Why Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) Standards are Real and Relevant and What’s the Difference

They encourage the integration of social, environmental, ethical, human rights and consumer concerns into business operations and core strategy.

Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) standards are crucial contemporary business practices. They encourage the integration of social, environmental, ethical, human rights and consumer concerns into business operations and core strategy. There are however important differences between them and what their outcome means to you; in this brief article I will explore their definitions and touch on a couple of best practices to ensure CSR and ESG standards are behaving in your best interests.

Corporate Social Responsibility

How a consumer views your business is, of course, extremely important. The actions you take and the values you present have a direct impact on your overall performance. This is where CSR comes in. CSR can be defined as the responsibility enterprises have with regards to their impact on society. In the process of creating a product or service, businesses should also strive to give something back, often in the form of supporting a charity (using a portion of profits, etc). For those on the outside (i.e. the consumer), these actions can be a huge bonus. It suggests that your business is not self-serving but is concerned with wider interests and issues. The result: people want to support and be associated with your brand. Those that commit to CSR outperform those that don’t, acting as a particularly strong way of helping your brand stand out against competitors.

There is some cynicism surrounding CSR that’s worth noting. Occasional charitable campaigns have been criticised as ‘marketing gimmicks’, which have resulted in negative reactions from the public and press. That’s not to say that a ‘gimmick’ will not boost your short-term sales, but it is important to be aware of how you present your actions and the causes you support. Jumping on the latest cause or trending hashtag might be a way to get your brand noticed, but ask yourself whether or not it reflects your companies overall message and attitudes. To forge a more genuine commitment, it’s valuable to form ties with causes that are linked to your organisation. For example, if you are selling food products then supporting ethical manufacturing or farming processes would be a good choice.

Patagonia is a great example of the benefits of good CSR. For Patagonia, CSR policies are considered as a core and inseparable component of their product, and it’s helped them grow their public support, allowing them to stand out in a crowded market. They have followed good practices, connecting their brand with contemporary concerns that relate to their products in order to carve a new conscious consumer culture.

Environmental, Social, and Governance Standards

ESG standards have a more internal focus, and are based around the values a company holds and how governance keeps it in check. The environmental aspect looks at areas such as an organisations targets to minimising waste or reducing water usage, whereas its social side looks at how individuals are treated, policies to encourage diversity and equal pay, and so on. When it comes to governance, this is the ability to show that the organisation uses accurate and transparent accounting methods, and that common stakeholders are allowed to vote on certain important issues.

Whilst ESG standards should be important to the organisation internally (and will benefit company culture in the long run), they have more of an impact on potential investors. Environmental, social and corporate governance criteria refers to the main factors and investor considers with regards to an organisations ethical impact and sustainable practices. It gives them an insight into how a company is performing as a ‘steward of the natural environment’, such as its impact on climate change, conservation efforts, etc. Companies with bad ESG practices are a no go for investors as they pose a risk for the firm suffering tangible losses, so in order to win the confidence of investors, it’s important to clearly present the criteria your organisation meets. It’s also worth noting that investors are looking for companies with values that match their own, so don’t be surprised if not every investor is suited to your ESG goals.

It’s clear to see that CSR and ESG standards should not be taken lightly. Although simple to grasp in theory, knowing that they have the power to make or break your business can put pressure on your organisation. And with consumers acting as an ever-watchful eye on the actions of organisations, you really can’t hide any dirty laundry. My advice – take CSR and ESG standards seriously; ingrain them in the roots of your organisations and set practices that has a positive effect on the planet and society as a whole at the forefront of what you do and how you are presented.

Updates in Corporate Governance in a Listed Environment

There’s a range of criteria that could mean your organisation will need to react to these requirement changes.

As a way of ensuring organisations show that they operate with responsibility, Corporate Governance requirements are updated regularly. Whilst not all businesses are affected by these changes, it’s extremely important to understand what they mean for you and what actions you might be required to take.

The most recent updates in Corporate Governance requires listed companies to report on two specific areas: firstly, CEO/worker pay ratios and the effect of share price on pay; secondly, stakeholder interests (S.172 Companies Act 2006).

There’s a range of criteria that could mean your organisation will need to react to these requirement changes, but in a nutshell this is focused on companies (not LLPs) that are UK-incorporated and considered to be ‘large’ (although different size tests do apply). All listed UK companies must report on the effect of share price on pay, and those that are listed UK companies with 250+ UK group employees should report on CEO/UK employee pay ratios.

