Chapter 8
Social Responsibility: The “S” in ESG
Sustainability Stories from the C-Suite and Boardroom …
I had the opportunity to spend two weeks in Papua New Guinea in the late 1990s. This was a starkly different physical and social setting from anything I had yet experienced. As a member of a high-level executive audit team, we were charged with assessing the environmental status of the controversial Ok Tedi mining operation for BHP Billiton (then BHP).
The Ok Tedi mine was critically important to BHP. One of the largest copper mines in the world, the mine was (at the time of our visit) about 15 years through its useful life of 30 years. Moreover, the mine was facing considerable pressure for environmental reasons. Despite being located in one of the most remote places in the world, Ok Tedi was in the crosshairs of NGOs in Asia. The mine was located about 6,000 feet above sea level, in a rainforest area on geologically “new” soil, which was easily eroded (the opposite of granite).
The environmental issues at Ok Tedi were mind-boggling, so much so that BHP actually had a staff of about 30 full-time environmental scientists and experts at the site. They had commissioned major ecosystem studies examining the impacts of mining waste runoff into the Fly River—one of the most fertile fishing grounds in the South China Sea.
For two weeks, we reviewed compliance records; took helicopter rides up and down the river systems; and met with local community groups. Then we came to a surprising conclusion: on paper, the Ok Tedi mine appeared to be largely or completely in compliance with PNG laws and regulations.
Yet, late one evening sitting around a conference room table, I stood up and went to a copy of the Corporate Environmental Policy hanging on the wall. I set it on the table so that all of us could read the words. The company’s environmental policy, like that of most peer companies, included a general statement about “commitment to protecting the environment.” We zeroed in on the actual words in the policy statement. After some heated discussions, our team developed a list of findings and recommendations.
Postscript: In the end, our report made it to the highest levels of the company. Not long after, BHP began divesting itself of the Ok Tedi mine and taking major financial charges against operations.
The message from this story: Social issues are complex, intertwined with environmental issues, and owned not only by the parent company but also throughout the value chain. Nike owned the child labor issues in the late 1990s that led to a Supreme Court lawsuit; Apple owned the Foxconn labor and environmental abuses a decade ago; and every company that purchased copper sourced at Ok Tedi owned the social and environmental issues in Papua New Guinea.
The Situation: Looking Back—Not Looking Ahead
From its beginning, the socially responsible investing (SRI) movement has had social issues at its core—as the name implies. Assets invested using SRI strategies have continued to grow, doubling between 2012 and 2014. Furthermore, one third of millennials consider socially responsible factors when they invest.i
The “social dimension” of sustainability has grown in importance across many industry sectors as they take responsibility for environmental, social, and governance (ESG) issues across their supply chains. The Nike, Inc. v. Kasky lawsuit that reached the U.S. Supreme Court in 2003 brought to the forefront how major corporations are responsible for far more than their own operations. Moreover, that lawsuit also raised visibility for human rights and related conditions. Supply chain issues pushed the social dimension of sustainability to a point of “roughly equal” weighting as the environmental issues—although this varies significantly by industry sector and by geography.
Globally, the environmental and social dimensions of sustainability tend to receive roughly equal focus. However, for many U.S. industry sectors, social responsibility (as depicted in the left-hand triangle of Figure 8.1) has long been overshadowed by the environment.
Unfortunately, it is not nearly as clean as Figure 8.1 depicts. The line between what is an environmental issue and what is a social issue is often blurry. Availability of fresh water may be seen primarily as an environmental issue in many parts of Arizona in the U.S., while it is considered a social issue in the 37 countries that the World Resources Institute rates 4.01 or higher on a 1-to-5 scale of water-stressed countries.
The emerging social responsibility agenda is vast and complex. To name a few, the issues of social injustice, economic inequality, and the impacts of digital transformation place social issues squarely in the C-Suite. A very simple way to segment the issues is depicted in Figure 8.2.
Social Responsibility: The Key Elements
In the Corporate Sustainability Scorecard, we break down social responsibility into three elements, depicted in Figure 8.2 and listed in Table 8.1.
Table 8.1: Elements of Social Responsibility
| Social Responsibility |
| –Own Operations: Workplace: The general workplace environment established by management and seen by the employees; the core workplace programs to promote safety, health, and employee wellbeing; and the sustainability capability-building initiatives in place. |
| –Supply Chain Social Impacts: The posture and management processes implemented by the company across its supply chain; the processes and programs in place to address the most material supply chain social impacts; and the supply chain partnerships that drive change. |
| –Community Investment: The company’s community policies and programs; the community investments made by the company; and the benefits to society from those initiatives and investments. |
The Opportunity: Glass Half Full
The exploding middle class globally and all that it represents is at the core of significant business opportunities over the next decade—and beyond. Every company, even those sourcing from and selling to suppliers and customers locally in the United States or Canada (where populations are fairly stable and the environment is clean) ignores these changes at its peril.
Think back to this list of major global risks reported by the World Economic Forum (WEF) in its annual Global Risks Report. As mentioned in Chapter 2 (Why Bother?), the latest WEF report looks at five categories of environmental risks:
–Extreme weather events and temperatures
–Accelerating biodiversity loss
–Pollution of air, soil, and water
–Failures of climate change mitigation and adaptation
–Risks linked to the transition to low carbon
All of these risks ranked highly on both dimensions of likelihood and impact.
