Community Investment

Most businesses, once they reach a certain size and level of resources, provide support for activities of organizations in their communities that are dedicated to address social issues or needs in the community.  There is no shortage of issues that companies can focus on in their communities.  For example, among the “global challenges” identified by the Future-Fit Business Framework as being the critical environmental and social issues for businesses and society as a whole were the failure to adequately invest in, upgrade, and secure critical infrastructure, coupled with rapid and poorly-planned urbanization, which has undermined the long-term health and resilience of communities; and a severe income disparity between the world’s richest and poorest citizens which both contributes to and is exacerbated by underemployment, a growing skills gap and depressed economies; social instability, which negatively impacts communities and markets and arises from a lack of equitable treatment and access to resources; and erosion of trust in institutions, from governments to business, due to unethical practices and a lack of transparency.[1]  In any given community, businesses of any size can make a meaningful contribution in relatively simple ways such as supporting reading programs for young children, raising awareness of infectious diseases and other health-related issues or providing meals to homeless people in the community. 

The form of community contribution and engagement by a company can vary significantly, running from a one-time cash donation to a “good cause” to investment of cash, in-kind resources and management time into the creation of long-term partnership with a community organization that works on a broader and deeper solution to a particular issue that has a material impact on the business and the community in which it operates.  While positive social and environmental impact in the community is important, businesses need not totally forego commercial advantages when supporting community organizations, as demonstrated by the popularity of “cause-related marketing” initiatives, which involve a collaboration between a business and a charity under which a product, service or brand of the business is affiliated with a particular charitable cause and a portion of the proceeds from sales of the product, service or brand is donated, with thoughtful publicity, to the charity.

When developing the business case for a community investment consideration needs to be given to the potential contribution that the particular project will have as a “business driver” including benefits such as compliance with global certification requirements, competitive advantage, customer loyalty, compliance with governmental requirements, building the company’s social license, risk management, reputation, access to land and improving local workforce skills and productivity.[2]   Examples include the following[3]:

• Logging firms comply with legal requirements by entering into social responsibility agreements with local communities to provide financing for social infrastructure and services in those communities
• A company’s innovative program for providing assistance to indigenous peoples in the community in which the company operates was a significant factor in the company’s ability to land a significant contract
• Companies that voluntarily join an industry sector group that has developed social responsibility principles make a public commitment to contribute to local development
• A company creates and builds its social license to operate in a severely underdeveloped community by making long-term commitments to work directly with local stakeholders on community development programs
• Responding to concerns about working conditions in its supply chain a company partners with a local nongovernmental organization in a developing country to provide education on workers’ rights and training and micro-financing for female entrepreneurship to provide alternative economic opportunities
• A company launches a large HIV/AIDS program including education and financial support for health services, as well as extensive outreach within local communities, that eventually leads to dramatic workforce productive gains due to reduced mortality and absenteeism and lower health insurance premiums

The challenge for companies is computing and assigning a value to the business drivers involved in a particular community investment project.  For example, while there are costs associated with general community engagement and consultations in advance of a project (e.g., wages, communications, facilities, equipment, logistics etc.) they must be balanced against potential benefits and avoided costs derived from completing a project ahead of schedules and avoiding contractual penalties for project delays.  Additional intangible benefits include building trust and goodwill and avoiding negative effects on the company’s reputation.[4]   

Philanthropy (e.g., grants, volunteering and donations) has been a mainstay of community engagement and involvement for businesses; however, more and more attention has been focused on how businesses can contribute to their communities through innovative investment activities designed to achieve economic, social and environment objectives.  This trend has led to extensive research and guidance on social investment generally and, in the context of engaging with local communities, corporate community investment.  While investing in community-focused projects involves many of the tools and principles used with traditional investments made by businesses on a day-to-day basis, there are unique issues and challenges that need to be considered.  This section sets the stage for building the business case for deploying scarce resources in the community by introducing and explaining several useful definitions of corporate community/social investment.

LBG, which is managed by Corporate Citizenship, a global corporate responsibility consultancy based in London with offices in Singapore and New York, has developed an emerging global standard for measuring corporate community investment.[5]  LBG noted that while businesses engage in a wide range of activities that have a positive impact on society and contribute to sustainability including creation of wealth and jobs, delivery of goods and services, payment of taxes and support for innovation, corporate community investment can and should be distinguished.  According to LBG, corporate community investment should be defined and understood as including “voluntary engagement with charitable organizations and activities that extends beyond companies’ core business activities”.[6] 

LBG explained that two key questions need to be considered and answered affirmatively when determining is a particular contribution or activities falls into the category of corporate community investment: “Is it voluntary?” and “Is it charitable?”.[7]  As to the question of “voluntariness”, the threshold is that the contribution or activity must be something that a business chooses to do and is not mandated under any legal or contractual obligation.  In addition, as mentioned above, the activity should be outside of the core business activities of the company, which means that using less energy or protecting the health and safety of employees, each hallmarks of a socially responsible business, would not be considered a corporate community investment.  Finally, corporate community investment does not include steps that companies should be expected to take to mitigate, or compensate community members for, the adverse environmental and social impacts associated with a particular business activity undertaken in pursuit of the company’s economic and financial objectives.