When it comes to section 172 and stakeholder reporting, a size test determines whether your organisation is required to report. If you are a large UK company and match two out of three of the following tests, you will be required to report: if you have a turnover of £36m+, a balance sheet of £18m+, and / or have 250+ employees. These organisations will need to complete reports on the following: a statement of how directors, when carrying out their duty to promote the success of the company in Section 172 Companies Act 2006, have had regard to stakeholders; and, give more detail about how the company has engaged with key stakeholders, including suppliers and customers. All companies with 250+ UK group employees will be required to complete a report on engagement with UK employees.

There have also been a series of updates to the UK Corporate Governance code that are worth being aware of. These changes to the code stress the importance of company purpose and values, workforce engagement, stakeholder engagement, director independence, fair pay, and diversity. As before, all London premium-listed companies must apply and report on Code Principles, and comply / explain against Code Provisions, so bear these in mind when reporting.

The new disclosure rules will apply to reporting periods starting January 2019, which means that companies will have to start reporting from 2020 onwards. Listed UK companies must include disclosures in their annual reports. Ahead of this, it will be valuable for your organisation to look at your corporate reporting function and ask whether it’s set up to deal with these changes, and whether you need to train directors and stage so that they are equipped to deal with these new obligations.

Good Governance for Small and Aspiring Businesses

Small and aspiring businesses often fall at the first hurdle when it comes to ‘good governance’.

Small and aspiring businesses often fall at the first hurdle when it comes to ‘good governance’. Throughout the course of this article, we will highlight a few common mistakes and why they occur as a way of showcasing the best steps your business can take going ahead.

Why You Must Establish the Principle of ‘Capability’

The first point to make is that many small businesses rely solely on their founder when it comes to governance. Founders often feel as though they should make all the decisions as they have a clear vision of where they would like the business to go, and therefore wish to handle the entire structure of the business to ensure that the way things are done meet this ideal. The problem with this is that founder’s attachment to their ‘idea’ means that they often make assessments and judgements based on their emotions. By taking action based on emotions, rational approaches are often thrown to the wayside and their is often very little consideration, negotiation or understanding. Their view-point is often narrow or blurred (especially when under stress from shareholders) and they do not make the best decisions for the business.

For example, they may feel as if growth targets are not being reached and under constant stress from stakeholders they may implement a change that is not discussed with the team. The team themselves may not find that this change is necessarily the way things should be done and might not benefit how they work. This can result in apathy from team members who feel their ideas and issues are not being addressed, damaging the outcome of their tasks and hindering the business further.

To avoid this, small businesses must reflect on one of the core principles of corporate governance – ‘capability’. Capability is enabled when organisations are led by a team of stakeholders that have a diverse mix of skills and responsibilities, as well as varying levels of experience. When those with different capabilities are brought into discussions about change projects and how business goal can be achieved, a much more structured organisation is formed where there is greater understanding of the inner-workings.

Clearly Defined Roles and Responsibilities Establish Good Governance

When a range of capabilities are harnessed, understood and operating together, this principle of corporate governance also makes sure that members are able to discharge their duties and responsibilities by clearly defining their roles and obligations. A structure of ‘who’s who’ and what they do is established; teams or departments develop (such as a marketing team) lead by key stakeholders (i.e. a head of marketing), in which individuals are expected to perform specific functions that go towards the ‘status quo’ of the business. This can be used as a metric for ‘good governance’ since there is a stable team working together (albeit often in separate departments)in the best interests of the business whilst being engaged in constant and fluent communication across all levels of the organisation.

The Importance of Accountability

Once a founder has distributed leadership by utilising varying capabilities, accountability is also enhanced. There is a clearer flow between the actions taken by individuals and their outcomes as a result of a greater number of ‘team leaders’ who are able to track and monitor results. When meeting shareholders and other stakeholders, a fair and balanced assessment of the organisation can be presented, which is something that can only be achieved when there is a strong system of communication which reaches into different aspects of the organisations. This can then take check of the business, ensuring that it is achieving its purpose, meeting legal and regulatory requirements and stating how responsibilities are met. If there are flaws in the organisation, it’s easier to identify where mistakes are being made.

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