and resource efficiency, drive innovation and change, deepen relationships and build more sustainable businesses. A good example of this approach is Wal-Mart, which recently made a similar point to its Chinese suppliers.
JR: Are ethical companies better placed to survive a recession?
TW: Not necessarily. Ethically minded (as opposed to “ethical”) firms are spread across many sectors. Certain industries will suffer more than others, no matter the ethos of companies in that sector. But, clearly, employee motivation, non-compliance risk and customer trust, for example, are vital business issues. Companies that get these right will be better placed than others in the downturn.
MB: Any company that doesn’t have its business model sorted out is going to have challenging times. But companies that are able to retain the loyalty of their staff, keep their waste costs down and build customer loyalty are going to have certain advantages. The recession is the test of our belief in the existence of a business case. The companies that spoke the language in order to assuage the concerns of others, but never really believed it, they’ll be the ones to drop the commitments when times get tough.
JR: Which aspects of corporate responsibility are best-placed to withstand a downturn? Will we see more emphasis from companies on “hard” issues, such as legal compliance, and renewed efforts by people in corporate responsibility trying to make the business case?
MB: Everything will survive except for non-strategic philanthropy, and certain niche products that may suffer as consumers opt for cheaper alternatives. Of course, there’s no reason why things like Fairtrade coffee should suffer if retailers remove the false price premium retailers often charge over and above the extra that actually goes to farmers.
TW: Employee communications will be key. Worried staff members lose focus, and focus is what’s needed right now across all aspects of a business. Engaging employees is also cheap compared with new product development or external spending on facilities changes. Many companies look set to cut jobs, so keeping staff informed of what’s happening and acting as transparently as possible will be very important.
Harder issues such as compliance will be important. At the very least, companies must obey the law, so getting to grips with complex new legislation around environment and worker rights (temporary workers in the UK and Europe, for example) will be top of mind.
The business case as ever remains the most popular topic on EthicalCorp.com. In the current climate, managers will have to make the case repeatedly for any spending, not just on corporate responsibility issues. So of course the business case will be constantly scrutinised by senior management in firms and investor groups.
Media scrutiny on companies making cuts will be intense, and managers must think about the danger of bad press, when cuts related to corporate responsibility may save a few tens of thousands but impinge on corporate reputation.
Financial crisis
JR: Will 2008 be remembered as the year that governments decided they had to rein in free markets?
PH: I am convinced that 2008 will go down in history as a turning point. While it may be tempting to return to the good old days of unrestricted free markets, the reality is that this would probably be short-lived.
Unless capitalism reinvents itself in a way that ensures greater sharing of the fruits of globalisation, and shows it can be instrumental in tackling climate change – delivering the goods in both senses – governments will have no choice but to intervene more extensively. Experts familiar with possible future climate shocks see the financial recession as a small dress rehearsal for what could come. Just think of what a succession of floods or droughts will do to food prices and stock markets, and government response options.
The reality is that the 21st century will be what Richard Heinberg has termed “peak everything” – a time when the supply of many raw materials will go into terminal decline. Oil, gas and fish are at the top of the list. The old economic model of growth based on freely available raw materials and cost-free waste disposal cannot last. Climate change is giving us – and indeed compels us to develop – a sustainable growth model.
While I doubt whether chief executives’ benefits will be regulated, I believe that calls for greater government oversight of financial instruments and flows will lead to changes. A bigger question is whether proposals for bold reform to the Bretton Woods institutions will be picked up. The key point here, however, is that whatever reforms are decided they must all drive towards genuinely sustainable development. There’s no point in getting markets settled back into the old growth model, only to find ourselves being ushered into a meltdown of even greater proportions.
TW: To a degree. Before the crisis, as ever, business innovation had outstripped regulation. That’s not a new story. What is new is the global scale it occurred on and deep worldwide spread. This has made everyone realise how connected economies and nations are today. The level of complexity in the financial system is quite new, probably dating from the 1990s. And this was the year when we realised just how great the markets governance challenge is and how much more interaction is needed between governments, rather than competition.
MB: It will be remembered as the year when it was conclusively demonstrated that the financial sector cannot be left to regulate itself, and that innovation in financial products needs to be subject to greater public scrutiny. Whether that will lead to good regulation or ill-judged burdensome regulation will be the arbiter of how it then really gets judged by history. Sarbanes-Oxley, the US accounting rules introduced in 2002 after the Enron and other scandals, does not seem to have entered history as the day legislators reined in unethical behaviour by corporate executives so much as an example of knee-jerk legislation rushed through.
JR: What implications will the rebalancing of power between business and government, in the wake of the financial crisis, have for corporate responsibility?