In order for the second condition to be satisfied the support must be given to “an organization or activity that is recognized in its geographical location and cultural context as having a clear charitable purpose (e.g., advancing education, protecting health or supporting human rights)”.[8]  Contributions to formally recognized charities are the easiest to identify; however, qualifying organizations can also include non-profits, non-governmental organizations (“NGOs”), third sector, civil society, schools, universities, government departments and social enterprises.  Whether or not a particular organization meets the test turns on whether it is has a purpose, or is delivering an activity, that is broadly recognized as charitable (e.g., education) and being managed in a way so as to deliver public rather than private benefit (i.e., the organization cannot be focused on delivering financial or other returns to private parties, such as shareholders).

Examples of contributions and activities that would qualify as a corporate community contribution include a cash donation to a local registered charity; support of education through a program that allows employees to use some of their paid time to participate in a reading partnership with an inner-city school; and running a program in partnership with a charity to provide work experience and training to homeless people.  Supporting the socially responsible actions of others, such as when an airline encourages passengers to donate their unused foreign currency to an international NGO when returning home from a trip abroad, also qualifies; however, the airline’s reporting on this activity should separate the contributions by passengers from its own contribution so that the airline does not take undue credit beyond the value that its leverage provided to the NGO. 

Businesses take many voluntary actions that have positive sustainability impacts, but they will not count as corporate community investments if the “charitable” criterion is not also satisfied.  For example, monitoring waste at a company’s factories is laudable but is generally considered to be focused on the company’s own environmental performance and not on wider charitable benefits, even though members of the community will presumably appreciate the company’s efforts.  In that situation the cost of monitoring should not be included in corporate community investment but should usually fit into the company’s environmental reporting.[9]  Other areas in which careful assessment of whether or not a valid corporate community investment has occurred include mandatory contributions, carbon offset, responsible product use, facilitating giving by customers and/or suppliers, support for small businesses and provision of benefits to employees and their family members.[10]

While LBG believed that the term “corporate community investment” was most descriptive, there are, not surprisingly, a number of different terms that are used to refer to the covered activities included “social investment”, “community social investment”, corporate social responsibility (“CSR”) programs, “corporate citizenship”, philanthropy, “company giving”, “giving back”, social programs, “catalytic philanthropy”, “strategic philanthropy” and creating “shared value”.  ISO 26000 described “community social investment” as taking place when organizations invest their resources in initiatives and programs aimed at improving social aspects of community life.[11] Community social investment includes both traditional capital investments by organizations and financial support to projects that may be identified, funded and/or managed by other groups such as non-governmental organizations.[12]  ISO 26000 notes that organizations generally choose from among a wide array of potential community social investments including projects related to education, training, culture, health care, income generation, infrastructure development, improving access to information or any other activity likely to promote economic or social development; however, when creating its community social investment agenda an organization should purposefully seek to align its contribution with its core competencies and the needs and priorities of the communities in which it operates and take into account priorities set by local and national policymakers and the actions that are already being taken by other community stakeholders.  ISO 26000 also emphasizes the importance of soliciting and encouraging community involvement in the design and implementation of projects to maximize success and build a foundation for projects to survive and prosper (i.e., to achieve sustainability) as the organization reduces its direct involvement.

This article is part of the Sustainable Entrepreneurship Project’s extensive materials on Community Engagement and Investment and an excerpt from Community Engagement and Investment: A Guide for Sustainable Entrepreneurs by Alan S. Gutterman, which is available for purchase at various online booksellers.  Readers may also enjoy the author’s Responsible Business: A Guide to Corporate Social Responsibility for Sustainable Entrepreneurs.

[1] Future-Fit Business Framework, Part 1: Concepts, Principals and Goals (Future-Fit Foundation, Release 1, May 2016), 11, FutureFitBusiness.org.

[2] Strategic Community Investment: A Quick Guide (Highlights from IFC’s Good Practice Handbook) (Washington DC: International Finance Corporation, February 2010), 8.

[3] Id.

[4] Id.

[5] From Inputs to Impact: Measuring Corporate Community Contributions through the LBG Framework—A Guidance Manual (London: Corporate Citizenship, 2014), 3.  The initiative was initially referred to as the “London Benchmarking Group”.

[6] Id. at 4.

[7] Id. at 3.

[8] LBG pointed out that there is no single internationally agreed definition of charitable purpose and that reference needs to be made to applicable laws and guidelines relating to charities and tax-exempt charitable organizations in specific jurisdictions. For that reason, LBG focuses on the purpose of the contribution/activity (i.e., its intent and outcome) and not simply the legal status of the beneficiary.  Id. at 4-5.

[9] Id. at 5.

[10] See specific LBG guidance notes on these areas.  Id. at 5.

[11] International Organization for Standardization, ISO 26000: Guidance on Social Responsibility (Geneva, 2010), 68.

[12] Handbook for Implementers of ISO 26000, Version Two (Middlebury, VT: ECOLOGIA, 2011), 33.