So why are we talking about these environmental risks in the chapter on social issues? The reason is that global environmental issues (such as climate change and fresh water shortages) can have profound societal impacts. They can also be a threat multiplier, as they contribute to economic and political instability.
With that backdrop, consider two scenarios:
–Scenario #1 is the “glass half empty.” From a societal point of view, the addition of 2.5 billion middle class consumers represents a massive threat in one sense. With society bumping up against ecosystem limits today (fresh water availability, atmospheric carbon, etc.), future regional wars will be fought over water rights, agricultural land, mineral rights, and the like. (At a local level, wars have been fought over such limits for generations.) In addition, populations are migrating to cities, most of which are already full of smog, vehicles, and congestion.
–Scenario #2 is the “glass half full.” Doubling the number of people globally represents massive growth markets: in renewable energy; in transportation (sustainable mobility, ride sharing, tomorrow’s car-sharing); in food (grown without use of hydrocarbon-based fertilizers and pesticides—and without depleting aquifers); in housing (zero energy, zero impact urban housing, etc.); in affordable health care (access to medicines, water, and food); and in consumer products. Clearly, providing products, services, and solutions to meet these future needs will not be the same as today. The future simply can not look like it does today. Realistically, one can not even envision a world with twice the number that we have today of cars in cities, big-box stores in suburbia, and CO2-spewing power plants—and much, much more.
Undoubtedly, both scenarios will play out in various ways, in different sectors and parts of the world, and in pockets of time. Yet the common thread through both scenarios is making a business out of solving the world’s most pressing challenges.
As the world becomes more volatile, boards and C-suite executives must make their companies more agile to deal with the increasing disruptive developments. That will require thinking about solutions in very different ways than companies have been thinking over the past few decades.
Data suggests that the next generations of consumers, entrepreneurs, and business leaders are ready to pitch in and do their part to solve the world’s pressing challenges (see Table 8.2).
Table 8.2: Next Generations of Consumers, Entrepreneurs, and Business Leaders
| Responses by age to the question: “We should do what is right for the planet, even if it harms the U.S. economy.” | ||
| Generation Descriptor | Born | Percentage |
| Matures | Before 1946 | 48% |
| Boomers | 1946–1964 | 53% |
| Xers | 1965–1978 | 62% |
| Millennials | 1979—1996 | 72% |
| Centennials | After 1997 | 74% |
Source: 2016 U.S. Yankelovich MONITOR.
Social Responsibility at a Glance: Tomorrow’s Leaders Today
The vast majority of companies that might be considered “leading” today tend to have Stage 3 or Stage 4 practice(s) in one or a few dimensions of social responsibility. One company may be a leader on diversity, another company on supply chain monitoring and verification, and another on community volunteerism. In some cases, the leading initiative is tied directly to a particular passion of the CEO.
Below is a brief snapshot of how a few leading companies are addressing these three key areas of social responsibility:
–Workplace: Stage 3 companies have a workplace environment and supportive core programs that make the company a “great place” to work. They set an inclusive and supportive culture at the top (Cisco, Kimberly-Clark, and SAS); have highly diverse leadership (Kaiser Permanente, PwC, and Sodexo); have great benefits (Adobe, Facebook, and Salesforce.com); have outstanding safety culture and performance; or have leading health and wellness programs (Goldman Sachs, Intuit, and Sprint). Leaders invest in personalized training and staff development related to sustainability.
–Social Supply Chain: Stage 3 companies actively drive social responsibility culture and initiatives throughout their supply chain. They set high standards and work closely with suppliers to create open and trusted collaboration (ASML Holding NV and Nike) and incorporate this philosophy into their procurement practices (Baxter and Siemens). Many leaders today have established a comprehensive supplier sustainability performance measurement system (Kaiser Permanente and Walmart) and provide strong independent oversight, assurance, and verification of performance (HP, Intel, and Siemens). Importantly, Stage 3 companies are boldly out in front of their peers on the most material social impact issue in their value chain, as seen by: Nike (human rights), Unilever and REI (labor relations), and Patagonia and Cisco (child and forced labor).
–Community: Stage 3 companies take philanthropy to a new level as they rethink their company relationship to the global community and the local communities where they operate. Leading companies focus squarely on initiatives that will help attract tomorrow’s best and brightest employees, who will help them produce outstanding competitive advantage. Intel’s annual Science Talent Search has a global and inspiring reach. Danske Bank (Denmark) helps the growing population of elderly citizens bridge the “digital divide.” IBM developed an app to allow students to catalogue rainforest biodiversity—a program that squarely addresses both the environmental and social “legs” of sustainability. JPMorgan Chase exceeded its initial $100 million investment in the city of Detroit in just three years and now expects to invest $150 million by 2019. The company’s goal is to prove the concept: As more people move up the economic ladder they share in the rewards of a growing economy.
The Scorecard: Social Responsibility
This chapter has provided a general overview of social responsibility, the fourth and final section of the Scorecard. As noted above, this section of the Scorecard contains three elements (workplace; supply chain; community).
In Part 2 of the book, a separate chapter (chapters 25 through 27) addresses each of these three elements in detail. Each of those three chapters aligns with the rating criteria on the web-based tool that has been used by sixty companies by February 2018 and by a growing number since then.
In addition to providing the detailed scoring templates for each element of social responsibility, the Part 2 chapters also provide dozens of company best practice examples—which are defined as being in Stage 3 or higher.
i https://www.kiplinger.com/article/investing/T041-C009-S002-7-great-socially-responsible-mutualfunds.html