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.