Building the Business Case for CSR Actions

While corporate social responsibility (“CSR”) is grounded in the fundamental proposition that companies should look beyond economic performance to take into account the social and environmental impact of their activities, the reality is that “doing the right thing” is not a sufficient argument and CSR initiatives also need to make good business sense and be based on economic, environmental and social goals that are achievable and that do not create undue risk to the survival of the company.  All this means that the leadership team should be creating and evaluate a business case for each of the CSR ideas that a company is considering; however, research indicates that only about one in four companies that have decided to formally pursue a sustainability strategy have taken the extra time to establish the necessary business case.  Among the companies that do take the time to develop a business case, many take a reactive approach and wait until it is necessary to respond to external pressures (i.e., “playing defense” and focusing their sustainability activities and investments on mitigating risk and other externalities, preserving reputation and regulatory compliance).  The preferred assumption for building a CSR business case is that the investment should be perceived in the same way as any other opportunity, which means demonstrating how the project will increase market share, enhance efficiencies and create a competitive advantage.  Having a strong business case that has been rigorously vetted supports other key requirements for effective CSR including leadership commitment, employee engagement and interest, clear goals and metrics that can be readily communicated and stakeholder engagement and support.

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While CSR is grounded in the fundamental proposition that companies should look beyond economic performance to take into account the social and environmental impact of their activities, the reality is that companies need to use the tools built for traditional business decision making when considering and selecting proposed CSR actions.  Companies have a duty to their stakeholders—customers, employees, investors and community members—to pursue and achieve sustainability so that they can continue to make positive social and environmental contributions and provide quality products to their customers and good and satisfying jobs to their employees.  This means that CSR needs to make good business sense and that the company’s CSR goals must be achievable and not create undue risk to the survival of the company.  The leadership team needs to create and evaluate a business case for each of the ideas that have emerged from the assessment stage and the other preceding steps outlined above.

Researchers on corporate sustainability from the MIT Sloan Management Review and The Boston Consulting Group (“BCG”) argued that long-term success for companies seeking sustainability depended on developing a clear business case for their sustainability efforts and reported that while 60% of companies had a sustainability strategy, only 25% had established the necessary business case.[1]  The researchers argued that successful innovators focused on opportunity creation—looking at market share, potential efficiencies, competitive advantages, and innovation rather than risk, reputation, and regulatory compliance, and that companies that were reactive and responded to external pressures (i.e., “playing defense” and focusing their sustainability-related spending on mitigating externalities) were less likely to develop a strong business case for sustainability.[2]

Tonello discussed the history of the search for the business case for CSR, seeking to describe how businesses could overcome the arguments of economists, such as Milton Friedman, that companies should only pursue the economic interests of shareholders and justifiably allocate certain of their resources to advance a certain socially responsible cause.[3]  He noted that building the business case for CSR was obviously important for the directors and senior executives given their fiduciary responsibilities for the financial well-being of the company; however, the debate regarding the business case also impacted other groups with relationships to the company: shareholders were primarily, if not exclusively, concerned about the financial performance of the company and as such could be expected to be sensitive to the impact of CSR initiatives that might distract company managers from maximization of shareholder value; social activists saw CSR initiatives from the business community as a means for achieving their long-term interests in social change; politicians and regulators wondered whether companies could deliver social and environmental benefits more effectively than the public sector, thus allowing them to shift limited tax revenues to other areas; and consumers were interested in purchasing products that were designed based on principles of sustainability and creating a better world for future generations.

Tonello noted that the earlier arguments in the 1960s and 1970s in favor of CSR were often based primarily on ethical considerations and altruism (“doing the right thing” and “being a good corporate citizen”) and that few claimed that companies that were more philanthropic would be more profitable than their less generous competitors.  However, researchers began what became a decades’ long project to establish a positive relationship between corporate social performance and corporate financial performance, eventually reaching the point where such a relationship could credibly be identified and quantified.  At the same time investors launched what eventually became known as the socially responsible investment movement and socially responsible investment funds emerged that operated with an explicitly investment strategy focusing on companies with a track record of successful CSR-oriented initiatives.  By the 2000s, companies were integrating CSR into their core operations and proactively seeking ways to create “shared value”: improving their financial performance while simultaneously fulfilling their responsibilities to the broader society.

