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Insight Spotlight: Corporate Social Responsibility

by Bo DeDeker, Ed.D.
Assistant Professor of Accounting

“Corporate social responsibility is not just about managing, reducing, and avoiding risk, it is about creating opportunities, generating improved performance, making money, and leaving the risks far behind.”

–Sunil Misser, Head of Global Sustainability Practice, PwC

Introduction

Corporate sustainable responsibility (CSR) programs, combined with the advent of social accounting are quickly becoming the language of business. A balanced approach to harmonizing the needs of all the stakeholders on our planet (humans, plants, and animals) is needed to protect our delicate environmental and social structures. Governments and corporations will play a crucial role in educating and changing our behavior to help keep our planet viable and a safe place to call our home.

Climate Overview

Conditions on our planet are changing rapidly; the human population has increased from 1 billion in the 1800s to 7.9 billion in 2020, placing pressure on the environmental carrying capacity of the earth. In August of 2021, the Intergovernmental Panel on Climate Change (IPCC), a collection of scientists sanctioned by the United Nations, issued their latest and most dire assessment about the state of our planet. Their report details how human activity has altered the earth’s environment at an unprecedented pace and cautioned that our world risks facing increasingly catastrophic impacts in the absence of rapid greenhouse gas reductions.

Our planet is warming with the average surface temperature having risen 2.12 degrees Fahrenheit (1.18 degrees Celsius) since the late 19th century, a change driven largely by increased carbon dioxide emissions into the atmosphere. Most of the warming has occurred over the past 40 years, with the seven most recent years being the warmest on record. The years 2016 and 2020 are tied for the warmest, with July 2021 being the warmest month across the globe since temperatures have been recorded. Scientists have warned that the tipping point leading to planetary destruction is a rise of 1.5 Celsius; it is now estimated that humans can release the equivalent of about 10 years of current global emissions to have an even chance at keeping temperatures below this level.

Global warming has caused significant melt of our polar ice, causing global sea levels to rise about 8 inches (20 centimeters) in the last century. The rate in the last two decades, however, is nearly double that of the last century and continues to accelerate slightly every year. It is estimated that the sea level rise in the next 10 years will displace over 630 million people from their homes causing the greatest migration in earth’s history. As coastal land disappears, coastal dwellers are forced to move inland creating more pressure on communities that are already struggling to provide services to their residents.

This warming of our planet is inducing extreme weather events with greater frequency and intensity. Droughts have become longer and drier, while rainfall events have become more extreme. In the United States alone, between 1980 and 2021, there have been 298 weather and climate disasters that have each caused more than $1 billion of damage. This list does not include wildfires caused from the extreme heat and droughts. Since 2000 there have been 12 wildfires causing over $1 billion in damage in the United States. Cumulatively these 12 events have caused over $44 billion in damages. As of August, the United States had a total of 37,650 fires destroy over 3 million acres of land with 91 working fires still burning. Besides the financial cost of the damage, these fires send tons of carbon into the atmosphere while eliminating millions of acres of trees that scrub the carbon from our air before it hits our atmosphere.

The August 2021 IPCC report underscores that changes in human activity potentially can have a profound impact to shape a better future by sharply reducing emissions. It is through our actions alone that we can decide the future of our planet. The report also notices that we can no longer avoid some measure of calamity in the coming years, our past impact has been too great and too detrimental to save us from escaping the future without harm.

Social Overview

In addition to problems of climate, there is greater awareness that social inequality has increased over the last several decades. There has been greater recognition that all individuals regardless of race, gender, sexual orientation, and political affiliation should be granted a fair opportunity to survive and thrive in this world. These inequalities threaten to undermine social sustainability. Social sustainability occurs when our societies processes, systems, structures, and relationships work to support the capacity of current and future generations to create healthy and resilient communities.

