The latest Economic Affairs (the quarterly journal of the Institute of Economic Affairs) arrived today. Its leading topic - Corporate Social Responsibility (CSR) - reminded me that I never published the short talk I gave at an EU "stakeholder" workshop on CSR (or Environmental Social and Governance [ESG] disclosure, as they have re-named that rancid and decaying rose) in Brussels a few months ago. I thought it might be of some interest: (I didn't choose the title.)
Why do some enterprises choose not to disclose ESG information?
Let me be clear first about two reasons why I am not opposed to ESG Disclosure.
- I am not opposed to companies taking account of environmental and social issues. We do, to a greater extent (relative to our size) than most companies who are enthusiasts for CSR.
- I do not argue that small companies should be treated differently to big companies. A sign of a bad system is one where it is necessary to treat small companies differently to big ones.
Indeed, I am not opposed to companies choosing to promote their environmental and social activities in any way they choose, including ESG Disclosure if they want.
What I oppose is any attempt to make it mandatory, or to give preference to companies who do it, or to make it a condition of doing business, or indeed to portray it as somehow virtuous or effective.
Running a business is not easy. Businessmen have large amounts of information to digest, possibilities to consider, and responsibilities to uphold. They must be good at predicting the future course of events, and at reacting quickly to changes they didn't foresee. They must be able to tell the difference between conventional wisdom and fundamental truth. Failing to do so can be catastrophic, as we have had to learn yet again.
Anything that distracts them from this focus - that complicates their judgments or clouds the information available to them - can be detrimental not just to their business, but to society at large. CSR does exactly that.
Accounts and prices are ways of condensing a lot of information into an easily-comprehensible, commensurable form. Commensurability is key to business information, and it is absent from the many CSR standards. What does it mean when we quote an “employee engagement score”? How do we weigh a change in that score against a change in our “business practices measure”? Can we compare our “business practices measure” against other companies' “business practices measure”? And where these scores are achieved through surveys, what are we really measuring – fundamental performance, or how we have influenced people's perceptions on the issue?
Even where you think you have something objective, like a firm's carbon footprint, it often turns out to be illusory. For example, BT (a firm with a strong reputation for CSR) claimed to have cut their carbon footprint dramatically by buying "green electricity", when in reality their contribution to the carbon savings was negligible. Despite an unfavourable decision by the energy regulator, BT maintain this fiction in their latest CSR report.
Where you have a material externality, the right approach is to create an appropriate institutional framework to internalize it. Businessmen and other leaders will then be able to take account of it through their conventional business tools and will have sufficient incentive to act where appropriate. Investors will be able to measure a business's success in acting on the externality through their single bottom line.
What drives real change is not fine words and woolly numbers in glossy reports, but incentives of sufficient value that they justify action. One danger of CSR is that, by creating greenwash for companies to pretend that their minimal and often illusory contributions are somehow significant, it provides cover for those companies to oppose measures that would have real effect.
We must judge, promote and reward businessmen according to their entrepreneurial ability, not their ability to direct or present their company's activities in a way that accords with some prescriptive attitudes to certain social and environmental issues. Otherwise, we will end up with the wrong type of people leading homogenised businesses, undermining the diversity that is vital to the effective functioning of markets.
All of the following businesses were strong proponents of CSR: ABN Amro, ING, Bradford & Bingley, Northern Rock, HBOS, RBS, Woolworths, Anglo Irish Bank, AIG, Bear Sterns, Lehman Bros, Merrill Lynch, Morgan Stanley, Washington Mutual, Fannie Mae, Freddie Mac, SachsenLB, Hypo Bank, Kaupthing, Martinsa Fadesa, General Motors, Chrysler, Nortel, and of course Enron before that.
I don't intend to be that type of businessman running that type of business.
The event was supposedly one in a series of workshops at which certain stakeholder groups could express their views on CSR. This one was for businesses (it is telling that business, on whom 100% of the burden falls, is perceived to be only one of five "stakeholder" groups whose opinions on CSR are to be given equal weight), and I was drafted in as one of two "anti's".
In practice, most of the participants in this workshop for "business stakeholders" were representatives of the CSR industry or of "social" or "environmental" pressure groups that strongly favour CSR. Of those from the commercial world, most were from the corporate sector that has largely embraced the advantage that heavy bureaucratic overheads, and marketing flannel dressed as objective assessment, can provide in protecting the market share of bloated incumbents.
Representing that class of business that dominates employment in the EU - SMEs - were me and a German girl, whose company stretched the definition of "SME" (they have thousands of employees) but at least largely maintained a small-company attitude, and one or two trade-association representatives. And as each of us business stakeholders were allowed three minutes to talk, much less than the CSR professionals (who naturally took even longer than they were given, because how can one describe concisely something so woolly?), the meeting was not really about airing and considering business views of CSR, but about the EU being able to tick the box that said they had discussed the issue with business.
The workshop was conducted under Chatham House rules, so I can't quote anything that was said there, but my general impression was that there is significant pressure to move towards making CSR reporting (or "ESG disclosure") mandatory, at least for a class of businesses (seleced according to size and/or whether they are listed), although that view was probably just about in the minority in this workshop (I doubt it will be in the others). The French have already made it mandatory for listed companies to provide it if asked by relevant stakeholders, and are moving toward extending it. Apparently, the legislation in France has no teeth, but they were arguing that the EU should take the role in driving convergence (i.e. the French yet again using the EU to inflict social costs on other countries that they have voluntarily inflicted on themselves). The Scandinavians have not yet made it mandatory but seemed to be saying they expected everyone to do it anyway. The Spanish were saying that it wasn't mandatory "for now". The Italians and Germans seemed less keen on any compulsion. There wasn't much from the New Entrants. Someone said that 6 European nations had so far made it mandatory to some degree, though no names were mentioned other than France.
The Commission staff themselves were playing their cards close to their chest, claiming to be neutral and undecided about what if anything the EC could do about it, but I would say there were hints through the day that they were sympathetic towards some sort of European action, though I don't know what. Importantly, they don't know what the next Commission will want, but after 10 years thinking about it, they want to have something ready in case the new Commission want to act.
The representatives of institutional investors were very keen on CSR, as were the representatives of NGOs and trade unions.
Even amongst those who opposed making it mandatory, there was more acceptance of such things as making it a requirement of public-sector contracts, which would effectively drive everyone to do it, as public-sector contracts are important in so many sectors now.
The "coordinating committee" or inner circle seemed to consist largely of CSR enthusiasts (mostly professionals who could expect to benefit from any impositions on businesses, plus a representative of Friends of the Earth).
I suggested that they should invite a leading economic commentator and author of sceptical publications on CSR to one of their later workshops, but they weren't much interested because it wasn't clear how such a person would fit into any of the "stakeholder" groups that they had defined. It is laughable that the EC views the opinions of NGOs and trade unions on this matter as of equal significance to the opinions of businesses, but are not interested in the opinions of economists, nor much interested in the opinions of typical European businesses.
How long before some mandatory CSR reporting requirements are inflicted on us by an EU Directive that we are powerless to oppose?