Although much progress had been made, it was still necessary for executives to make a formal business case for CSR initiatives to their boards and board members needed to be able to explain their decisions regarding strategy and allocation of corporate resources to shareholders and other stakeholders.  Tonello reviewed several alternative views of the business case for CSR and concluded that there really was no single rationalization for how CSR improved the corporate “bottom line”.  Instead, he argued that businesses should build their arguments for pursuing CSR initiatives based on one or more of the following categories of benefits that they might attain:

• Reducing Costs and Risks: It has been argued, and generally accepted among researchers and managers, that certain CSR activities can reduce a company’s inefficient capital expenditures and exposure to risk, thus protecting the economic interests of shareholders and alleviating their concerns about the viability of the organization while simultaneously addressing environmental and social issues. Examples include implementation of energy-saving and other environmentally sound product practices, which typically reduce long-term costs after sometimes significant initial investments; adoption of equal employment opportunities (“EEO”) policies and practices which support diversity and thus reduce costly employee turnover through improved morale, which also enhances productivity; and community relations management, which focuses on building positive community relationships that can lead to tax advantages for future investments and decreased regulatory burdens on the company because it is perceived as a sanctioned member of the local community.
• Gaining Competitive Advantage: Executives have come to see addressing stakeholder demands as opportunities to achieve competitive advantages rather than constraints. For example, implementing an EEO policy not only reduces costs and risks it provides the company with better opportunities to recruit and retain employees from the widest talent pool.  Customer and investors relations programs strengthen the company’s competitive advantage, brand loyalty and consumer patronage and can also have a positive impact on attracting new investment given that institutional investors have made it clear that they prefer companies with good records on employee relations, environmental stewardship, community involvement, and corporate governance.  Employee volunteer programs improve employee morale and productivity and provider opportunities to employees to develop skills they can use in their day-to-day work with the company.  Competitive advantage may also be gained through adoption of strategic philanthropic practices which are based on alignment of philanthropic activities with the firm’s core competencies and capabilities.
• Developing Reputation and Legitimacy: Surveys have indicated that a large majority of executives believe that CSR strategies result in improved corporate reputation and legitimacy, each of which are perceived as beneficial generally and particularly valuable in building mutually beneficial relationships with employees, customers and other stakeholders. Companies use philanthropy as a tool of legitimization, particularly when they are engaged in operational activities that create environmental and product safety issues, although such companies remain open to skepticism from activists unless and until they take more aggressive actions to mitigate the adverse impacts from their operations. Sustainability reporting has also become a strategy for enhancing legitimacy and reputation by demonstrating a commitment to disclosure and transparency and providing a means for communicating with stakeholders on the ways in which the company is conducting its operations in a manner consistent with social norms and expectations.
• Seeking Win-Win Outcomes through Synergistic Value Creation: Companies can achieve synergistic value creation and “win-win” outcomes for themselves and society by identifying and exploiting opportunities that both reconcile differing stakeholder demands and allow the company to pursue its own financial success with the consent and support of its non-financial stakeholders.  For example, companies that support philanthropic activities in their local community to improve education not only create a higher quality of life for their neighbors but also develop a more talented pool of potential human resources and expand their local customer base.[4]  At the same time, such activities strengthen community engagement, contribute to enhancement of the company’s reputation and legitimacy and reduce the risk that the company will be caught unprepared by criticism from community groups.

Each of the alternative business cases discussed above make intuitive sense; however, proponents of CSR initiatives also need to provide concrete targets and associated metrics that can be used to assess whether the promised benefits have actually been achieved.  One of the challenges relating to developing a business case for sustainability was being able to identify and measure the relationship between the environmental or social impact of a product, service or activity and the company’s bottom line.  One company created an index that measured climate impact and the chemicals and resources consumed in the manufacture of certain of its products and then compared a product’s score to its profit margin.  The company found that even though sustainable products were often more expensive to produce, they generated better margins.  However, the business case for developing and promoting a sustainable product really comes down to what customers are willing to bear in terms of pricing, and finding those limits is challenging and requires a lot of experimentation and heavy up-front development and marketing expenses.  Some experts counsel companies not to get too tied up with business case development when a new idea appears, recommending that companies “just do it” with the confidence and expectation that a business case will ultimately emerge from the learning process associated with developing sustainable solutions.  Another piece of advice offered in the report was for business case development to focus on broad changes to the business model that promise a bigger impact as opposed to incremental changes.[5]  As sustainability reporting methods have matured, companies have been able to implement quantitative and qualitative tools and methods to measure the impact of their CSR initiatives on stakeholders and the financial performance of the enterprise.

