CSR management, Investors

In the last few years, those promoting the case for corporate social responsibility have started hitching their cause to a risk management bandwagon. Turnbull, the last element of the combined code on corporate governance, gave this tendency a boost by using a broader definition of non-financial risk. The newly launched ABI guidelines will do likewise: directors' training and disclosure in the main annual report and accounts are high-profile issues, requiring the attention of senior executives. In the short term, this focus on risk is fine as a pragmatic move, especially as boardroom credibility is vital right now. However there are real dangers in being too closely aligned to the risk minimisation agenda. Risk managers are all about managing the downside - reducing the cost of things going wrong. Their close cousins are the ethics compliance officers, rooting out bribery and other wrong-doing. Not doing bad things is of course part of corporate social responsibility, but CSR managers should be focusing on the upside - the long-term added value of sustainable business behaviour. We've highlighted this distinction before, contrasting FTSE4Good (where companies are excluded if they do things EIRIS does not like) with the Dow Jones indexes (which identify the most sustainable companies in each sector). For individual investors, selecting companies according to ethical criteria actually increases your risk and share price volatility, when compared to a balanced fund representing the market as whole. With higher risk comes the possibility of higher reward, if CSR does indeed pay off long term. But right now, the dotcom slump and then September 11 hit some ethical funds hard, as they could not benefit from the boom in arms company valuations. Whichever way you look at it, it's best not to equate CSR too closely with risk management.

Corporate Citizenship Briefing, issue no: 61 - December, 2001