Wage and wealth inequality in the United States has increased substantially just in the last 30 years. The overall level of inequality is currently approaching levels that prevailed prior to the Great Depression. In the United States, CEO pay is now 300 times that of the average worker, compared to the 1960s, when the rate was only 27 times. Workers’ wages have stagnated while the pay of higher income earners has skyrocketed. The minimum wage in the United States is worth 17% less in 2020 than it was just 10 years ago, and the top 10% of households now control 87.2% of all the wealth compared to 68.2% in 1983.

The gender pay gap still exists and is not getting better. Women, on average, make 80 cents for each $1.00 earned by a male counterpart, a rate that held steady in 2020. Women in almost every industry are paid less than their male counterparts, the disparity is even larger for minority women. Based on the rate of historical progress, it will take over 140 years for the pay disparity between men and women to disappear.

In the United States the poverty rate for children has risen to 21%, a rate higher than any other rich nation. There are 8.1 million children under 18 without health insurance unable to obtain even the basic levels of health care needed for a healthy life. Collectively, in the United States there are 44 million uninsured Americans and another 38 million that have inadequate coverage with one in five people in this country having little or no access to even basic healthcare services.

Homelessness has risen dramatically in the last decade. There are 750,000 homeless Americans on any given night, with one in five considered chronically homeless. The largest share of homeless include males, blacks, the middle-aged, veterans, and the disabled. This rate will continue to climb as housing becomes less affordable. Homelessness disproportionately impacts marginalized population; Hispanics and African Americans are twice as likely to experience housing insecurity.

The incarceration rate in the United States has grown so dramatically since the 1970s that the US now has the highest incarceration rate in the world, 655 per 100,000 of population. The rise has been greatest among high school dropouts and young black males. Currently 37% of all black males that are high school dropouts are incarcerated in a US prison. Not only does this high rate of incarceration create a burden on community resources, it also impacts the workforce needed by corporations to staff their operations.

Corporations that work to support our social systems not only improve the quality of life of our citizens but help build capacity for future growth by increasing the number of well trained and healthy individuals that are able to enter the workforce.

Corporate, Social and Environmental Responsibility

Some may ask why our corporations should be socially and environmentally conscious. Of course, the first comment might be because it is the right thing to do. But there are many individuals who don’t subscribe to that type of thinking; for them more profit and shareholder value is the only motive for running a corporation. But what if research shows that CSR programs in the long run tend to be the most profitable?

A study published in the Accounting Review in 2016 by Harvard Business school researchers discovered that investments in sustainability do add shareholder value to organizations. Using both calendar-time portfolio stock return regressions and firm-level panel regressions they discovered that firms with good ratings on material sustainability issues significantly outperformed firms with poor ratings.

In addition to a positive ROI motive, according to Mark Horoszowski at Movingworlds.com there are 7 operationally motivated reasons backed by research for corporate socially responsible actions:

  1. Consumers are demanding corporate responsibility.
  2. People want to work at companies with world-positive missions.
  3. Employees perform better when they engage in socially responsible activities and reporting.
  4. Corporations develop new markets and improve operations by building and strengthening partnerships.
  5. Social good fosters innovation and collaboration across organizations.
  6. It can increase access to capital. (Impact investing is growing dramatically with investors)
  7. It is a moral imperative.

CSR programs build future capacity which fosters stronger income potential in the future. Measuring only current income generation is a short-sighted management philosophy. Maximizing today’s profit often comes at a cost of lower future income and stability. As the Harvard research shows, corporations that actively participate in social and environmental actions demonstrate stronger income and growth potential than their counterparts that negatively impact the earth and its societies.

Not only are CSR investments smart business, they are imperative in promoting the changes needed to ensure our survival. Corporations produce just about everything we buy, use, and throw away; they play an outsized role in driving global climate change. Our corporations are also the sources of income generation for individuals, helping to create the income inequalities and wealth disparities we see today. Change in our world will come from changing expectations of individuals that will in turn drive a change of actions by our corporations.