Business case preparation should be familiar to the members of the leadership team; however, it is important to integrate CSR concepts into the process and Hohnen and Potts suggested that companies need to take the following elements into account[6]:

• Possible leverage points (on which particularly large CSR gains can be made)
• Areas in which the company could potentially gain a competitive advantage
• Areas in which stakeholders might have particular influence
• Short- and long-term goals
• Estimated costs of implementation (including that of not doing more on CSR)
• Anticipated benefits
• Opportunities for cost reductions
• Broader changes the company would need to make
• Any risks or threats each option poses
• Implications of each option for new developments

While many hope that sustainability initiatives will be compelling in their own right because of the need for businesses to participating in addressing significant global challenges and threats, the reality is that sustainability executives and managers must be prepared to demonstrate a strong business case for those initiatives in order to mobilize sustained commitment to them throughout the organization and ensure that the appropriate resources are allocated to the initiative and that the necessary changes are made to company’s measurement, management, recognition and reward systems.[7]  As evidence for the importance of the business case, Willard, who has written extensively on best practices among companies with respect to sustainability, pointed to a report by Bain & Company, “Achieving Breakthrough Results in Sustainability”, that was based on a survey of over 300 large companies engaged in sustainability efforts and found that 98% of their sustainability initiatives had failed.[8]  According to Bain & Company, one of the five reasons for this dismal failure rate was “lack of a compelling business case”.

While the results of its survey were discouraging, Bain & Company believed that companies could improve their performance with respect to sustainability initiatives by following four guidelines: “make a public commitment”, “lead by example at the top”, “highlight the business case” and “hardwire change through incentives and processes”.  Willard argued that a compelling business case should be seen as the prerequisite for the other three guidelines since executives could not reasonably be expected to do any of the other things unless they were convinced that the initiative was good for the company and its direct stakeholders (i.e., investors, employees and customers), as well as good for the environment and for society as a whole.  Willard also pointed out that “strong leadership support”, cited by Bain & Company as one of five factors that contributed to successful sustainability initiatives, could only be expected if the business case was strong enough to earn the endorsement, engagement and proactive support of company executives and senior managers and that such support paved the way for the other success factors mentioned by Bain & Company: “employee engagement and interest,” “clear goals and metrics,” “effective internal communication,” and “introduction of environmentally friendly policies/processes.”  Willard made his pragmatic case for focusing on the business case for sustainability initiatives as follows:

“We need to meet executives where they are and honor their need for compelling ROI information when they assess proposals. If an initiative improves the company’s reputation, grows revenue, saves expenses, engages employees, helps win the war for talent, spurs innovation, meets company norms for payback periods, provides a good internal return on investment, increases the value of company assets, and / or contributes to higher share prices, of course executives will support it.”[9]

There are a number of different methods that can be used to develop a business case; however, Willard has developed a customized approach that he recommends for sustainability executives and managers looking to build the business case for sustainability initiatives.  Willard’s “sustainability return on investment” workbook “provides a comprehensive cost-benefit analysis framework by which to build a tailored business case for single or multiple sustainability initiatives implemented within various timeframes”, is extensively annotated and should be consulted directly for practical guidance on developing and implementing sustainability initiatives.[10]  The elements of Willard’s method for developing the business case for a sustainability project or initiative are based on his assumption that there are only three reasons that companies undertake major projects and that these justifications for investment must be borne in mind when making the case for implementation to decision makers:

• “Do the Right Thing”: This justification means activating the company’s purpose and values, being ethical, and making sure that projects and initiatives are aligned with the company’s strategic direction and mission. Willard explained that something is “right” when it improves the wellbeing of stakeholders and that since society and the environment are stakeholders there is a strong justification for sustainability projects and initiatives that improve their wellbeing by reducing harmful impacts and increasing positive impacts.  In addition, a sustainability project or initiative may be the “right thing” for the decision maker’s own personal values, wellbeing and aspirations.
• “Capture Opportunities”: This crucial justification speaks the need to the chief executive and financial officers to accommodate the needs of the company’s investor stakeholders by not approving any sustainability project or initiative that cannot be cost justified over a specified planning period, be it short- or long-term.  When presenting a business case consideration must be given to the specific financial metrics that are motivating the decision makers and these may vary and can include return on investment, reductions in expenses, top-line revenue growth and/or the impact of the project or initiative on the company’s investment market value and share price.
• “Mitigate Risks”: Willard explained this justification as being the flip side of “Capture Opportunities” and pointed out that prudent stewardship of the company’s assets and principles of good governance demanded implementation of robust enterprise risk management processes. Part of those processes is examining each new project or initiative from a risk management perspective and that requires that business cases must quantify risks that could arise if the project or initiative was not undertaken and the risks that could arise if the project or initiative fails.

