UK: Corporate Social Responsibility & The ABI

Last Updated: 16 January 2002
Article by Richard Sharpe

Co-written by Adam Fenner

The Association of British Insurers, (the "ABI"), has published a new report on the relevance of corporate social responsibility ("CSR") and issued an accompanying set of investment guidelines. The following constitutes an examination of the concept of CSR, its current prominence in the corporate realm, and the possible impact of the ABI’s recommendations.

Corporate Social Responsibilty - An Introduction:

The notion of CSR is one that is increasingly in the ascendancy. In essence, it is concerned with a company’s awareness and handling of social, ethical and environmental matters ("SEE matters"). These matters harbour potential risks, detrimental to a company’s performance, and it is the minimisation of a company’s exposure to those risks, that is at the crux of CSR.

SEE matters encompass a wide range of issues such as human rights, employee rights, community involvement and environmental protection. The individuals and groups whose interests lie at the heart of those issues are referred to as stakeholders, and maintaining their confidence is paramount to the successful integration of a CSR programme. The ABI’s report, Investing in Social Responsibility – Risks and Opportunities, suggests that there are two distinct advantages borne from the adoption of CSR policies.

The first is that shareholders need to be satisfied that a company is actively managing the serious risks posed to it by various SEE matters. Serious financial penalties can be incurred and thus shareholder value diminished, by failure to address issues such as inadequate working conditions or pollution of the surrounding environment. Those failing to implement effective risk management strategies risk diminishing their appeal to potential investors. The ABI’s report is ominous in this respect, stating:

Ultimately, companies which do not engage in this process will incur a higher cost of capital.

The report’s second argument for CSR centres on the competitive advantage that it might afford a company, though by the ABI’s own admission such an advantage has yet to be established conclusively. The report acknowledges that the nature of the issues involved make it hard to demonstrate causal connections, but does point to the existence of "a growing body of evidence" to support their argument. They cite by way of example, greater stakeholder loyalty, lower operating costs, higher productivity and quality and reduced share price volatility as potential benefits of embracing CSR. By way of example, the report states that The Co-operative Bank calculated that its firm stance on SEE matters made it £16million better off in 2000. Furthermore, the extra profits arose despite the Bank having turned down 105 account applications due to the ecological impact of the applicant’s business.

Current Initiatives & The Pressure To Comply:

With the publication of the ABI’s report and investment guidelines (which will be looked at later), the case for promoting CSR has become ever more compelling. However, the pressure to comply is not restricted to that which emanates from the ABI. Recent legislation has also furthered the cause. An amendment to the 1995 Pensions Act that was passed by the Government in 1999 requires all pension fund trustees to consider social, ethical and environmental issues. In addition, trustees are required to include commentary in their annual statement of investment principles, which describes the extent to which SEE matters determined their choice of investments. The ABI’s report noted that many trustees delegate this task to fund managers, and this has had the effect of fostering the development of socially responsible investment, ("SRI").

Another major CSR development was the launch of the FTSE4Good index, in July 2001. It comprises approximately seven hundred companies, the majority of which are relatively small quoted companies in the FTSE All-Share. The official web site states that "FTSE4Good is a series of benchmark and tradable indices facilitating investment in companies with good records of corporate social responsibility." Accordingly, only those companies who satisfy certain SEE-based criteria are eligible for admission. Nestlé for example, failed to secure its inclusion on the index as a direct result of marketing breast milk substitutes. The constituents of the FTSE4Good index are determined as follows:

  1. A company must be a constituent of the starting universe indices such as the FTSE All-Share Index;
  2. Companies operating in excluded industries – tobacco, weapons systems, nuclear power – are removed form the starting universes to give the eligible universe;
  3. Once the eligible universe has been determined, each company is screened according to the FTSE4Good selection criteria; (the criteria cover issues such as human rights, environmental sustainability, management systems and policies on social issues and stakeholders);
  4. After the index constituents have been determined, the indices are constructed according to FTSE’s index calculation methodology.

Also of note is the increasing prominence of CSR outside of the UK. The EU published a Green Paper on the topic last year that noted the impact of the UK’s Pension Act amendment, and advocated similar legislative adjustments in other Member States. Further afield, the US launched the Dow Jones Sustainability indices in 1999 and has embarked on a bilateral project with the UK on security and human rights in the oil and mining industries. The ABI’s report also points to strong growth in the development of CSR in Asia and the UN’s launching of the Global Compact, an initiative designed to encourage responsibility among multinationals. This world wide concentration on SEE matters is testament to the timely nature of the ABI’s report and resultant guidelines.

The Abi Investment Guidelines & Their Potential Impact:

As noted above, the ABI has issued a stern warning to company boardrooms throughout the U.K. that failure to comply with their guidelines (which are examined below) will lead to difficulties in attracting investors. This is no empty threat. ABI members manage funds worth in excess of £1 trillion, which represents 40% of all money invested in London. The report reinforces its message by stating:

Shareholders want to see that companies are managing such risks. Concerned investors will apply pressure to those which are not and reward those which are.

The guidelines seek to give investors that reassurance, by prescribing the minimum level of information that must be provided by companies with regard to SEE matters. Thus they take the form of certain disclosures which investment institutions would expect to see included in the annual report of all listed companies. The Disclosure Guidelines take the following form, and are intended by the ABI to apply to all companies regardless of size:

With regard to the board, the company should state in its annual report whether:

    1. The Board takes regular account of the significance of social, environmental and ethical (SEE) matters to the business of the company.
    2. The Board has identified and assessed the significant risks to the company’s short and long term value arising from SEE matters, as well as the opportunities to enhance value that may arise from an appropriate response.
    3. The Board has received adequate information to make this assessment and that account is taken of SEE matters in the training of directors.
    4. The Board has ensured that the company has in place effective systems for managing significant risks, which, where relevant, incorporate performance management systems and appropriate remuneration incentives.

With regard to policies, procedures and verification, the annual report should:

    1. Include information on SEE-related risks and opportunities that may significantly affect the company’s short and long term value, and how they might impact on the business.
    2. Describe the company’s policies and procedures for managing risks to short and long term value arising from SEE matters. If the annual report and accounts states that the company has no such policies and procedures, the Board should provide reasons for their absence.
    3. Include information about the extent to which the company has complied with its policies and procedures for managing risks arising from SEE matters.
    4. Describe the procedure for verification of SEE disclosures. The verification procedure should be such as to achieve a reasonable level of credibility.

Future Developments:

Companies would be well advised to take note of the ABI’s recent contribution to CSR. The report and guidelines seem likely to have a significant impact on the UK investment market, but whether they bite deep or not, the international march towards CSR will continue to gather pace. Domestically, matters will be taken a step further when the new Companies Act comes into force. The final report of the Company Law Review group published last year and currently available on the DTI’s web site, indicated that directors will need to report annually on social and environmental matters, and will need to recognise, where relevant:

the importance of relations with employees, suppliers, customers and others, the need to maintain a reputation for high standards of business conduct, and the impact of their actions on the community and the environment.

 

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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