Making the case for #CSR

| July 24, 2017 | 0 Comments

Green party activists might not like it, but according to some, investing in the “sin bin” still proves profitable. Consumers in Europe can’t seem to shed their appetites for tobacco, alcohol, and products like chocolate that often draw from highly problematic supply chains. Investors like the Barrier Fund, formerly known as the Vice Fund, argue that firms that rank lowest in terms of corporate social responsibility (CSR) offer reliably high returns over the long run. Several studies have backed up their claim: Crédit Suisse, for instance, has said alcohol shares are among the best performers in the UK stock market. The trope that ethical investment doesn’t pay off has had CSR advocates and lawmakers throwing up their hands in despair writes Colin Stevens.

Here’s a piece of good news, however: that platitude might not be as true as we once thought. According to the FT, firms that follow environmental, social, and governance (ESG) standards outperform enterprises with, say, heavy state ownership, in polluting sectors, or with a history of flouting labour laws. Every year since the financial crisis, the MSCI Emerging Market ESG Leaders Index, which includes 417 firms that received high ESG scores, has outperformed the MSCI Emerging Market benchmark. Last month, the outperformance gap reached its highest level yet at 51.84 points, twice as high as in 2013.

The news could signal a sea change as investors realize the benefits of shifting their cash to ESG-compliant firms – potentially turning the tide as grassroots-driven, legislative, and other efforts both in Europe and other parts of the world still have a patchy record convincing certain firms to act more responsibly, especially in emerging markets.

Not surprisingly, state-owned enterprises (SoEs) have performed the worst both in terms of ESG and share price, as they ultimately answer to the government, not minority shareholders. But even publicly listed European firms have displayed low adherence to ESG standards – at home as well as abroad.

Earlier this year, the European Commission quietly shelved its biannual anti-corruption report, which provides an assessment of efforts to combat corruption in every member state combined with recommendations for each country. It was a disappointing move, as it came after several years’ worth of massive corporate scandals affecting some of Europe’s biggest blue chip companies. 2015 was a banner year, of course, marked by well-known scandals like the Volkswagen emissions cover-up. Yet news of corporate misbehaviour continues to pour out, with revelations that British telecoms firms BT was involved in improper accounting in Italy, and reports that firms like Denmark’s Tulip Food are dumping inferior products in Eastern European markets.

But the track record of a number of European firms in developing countries, especially in China, has been far worse. For instance, there’s substantial evidence that Switzerland-based Nestlé and other firms continue to push infant formula aggressively in emerging markets, contravening international codes that were first established in the 1980s. Most recently, despite a 1995 Chinese law intended to ensure the neutrality of doctors and protect infants, investigators have found that Nestlé marketers in that country have found ways to circumvent the rules, going so far as to bribe doctors to gain better access for their products. This month, six Nestlé employees were charged with illegally gaining access to patient information to boost formula sales.

European pharmaceutical companies, too, have been engaging in unethical practices in China, even as they broadcast their commitment to CSR back home. In 2013, Beijing began a series of probes into several major drug makers for engaging in corruption and other illegal activities. This included an investigation into French pharmaceutical giant Sanofi, which was accused of giving kickbacks to more than 500 doctors across 79 hospitals in 2007 to increase sales. Only a few weeks later, Chinese authorities paid a visit to the Shanghai office of German drug maker Bayer AG to investigate a potential case of unfair competition. The probes marked the beginning of a wide-ranging campaign by the Chinese government to scrutinize Western pharmaceutical firms that had been operating in the country, which would later expand to include Novo Nordisk, Lundbeck, and UCB, among others.

Even as the Chinese government has been increasing scrutiny of corporate corruption, European institutions and national legislatures have been relatively slow to crack down. To be fair, the past few years have been marked by the codification of CSR-related laws and regulations in Europe that have been catching up with already existing social norms. In April 2014, the European Parliament passed a long-overdue law that would require publicly traded firms with more than 500 employees to include social, environmental, and human rights impact in their annual company reports. 2,500 companies currently publish such reports voluntarily, but the law expanded to implicate nearly 7,000 firms when it took effect this year.

A similar law, the National Action Plan on Responsible Business Conduct, was passed in the United States last December. The law was intended to encourage corporations to respect standards of human rights, transparency, and accountability, and comes on top of laws like the 1977 Foreign Corrupt Practices Act (FCPA), which forbids firms from bribing foreign government officials. While the existence of these laws is certainly encouraging, it’s dismaying that so many firms continue to flout them. It’s clear that US authorities and European institutions alike must do much more to enforce them, especially in emerging markets.

However, news that ethically conscious firms also deliver high results represents cause for hope, as share prices might be the catalyst that will enact real change. Already, activist investors have started to target certain firms, saying they need to revamp their operations to deliver on share price. If CSR compliance means higher returns over the long run, this could mean a sea change in how corporations operate – meaning that ethical business practices might finally become the norm.

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Category: A Frontpage, Circular economy, Corporate Europe Observatory, Economic governance, Enterprise, EU, EU, EU law, Fair Trade Manifesto, featured, Featured Article, Future EU policy, Safety, Single Market, Sustainable development, Trade

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