While each of the justifications should be addressed in every business case the appropriate weighting will depend on the particular circumstances and the personal concerns and approaches of the decision makers involved.  In many cases capturing opportunities and/or mitigating risks will remain the predominant factors for decision makers, even as the company is looking to integrate sustainability into its operations; however, the need to “do the right thing” is becoming increasing important as non-investor stakeholders, such as employees and customers, apply pressure on executives to take societal and environmental wellbeing into account.  Moreover, when a company decides to “do the right thing” by improving working conditions for its employees it will hopefully see that the company’s capacity to capture opportunities will be enhanced due to the involvement of a happier and better trained workforce.

Willard argued that each business case for a sustainability project or initiative should include several common elements, each of which is related to one of the justifications described above:

• When a project or initiative is recommended as being in furtherance of the desire to “do the right thing” it must be aligned with the company’s purpose, values, mission, vision, principles, beliefs and long-term strategic goals.
• When a project or initiative is recommended as a means for capturing opportunities it should include a cost-benefit analysis and return on investment assessment that supports one or more particular categories of opportunities such as revenue growth from improved company reputation with customers, innovative sustainable products, services and financing and strong brand and social license to operate; operational expense savings and improved efficiencies or human resource expense savings (e.g., lower hiring and attrition costs and increased productivity). Additional opportunities may be available with respect to asset and/or market value improvement.
• When a project or initiative is recommended as a means for mitigating risks the business case should address mitigation of risks of inaction (i.e., if the initiative is not undertaken by the company and its competitors do) and mitigation of risks of taking action (i.e., if there might be cost overruns, delays, or collateral damage). For example, a project or initiative may be appropriate to mitigate the risk of lost revenue from poor company reputation with customers; the risk of lost revenue from outdated products and services; or the risk of higher energy, carbon, materials, water, waste, maintenance, travel and/or transportation expenses.

The business case should also address potential benefits to the company with respect to “reputation” and “innovation”; however, it should be acknowledged that impact and value to these areas from a particular project or initiative will be difficult to quantify in the same manner as revenues and expenses.  In spite of the measurement challenges, successful projects and initiatives can improved reputation with customers, which may drive revenue growth; improve reputation with employees that drives engagement and productivity that eventually leads to human resources expenses savings; and improve reputation with investors that causes the company’s market value to increase.  In addition, projects and initiatives that produce new revenues and cost savings are generally new and innovative and will lead to advances in many operational areas including policies, products, processes and practices.

Willard recommended the following multi-step process for creating a business case for sustainability projects and initiatives:

• Step 1 – Prepare a High-Level Description of the Project or Initiative and the Proposed Scope: Describe the project and indicate if it applies to the whole company/all departments/all product lines or one location/one department/one product line.  Indicate whether this is the business case for the whole project or just for the extra investment required to make an already planned and approved project “sustainable”.  The business case should identify the department that will manage the project, sources of required capital and which accounts or budget line items will be impacted.
• Step 2 – Describe the Business and Sustainability Needs: Describe the business problem(s) that the project or initiative will address, the overall opportunities it will capture, how it relates to the company’s strategic plan, and why it is timely. In addition, describe how the project or initiative will improve the company’s current level of performance on one or more of its sustainability goals (i.e., the expected percentage change in progress toward the goal(s) after successful completion of the project or initiative).  Also estimate the extent, if any, to which other sustainability goals may be positively or negatively impacted by the project or initiative.
• Step 3 – Describe How the Project or Initiative Activates the Company’s Purpose and Values: Move beyond the impact on the company’s sustainability goals to describe specific ways in which the project or initiative helps fulfill the company’s purpose and values and aligns with the company’s mission, vision, principles, beliefs and long-term strategic plans.
• Step 4 – Estimate Potential Revenue Growth and Expense Saving Benefits and Do a Cost-Benefit and ROI Analysis: Revenue growth may come from improved reputation with customers, innovative sustainable products, innovative service and finance offerings and/or improved social license to operate/brand.  Savings may come from savings on energy, carbon, shipping and transportation, business travel and/or maintenance expenses; lower materials, water and/or waste disposal costs; lower insurance premiums; lower litigation and compliance expenses; lower cost of capital; and lower hiring and attrition costs coupled with higher productivity from employees.[11]  Use the estimates to develop and analyze projected benefits and expenses over the term of the project or initiative and determine NPV, IRR, Payback Period etc. using the company’s normal discount rate.
• Step 5 – Estimate Asset Value and Market Value Opportunities: Companies may achieve an increase in several classes of asset values including company-owned buildings and properties, company-owned vehicles and equipment and the company’s investment portfolio. In addition, the project or initiative will hopefully create an opportunity for increasing market value/capitalization.
• Step 6 – Estimate Revenue and Expense Risks If the Project or Initiative is Not Undertaken: There are situations where companies need to consider revenue and expense risks is a project or initiative is not  Potential loss of revenues may come from poor reputation of the company with customers, outdated/unsustainable features, lack of potential services and financial offerings and weak brand and social license to practice. In addition, foregoing a project or initiative may cause increased expenses for energy, shipping and transportation, business travel and/or maintenance; higher materials, water and/or waste disposal costs; higher insurance premiums; higher litigation and compliance expenses; higher cost of capital; and higher hiring and attrition costs coupled with lower productivity from employees.
• Step 7 – Estimate Asset Value and Market Value Risks If the Project or Initiative is Not Undertaken: In addition to the revenue and expense risks of not undertaking a project or initiative, companies must consider the likelihood of decreases in several classes of asset values including company-owned buildings and properties, company-owned vehicles and equipment and the company’s investment portfolio.  In addition, failing to pursue a project or initiative may damage the company’s market value/capitalization.
• Step 8 – Estimate Contingency Risks Associated with Doing the Project or Initiative: As with any business case, estimates and projections are not always accurate and the case should include estimates of contingency risks associated with doing the project or initiative including risks if the project does not meet expectations, is delayed, has cost overruns or meets expectations at first but fails later; risks if the initiative succeeds but causes unforeseen negative “collateral” impacts in other areas; and objections that are like to occur and must be addressed if and when they are raised by opponents of the project or initiative.