TW: It’s hard to say right now. Much depends on what happens in 2009 as the crisis unfolds further. It will come down to what the shake-out in the system does to public and political expectations around corporate governance. When money is flowing, unfettered capitalism is easier for big business to defend. When times are tight, voters want to see business sharing their pain. Companies making profits will undoubtedly be even more open to criticism, often unfairly.
In times of crisis, there’s a tendency to talk about revolutionising systems. But I don’t see this happening. More likely is that regulators and governments will realise how much more they need to invest in oversight and talent, not just new laws.
MB: None of the arguments around the value of voluntary corporate responsibility go away. We just get a new area of doing business that gets an additional layer of regulation. There may be additional implications for businesses in terms of increased costs, but not in terms of corporate responsibility.
Climate change: politics
JR: At the end of 2008, are we any closer to knowing what a post-2012 global climate deal will look like?
PH: Climate change in 2008 is now a story of the good, the bad and the ugly. The good is that there is widespread recognition that renewable energy systems can be rapidly brought on stream. Together with concerted energy efficiency policies, we have the means of significantly reining in emissions.
The bad is that the political game of climate poker will mean that most countries will play their cards close to the chest, right up until the 2009 Copenhagen meeting, and probably beyond.
The ugly is that the rapid growth of greenhouse gas emissions is raising the stakes, making deeper and earlier cuts necessary. Climate change is a case of “you can run, but you can’t hide” where mitigation and adaptation are concerned.
TW: Not really. We won’t know until after Copenhagen next year. This month’s meeting in Poznan will be a wasted effort as the predominant focus will be on economics and in-fighting in and between the EU, the US and Asia.
Once Barack Obama is in office, and we know what his plans are, things will be clearer. Likewise, when the EU grasps the twin issues of climate change and energy security once more as turmoil subsides slightly in 2009, we’ll be able to see more clearly just how much commitment there really is to a post-2012 agreement.
MB: It very much depends on events in the next year. I am rather expecting that we will be seeing additional further physical evidence of the impacts of climate change, and that will sharpen resolve to create a substantial deal – but we will also see increasing backlash as the recession bites. The point is, with so many players on the stage trying to manipulate the outcome to fit their own national objectives, it will remain a nail-biter up to the wire.
JR: What will an Obama presidency mean for international action to address climate change?
MB: There’ll be some. But it won’t meet the high hopes and expectations that people will layer onto an Obama presidency. If he follows up on his promise to put Al Gore in charge of working out the US response to climate change, we can expect to see something much more proactive from the US. But constrained as they will be by the sound of suffering citizens in the recession, they will be striking a delicate balance of action, reaction and communication.
PH: In the US, I fear that nothing short of a climate Pearl Harbour or a new spiking of oil prices will trigger the scale of political response necessary to get Congress to respond effectively. Until then, legislators will remain in denial.
All the pieces, however, are in place for a rapid turnaround in the US. There is an unprecedented level of interest, analysis, technology and finance going into climate protection in the US at the business and state levels, which has enormous potential. But this can’t be scaled up by the business sector unless there is real political leadership across both parties.
Climate change: business
JR: Was 2008 the year that sustainability communications went mainstream?
TW: I would say so. Industrial firms have been doing it for several years but in 2008 we saw more and more consumer brands taking on the communications challenge. A few got it right, such as those that easily make it part of their core proposal, but many big firms struggled. Car firms, for example, very much overdid the green angle. One major indicator, published during 2008, was the number of complaints, at least in the UK, about greenwash advertising in 2007.
MB: Not quite, but we’re getting closer. There’s still a lot of companies that want the communications benefits of a Marks & Spencer Plan A without the awkward burden of the 100-point action plan. Green marketing is making progress, but the understanding of sustainability is still patchy through the corporate world.
PH: There is no question that sustainable development is now an accepted theme in corporate communications, especially in the financial, oil and gas, and general energy sectors. Five years ago, there wasn’t a wind turbine to be seen in advertisements: now they have become the icons of sustainability, even for companies that have nothing to do with energy.
While much of this has a positive effect in raising awareness, some of it is the thinnest layer of greenwash. It’s all too easy to find advertising where sustainability terms and images abound, but the core business seems little changed. A recent Porsche ad in Australia, for example, boasted the planet saving credentials of a 911. A lot more public scrutiny of such claims is overdue, by advertising standards bodies or by NGOs.
JR: Are brands learning from their greenwash mistakes?
TW: Some are. One problem is measurement. This is one of the hardest areas generally in business. How do you know something works when so many variables are in play?
MB: According to the UK’s Advertising Standards Authority, they’re starting to. But there will always be some wanting to tread close to the line. There’s little evidence that the marketing community as a whole has begun to understand the opportunities or risks for them inherent in this agenda. They still see the corporate responsibility teams internally with some scorn as the sales prevention specialists.
