CSR, Sustainability and ESG

The traditional profit-centered approach to management originated during the Industrial Age with the presumption that capital formation was the only legitimate role of business and that managers were obligated above all other things to pursue profits to enhance the wealth of their shareholders; however, the 1960s and 1970s saw the slow ascendency of the social responsibility approach to management which was based on the assumption that businesses were actors in a broader environment and thus had responsibilities to respond to social pressures and demands and treat their stakeholders in a manner that complied with both law and ethics.[1]  Writing in the 1970s, Davis defined corporate social responsibility, or CSR, as “the firm’s considerations of, and response to, issues beyond the . . . economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks.”[2]  By the 1980s, the notion that corporations had a duty to behave ethically had achieved broad acceptance and attention then began to turn to what ethical behavior actually entailed, how companies should respond to business-related social issues and how “corporate social performance” should be measured.  Beginning in the 1990s, a new economic theory of the firm, the “corporate community model”, put stakeholders at the center of corporate strategy as partners who contributed their special knowledge to create value and competitive advantage through collaborative problem solving.[3]

In 2011 the European Commission provided a simple, yet expansive and important, definition of CSR as being “the responsibility of enterprises for their impacts on society” and went on to explain that “[e]nterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders.”[4]  The World Business Council for Sustainable Development (WBCSD), an organization established and led by chief executive officers of companies focused on sustainability, has defined CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.”[5]  This definition recognizes the traditional role of corporations in seeking economic benefits and then expands the responsibilities of corporations to include the voluntary pursuit, as a matter of ethical conduct as opposed to compliance with legal requirement, of wellbeing for a broad range of non-investor constituencies including employees and their families, the local communities in which the business is operated and society as a whole (e.g., environmental responsibility).

CSR is clearly a global phenomenon.  Companies in Europe have been guided by the EU Commission’s Green Paper on Promoting a Framework for CSR and the European Code of Conduct Regarding the Activities of Transnational Corporations Operating in Developing Economies.  A number of individual countries in Europe have also taken action driven, at least in part, by a series of resolutions adopted by the European Parliament to facilitate the development of the incorporation of CSR principles in its member economies.  There have also been a number of important quasi-legal initiatives for the promotion of CSR at the national level throughout Europe including the International Business Leaders Forum, the Ethical Trading Initiative and Partnership for Global Responsibility.[6]  While the U.S. has been slower than the Europeans in using formal regulation to incorporate CSR into the business strategies and operations of corporations, it has emphasized developing specialized organizations that set rules and standards and provided enforcement regimes for certain aspects of CSR including the Occupational Safety and Health Administration, Equal Employment Opportunity Commission, Consumer Product Safety Commission and the Environmental Protection Agency.  In addition, trade associations in specific sectors, such as automobile manufacturing and paper products, have promulgated guidelines for their members on environmental management practices for themselves and their suppliers.[7]

While CSR is generally associated with ensuring the corporations contribute to sustainable economic development at the macro-level, the concept of corporate sustainability can be seen as primarily concerned with the survival, or sustainability, of the corporation itself, something that is necessary in order for the corporation to make the contributions to society that are expected from being a “responsible corporate citizen.”  Corporate sustainability goals and programs are focused on issues that not only impact society as a whole but must also be addressed by the directors and managers of a corporation in order for it to survive and thrive: climate change; resource scarcity; demographic shifts; and regulatory and political changes.[8]

A 2017 article in The Economist described “sustainability” in the corporate context as follows:

The term “sustainability” is often used interchangeably with CSR or viewed exclusively through an environmental lens. Thought leaders, however, generally describe it as a business strategy that creates long-term stakeholder value by addressing social, economic, and environmental opportunities and risks material to a company. It is integral to a company’s business and culture, rather than on the periphery. Optimizing waste reduction, or water or energy consumption, for example, can help a company reduce operational costs. Sustainability can drive innovation by reconceiving products and services for low-income consumers, opening new lines of business and boosting revenue in the process. Finally, being socially responsible can help a company earn license to operate in new markets, and attract and retain talent.[9]

While the terms CSR and corporate sustainability are often used interchangeably, there are real and important distinctions between the two concepts; however, corporations can and should pursue both CSR and sustainability in order to generate the most value for all of their stakeholders:

• Avoiding environmental harm from operational activities is not only a socially responsible way to conduct business but also ensures that the corporation has sufficient natural resources available to it to survive and thrive in the future
• Monitoring the environmental and social impact of the activities of members of the corporation’s supply chain not only protects natural and human resources it also ensures that the corporation will have reliable partners and a stable stream of inputs for its products
• Treating employees and their families fairly and providing them with a living wage not only enhances their wellbeing but also makes it easier for the corporation to attract and retain the talent necessary to create and commercialize innovative products and services needed to maintain long-term competitiveness
• Honest engagement with local communities and environmental and social activists promotes mutual understanding and problem solving while reducing potential distractions for directors and members of the management team
• Products that are developed in an environmentally and socially responsible manner not only reduce the burden on natural and human resources but also improve the corporation’s reputation and brand and reduce the risk of consumer disenchantment and product recalls  

Sustainability has become an important issue for the major institutional investors and asset managers and the marketplace is seeing an increase in smaller, more specialized investment funds that are primarily oriented toward providing capital to companies that excel in their environmental, social and governance (ESG) practices and which focus on ESG-oriented activities such as climate change and impact investing.  The goal of investors is to encourage their portfolio companies to contribute to the successful pursuit of environmental and social outcomes which continuing to provide investors with a suitable financial return.

A number of factors have contributed to the surge in the interest of investors in corporate sustainability and the ESG practices of their portfolio companies:[10]

• Recognition in the financial community that ESG factors play a material role in determining risk and return
• Understanding and acceptance that incorporating ESG factors is part of investors’ fiduciary duty to their clients and beneficiaries
• Concern about the impact of short-termism on company performance, investment returns and market behavior
• Increased legal requirements protecting the long-term interests of beneficiaries and the wider financial system
• Pressure from competitors seeking to differentiate themselves by offering responsible investment services as a competitive advantage
• Increasing activism of beneficiaries who are demanding transparency about where and how their money is being invested
• Concern regarding value-destroying reputational risk associated with environmental and social issues such as climate change, pollution, working conditions, employee diversity, corruption and aggressive tax strategies in a world of globalization and social media.

The potential benefits to institutional investors have been highlighted by the Conference Board, which has argued that CSR enhances market and accounting performance, lowers the cost of capital, improves business reputation, and fosters new revenue growth when it is channeled toward product innovation.[11]  Similarly, the Chairman and CEO of BlackRock, Inc., the largest asset manager in the world, wrote in his 2016 Annual Letter to the CEOs of BlackRock’s portfolio companies that “[o]ver the long-term, environmental, social and governance (ESG) issues—ranging from climate change to diversity to board effectiveness—have real and quantifiable financial impacts.”[12]  While many investors argue that focusing on corporate sustainability is necessary in order for companies to identify and mitigate the risks to current operations due to climate change, shortages of natural resources and ignoring basic human rights issues, investors also believe that developing and implementing innovating solutions to environmental problems, improving workplace conditions and forging strong relationships with local communities will lead to better economic performance for the business.

Investor activism around ESG issues and investors’ growing demand growing demand for investment-grade ESG information has important implication for how directors should approach corporate governance, investor engagement, compliance and disclosure practices.[13]  First of all, the broadened scope of risks that directors must consider in light of ESG activism means that boards must have new capacities to support oversight of ESG risk.  Second, investors want their companies to integrate ESG performance metrics and long-term benchmarks into executive compensation.  Third, directors need to ensure that investor engagement encourages dialogue and learning and confirm that senior management and investor relations personnel are aware of the increasing overlap between corporate governance and environmental and social concerns.  Finally, directors need to improve the quality and formatting of their sustainability-related reporting and ensure that ESG materiality is being considered as part of their company’s financial reporting process.  Companies that can improve their practices in these areas are likely to see improved financial and operational performance, improved focus on long-term risk and return, better access to “patient capital” (i.e., investors that are less fixated on quarterly earnings and more supportive of R&D and other investments in the company’s future) and be able to identify and exploit new sources of value for the company and keep ahead of emerging risks and opportunities.[14]

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This article is an excerpt from the author’s forthcoming book on Sustainability and Corporate Governance, which will be published by Routledge in late 2020.  For further information, visit the author’s Sustainable Entrepreneurship Project website at https://alangutterman.com/topics/sustainability-and-corporate-governance/.

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About the Author

This article was written by Alan S. Gutterman, whose prolific output of practical guidance and tools for legal and financial professionals, managers, entrepreneurs and investors has made him one of the best-selling individual authors in the global legal publishing marketplace.  His cornerstone work, Business Transactions Solution, is an online-only product available and featured on Thomson Reuters’ Westlaw, the world’s largest legal content platform, which includes almost 200 book-length modules covering the entire lifecycle of a business.  Alan has also authored or edited over 90 books on sustainable entrepreneurship, leadership and management, business law and transactions, international law and business and technology management for a number of publishers including Thomson Reuters, Practical Law, Kluwer, Aspatore, Oxford, Quorum, ABA Press, Aspen, Sweet & Maxwell, Euromoney, Business Expert Press, Harvard Business Publishing, CCH and BNA.  Alan is currently a partner of GCA Law Partners LLP in Mountain View CA and has extensive experience as a partner and senior counsel with internationally recognized law firms counseling small and large business enterprises in the areas of general corporate and securities matters, venture capital, mergers and acquisitions, international law and transactions, strategic business alliances, technology transfers and intellectual property, and has also held senior management positions with several technology-based businesses including service as the chief legal officer of a leading international distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an emerging broadband media company.  He has been an adjunct faculty member at several colleges and universities, including Berkeley Law, Golden Gate University, Hastings College of Law, Santa Clara University and the University of San Francisco, teaching classes on corporate finance, venture capital, corporate governance, Japanese business law and law and economic development.  He has also launched and oversees projects relating to sustainable entrepreneurship and ageism.  He received his A.B., M.B.A., and J.D. from the University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from the University of Cambridge.  For more information about Alan and his activities, and the services he provides through GCA Law Partners LLP, please contact him directly at alangutterman@gmail.com, follow him on LinkedIn (https://www.linkedin.com/in/alangutterman/) and visit his website at alangutterman.com.

About the Project

The Sustainable Entrepreneurship Project (www.seproject.org) was launched by Alan Gutterman to teach and support individuals and companies, both startups and mature firms, seeking to create and build sustainable businesses based on purpose, innovation, shared value and respect for people and planet.  The Project is a California nonprofit public benefit corporation with tax exempt status under section 501(c)(3) of the Internal Revenue Code dedicated to furthering and promoting sustainable entrepreneurship through education and awareness and supporting entrepreneurs in their efforts to launch and scale innovative sustainable enterprises that will have a material positive environmental or social impact on society as a whole. 

Copyright Matters and Permitted Uses of Work

Copyright © 2020 by Alan S. Gutterman.  All the rights of a copyright owner in this Work are reserved and retained by Alan S. Gutterman; however, the copyright owner grants the public the non-exclusive right to copy, distribute, or display the Work under a Creative Commons Attribution-NonCommercial-ShareAlike (CC BY-NC-SA) 4.0 License, as more fully described at http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode.  Gutterman Law is a service mark of Alan S. Gutterman, P.C.

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[1] C. Masuku, Corporate Social Responsibility Literature Review and Theoretical Framework, available at https://www.academia.edu/2172462/CORPORATE_SOCIAL_RESPONSIBILITY_LITERATURE_REVIEW_AND_THEORETICAL_FRAMEWORK

[2] K. Davis, “The Case For and Against Business Assumption of Social Responsibilities”, American Management Journal, 16 (1973), 312.

[3] C. Masuku, Corporate Social Responsibility Literature Review and Theoretical Framework, available at https://www.academia.edu/2172462/CORPORATE_SOCIAL_RESPONSIBILITY_LITERATURE_REVIEW_AND_THEORETICAL_FRAMEWORK (citing W. Halal, “Corporate community: a theory of the firm uniting profitability and responsibility”, Strategy & Leadership, 28(2) (2000), 10).

[4] European Commission, A Renewed European Union Strategy 2011-14 for Corporate Social Responsibility, COM (2011) 681, ¶ 3.1. 

[5] World Business Council for Sustainable Development, Corporate Social Responsibility: Meeting Changing Expectations, 3, available at wbcsd.org.

[6] M. Rahim, Legal Regulation of Corporate Social Responsibility: A Meta-Regulation Approach of Law for Raising CSR in a Weak Economy (Berlin: Springer, 2013), 13, 34-38.

[7] Id. at 38-39.

[8] RobecoSAM, Corporate Sustainability, available at sustainability-indices.com.

[9] J. Cramer-Montes, “Sustainability: A New Path to Corporate and NGO Collaborations”, The Economist (March 24, 2017), http://www.economist.com/node/10491124

[10] https://www.unpri.org/about/what-is-responsible-investment

[11] M. Tonello, Corporate Investment in ESG Practices (The Conference Board, Inc.: August 5, 2015).

[12] Annual Letter from Larry Fink, Chairman and CEO, BlackRock, to CEOs (February 1, 2016), available at blackrock.com.

[13] V. Harper Ho, Director Notes: Sustainability in the Mainstream–Why Investors Care and What It Means for Corporate Boards (The Conference Board, November 2017), 13-14, electronic copy available at: https://ssrn.com/abstract=3080033 (based on information available at UNPRI, Signatories, https://www.unpri.org/signatory-directory/).

[14] Id. at 15.