Alan S. Gutterman is the Founding Director of the Sustainable Entrepreneurship Project.  This article is an excerpt from Alan’s book Strategic Planning for Sustainability.  For more information and tools on the subject, see here.

Notes

[1] D. Kiron, G. Unruh, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Corporate Sustainability at a Crossroads: Progress Toward Our Common Future in Uncertain Times,” MIT Sloan Management Review (May 2017), 13-14.

[2] Id. at 12.

[3] M. Tonello, The Business Case for Corporate Social Responsibility, Harvard Law School Forum on Corporate Governance and Financial Regulation (June 11, 2011), https://corpgov.law.harvard.edu/2011/06/26/the-business-case-for-corporate-social-responsibility/  The post was based on a Conference Board Director Note by Archie B. Carroll and Kareem M. Shabana, and related to a paper by these authors, titled “The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice,” published in the International Journal of Management Reviews.  See the post for extensive citations on the categories of business benefits to companies from engaging in CSR that are discussed below.

[4] This example is consistent with the argument that Peter Drucker made that “the proper ‘social responsibility’ of business is to … turn a social problem into economic opportunity and economic benefit, into productive capacity, into human competence, into well-paid jobs, and into wealth.”  P. Drucker, “The New Meaning of Corporate Social Responsibility”, California Management Review, 26 (1984), 53.

[5] D. Kiron, G. Unruh, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Corporate Sustainability at a Crossroads: Progress Toward Our Common Future in Uncertain Times,” MIT Sloan Management Review (May 2017), 14-15.  Companies that had successfully developed a business case for sustainability had a distinct set of characteristics: they tended to act without complete information; balanced a long-term vision with concrete near-term wins; drove sustainability top-down and bottom up; de-siloed sustainability; measured everything; valued intangible benefits seriously; and tried to be authentic and transparent—internally and externally.   Sustainability: The “Embracers” Seize Advantage, MIT Sloan Management Review (Spring 2011).

[6] P. Hohnen (Author) and J. Potts (Editor), Corporate Social Responsibility: An Implementation Guide for Business (Winnipeg CAN: International Institute for Sustainable Development, 2007), 39.

[7] B. Willard, “Introduction” in Sustainability ROI Workbook: Building Compelling Business Cases for Sustainability Initiatives (May 2017 Edition) (the Workbook, which is regularly updated, is available for download, along with other information on corporate sustainability projects, at http://sustainabilityadvantage.com/).

[8] Id. (citing and describing J. Davis-Pecdoud, P. Stone and C. Tovey, “Achieving Breakthrough Results in Sustainability”, Bain & Company (January 2017)).

[9] Id.

[10] Id.

[11] Productivity gains from employees may come in different forms such as gains from more time on the job (i.e., gains from less unplanned absenteeism, more telecommuting and/or reduced business travel) and gains while on the job (i.e., gains from working in green buildings, improved collaboration and/or higher employee engagement).