The Triple Bottom Line of Accounting

Part of a good CSR program is the creation of a balanced reporting effort. Corporations have adopted the use of the Triple Bottom Line (3BL) accounting method which focuses on three distinct areas of impact: social (people), environmental (planet), and financial (profit).

Measures of each area consist of the following:

Profit, financial performance – The focus of these metrics is to develop strategic planning initiatives and focus key business decisions designed to maximize profits, while reducing costs and mitigating risk. Purpose driven leaders are discovering they have the power to use their business to effect positive change across the globe while creating maximum value in their organizations.

People, the social equity bottom line – As organizations start to embrace sustainable measures, the traditional focus on maximizing shareholder wealth is being replaced by the credo of creating values for all stakeholders of the company including customers, employees, and community members. This can be accomplished by ensuring fair hiring practices, encouraging volunteerism, or by creating strategic alliances with non-profits that share a similar purpose driven goal.

Planet, our environment – Research shows that large corporations have contributed a staggering amount of pollution with over 100 energy sector companies responsible for up to 71% of all industrial emissions. While corporations create the largest impact, they are also at the heart of making positive change. Savvy business leaders have discovered the benefits of reducing their carbon footprint, thereby reducing costs. Adjustments like using ethically sourced materials, cutting down on energy consumption, and streamlining shipping practices are all cost saving measures that have huge impacts on our environment and the bottom line of their businesses.

Adopting a 3BL reporting approach may seem idealistic in a world that often emphasizes profit over purpose. Research, however, shows that innovative sustainable companies have proven time and again that it’s possible to do well by doing good. The 3BL doesn’t inherently value societal and environmental impact at the expense of financial profitability; many firms have reaped financial benefits by committing to sustainable business practices.

In conjunction with the 3BL a new type of organization, the B Corporation (B Corps), has entered the organizational mainstream. B Corps were first developed in 2007 by the State of Maryland. Certified B Corporations are businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose. B Corps are accelerating a global culture shift to redefine success in business and build a more inclusive and sustainable economy.” The State of Wisconsin in 2017 was the 34th State to approve B Corps as an organizational form, thereby legitimizing the balanced business model.

The Progress

Many organizations have already started to embrace CSR commitments. General Motors has developed goals to produce only electric vehicles by the 2035, with 30 new plug-in models arriving by 2025. Ford has also made the announcement that 40% of their cars will be electric by 2025. On Earth Day, the City of Chicago has committed that when the lights are turned on in 2050, all the power will be generated by renewable sources. PepsiCo has committed to expanding their minority managerial population by 30% and double its spending with black owned suppliers. They along with Apple have committed to obtaining a 40% female representation in their C-Suite. Paypal, Apple and the Bank of America have announced that the companies will invest $530 million, $100 million, $1 billion respectively to advance social equity and inclusion in the United States. Woke CEOs are recognizing the importance of a becoming a responsible corporate partner on this earth.

We can all contribute to improving our life on our planet. Living a sustainable life means reducing our share of the earth’s resources and fostering equality by supporting marginalized and less fortunate populations. Like many CEOs, we can become better partners to our earth and society. Being conscious of our surroundings and recognizing how our actions impact the environment and the lives of others is the first step. Other tangible steps include using ecofriendly cleaning products, riding your bike as a means of transportation, reducing your use of water, recycling and reusing whenever we can, working to save energy by turning down the furnace or air conditioning, and turning off standby products when they’re not in use. Regarding social sustainability, educate yourself with reliable information sources about justice issues, volunteer in your community, examine your beliefs and habits, invest responsibly, support local minority owned businesses in your community, and of utmost importance, be kind, understanding and compassionate.

The future of our earth is in our hands whether you are an individual, or a CEO of a corporation. We are all responsible to hand this earth over to our children and grandchildren in condition the same as when we inherited it from our grandparents. The earth is our only home, it is all our responsibilities to take care of her so we can live together in peace and harmony for millenniums to come.

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