WHEN DOING THE RIGHT THING PROVIDES A PAY-OFF

Global Finance, Jan 2004 by Fittipaldi, Santiago

The corporate world is still searching for definitive proof that corporate responsibility pays-and now the evidence is piling up. By Santiago Fittipaldi

For a little more than a decade, companies have tried to meet increasing consumer and investor demand for them to 'do the right thing' through corporate citizenship efforts. However, with executives closely watching the bottom line, many now want to know if their efforts are paying off.

Whether it's corporate citizenship, corporate social responsibility (CSR), sustainability or any number of other names by which these efforts have come to be known, studies indicate companies may already be reaping some rewards. One such study by Germany's Oekom Research independent sustainability rating agency correlates sustainability with financial performance. The study, conducted in conjunction with Morgan Stanley Dean Witter, indicates shares of companies with good sustainability records perform better than those of their less socially responsible competitors. It examined 602 companies included in the Morgan Stanley Capital International (MSCI) World Index and also rated by Oekom on social and environmental performance.

Morgan Stanley calculated the share performance from December 31, 1999, to October 27, 2003, of companies receiving Oekom's highest ratings and that of companies receiving lower grades. It found that the best-in-class portfolio outperformed sustainability laggards by 23.4%. Through early December 2003, year-to-date performance of the best-in-class portfolio outperformed the MSCI World Index as a whole by 3.8%.

While good sustainability performance can lead to better financial results, good financial results can allow a company more room to invest in better sustainability efforts. Good corporate management, the Oekom study says, also tends to produce better financial and sustainability performance.

Earlier in 2003, Oekom-which predicts sustainability ratings will be an integral part of common stock and bond analysis by 2010-also conducted a similar analysis of carmaker share prices. It found that those with top ratings, including Germany's BMW and France's Renault, saw their share prices rise by an average 8.8% between September 2000 and September 2003. Corporates on the lower end of the rating spectrum, which included mainly Asian companies, saw share prices drop by 9%.

Both studies indicate market players who contend sustainable investments do not provide worthwhile returns may be mistaken. "On the contrary, it is becoming more and more widely recognized that sustainability is a value-added factor," says Markus Krisel, director of Morgan Stanley Private Wealth Management. "The positive correlation between sustainability and financial performance will provide an enormous boost to the sustainable investment sector."

Executives are catching on to this new reality. More than 80% of respondents to a survey of CEOs in the US last year said good corporate citizenship helps the bottom line. The survey, conducted by The Center for Corporate Citizenship at Boston College and the US Chamber of Commerce, also found that CEOs want these efforts to be voluntary and not regulated, with 80% saying corporate citizenship should not be governed by law. Admitting a dilemma over which efforts to report, 85% said many companies are already doing more for their communities than is talked about.

The reality is also that CSR efforts require some degree of investment by companies, whether in implementing a program, changing a policy or even in taking the extra step to publish a report making their CSR strategies known. 'Lack of resources' was identified by 46% of respondents to the CEO survey as the primary obstacle to corporate citizenship, despite the fact that investment in this area has increased or remained constant among most companies polled. The survey concluded that most US businesses, regardless of size, provide cash, volunteer time or goods and services to their local communities.

No matter the level of involvement, few companies can escape growing pressure to show some degree of commitment to social responsibility. For the World Economic Forum (WEF), corporate citizenship is equally as important these days as competitiveness and governance, forming a triad of pressures that the organization feels will shape business leaders' agendas. Compliance and philanthropy, which had gained companies goodwill in the past, are no longer enough.

"In the face of the high levels of international insecurity and poverty, the backlash against globalization and the mistrust of big business, there is growing pressure on business leaders and their companies to deliver wider societal value," notes a CEO survey on corporate citizenship conducted by the WEF and The Prince of Wales International Business Leaders Forum, adding that the situation calls for effective management of wider corporate impacts and contributions to society to make appropriate use of stakeholder engagement.

"Once again it requires new types of public-private partnerships to address challenges that are beyond the capacity or responsibility of an individual company or the private sector," says the survey. "These include issues such as access to training and education, healthcare, water, energy, credit and markets, as well as tackling problems such as corruption, money laundering, crime and terrorism." In 2002 WEF members not only signed a joint statement on global corporate citizenship but went a step further by designing a framework for action by CEOs and management.