JR: Are companies doing enough to green their supply chains?
TW: Clearly not. But greening the supply chain is a bit like your first few years of carbon cuts. There are some easy wins, as found by M&S, Wal-Mart and BP. But once you get those out of the way, incremental gains can be very expensive.
Look at China. Companies can tighten up UK goods distribution and put pressure on shippers to be more efficient. But we’ve essentially outsourced our manufacturing emissions to China. This is a country where factories are thrown up cheaply, often with old, cheap equipment, and the suppliers operate on margins akin to 1%. What can be done here without increasing production and facility costs in a major way?
A company cannot be responsible for rebuilding its suppliers’ facilities or making China’s infrastructure better. So what’s a firm to do once it has achieved the easier wins? This is the big question for green supply chains and most firms are, understandably, avoiding it, particularly for now.
MB: Not even remotely, at the moment. There’s a long way to go and it needs to go further up the list of priorities. The advent of robust carbon labelling will probably be the thing that drives progress here – once you have to report on the carbon embedded in your products, you will simply have to begin the process of active engagement.
Predictions for 2009
JR: What will be the key developments in responsible business in 2009?
TW: Governance, regulation and cleaning up the transparency mess will be key. How companies continue to look at the medium term of climate regulation and the long term of its impacts will be fascinating.
Carbon reporting will be on every company’s agenda in the UK at least. With meaningful US carbon action still some years off, countries will be watching the UK’s approach to using the powers enshrined in the Climate Change Act with great interest. To mandate disclosure or not? This will be a major point of debate in 2009, along with just how methodologies that allow comparisons may or may not work.
MB: It will be a year that demands leadership. Companies need to continue to force the pace of change on climate change, lobbying governments to hold their course. Top business leaders need to show they can address the crisis of confidence in them following the poor example shown by some of the former chiefs of the financial institutions. And good companies need to show courage in keeping to their course in spite of the steady stream of bad news we are likely to get through the whole of the year.
PH: I don’t see any huge shifts in the current direction of corporate responsibility. This is that sustainability and climate change in particular will increasingly dominate the agenda, with less attention to corporate responsibility as a general panacea.
It will be increasingly hard for companies not to have a policy on climate change, and not to be transparent about their emissions, either because they will want to disclose emissions for trading purposes, or because investors – think of the Carbon Disclosure Project – will demand it. This will be a big problem for many companies, whose emissions are actually increasing. The big winners will be those involved in well-managed carbon trading and offsets, and suppliers of renewable energy and energy efficiency. In the run-up to Copenhagen, governments will probably be forced to increase incentives further in these areas.
Whether one likes it or not, the scale and urgency of climate change will increasingly eclipse other ethical issues, although there will inevitably be further incidents involving product safety, poor labour conditions and impacts on local communities.
Good year for business and human rights
Toby Webb: John Ruggie’s report is probably the most significant global document on business and human rights ever produced. Essentially he is asking both business and government to take on their responsibilities, and for intelligent debate about the limitations of international agreements, how boundaries can be drawn and responsibilities divided.
Paul Hohnen: John Ruggie’s work could be a useful precedent for other roving “issue ambassadors” or inquiry forums. There are several complementary areas – including on issues such as the effectiveness of voluntary global standards and reporting – where a similar approach might be enormously helpful.
No one has really looked, for example, at the impact of the myriad corporate responsibility codes and instruments. It’s time that someone profiled what’s working, questioned what’s not, and explored how voluntary instruments can be made to work better. We can’t and shouldn’t regulate everything, but we should do whatever is possible to encourage use of effective voluntary approaches that complement legislation.
Responsible sourcing – under pressure in 2009
Toby Webb: What happens with responsible sourcing will be fascinating, and along with how companies treat staff, it will set apart the companies that “mean” corporate responsibility from the ones that do not.
Both Unilever and Nestlé will be worth watching, for different reasons. Other firms using responsible sourcing to secure supply, such as Cadbury, I would expect to keep up their commitments.
The key area will be issues such as labour standards in ever more expensive manufacturing centres such as China and Vietnam. Will we see a drop in labour auditing? A return to “three strikes and you are out”? For some firms, probably. But Wal-Mart’s announcement about its labour plans in China will keep up the pressure on other big sourcing firms to continue to raise their game or face bad headlines back home.
Barack Obama’s promise to look again at trade agreements such as Cafta and Nafta on the basis of social and environmental issues will be tested by business lobbying, but could prove a big stimulus to responsible sourcing in late 2009 if he holds firm.
How companies are managing many of the issues discussed above will be debated and analysed at the 8th annual Responsible Business Summit on May 11 and 12 2009 in London. Sign up for updates and see the conference website at: