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Capitalism coming of age

Capitalism coming of age

01-02-2018 | Article

Using the SDGs to bridge business strategy and social responsibility

Corporate Social Responsibility (CSR) has evolved from an ad-hoc feature to a strategic imperative for corporations. A well-defined and aligned CSR program can help companies articulate an overarching purpose that motivates employees, inspires customers, gratifies shareholders and advances society. The UNs Sustainable Development Goals (SDGs) provides a useful framework to help companies target and align their CSR programs with the economic, social and environmental needs society and investors value most. Our analyses of corporate philanthropy and citizenship practices shows that companies already recognize the need to address SDGs and are using their CSR programs to apply, advance and report efforts. However, stronger metrics are still needed, especially for companies and stakeholders to fully maximize impact.

  • Roland Hengerer
    Roland
    Hengerer
    PhD, Senior SI Analyst
There is growing agreement today that companies must demonstrate credible corporate citizenship for local community acceptance and to guarantee their license to operate. “Don’t be evil” 1 or simply “behave yourself” are no longer sufficient standards for corporate sustainability leaders. Society, governments, and investors expect companies to not only “do the right thing” but also “make it count” by generating positive impacts for society. In an age of fake news, faked data, over-valued markets, and over-stated goals, stakeholders of all shades and ranks are increasingly demanding less talk, more substance, and visible proof. Notions of Corporate Responsibility have not escaped judgement and in future, companies will be expected to advance their citizenship to a new level.

Society, governments, and investors expect companies to not only “do the right thing” but also “make it count” by generating positive impacts for society.

The Evolution of Corporate Social Responsibility

Developing a moral conscience: a theory of children and firms

In the late 1950s, Lawrence Kohlberg2 developed a theory of moral development in early childhood. In it he posits children pass through three distinct levels on their road to moral consciousness. Level one begins with “pre-conventional morality” where selfinterest dominates and “being good” means avoiding punishment. In the next level “conventional morality” children come to understand rules and authority as part of a larger framework of social norms. Favor, acceptance, and a sense of order requires adherence to the rules. In the final stages, young people reach the “post-conventional” level where they are capable of defining a personal code of conduct that integrates personal autonomy within a wider social order. This post-conventional level comes closest to a universallyaccepted code of ethics.3

Over the last half century, firms have followed a similar route to social consciousness. Prior to the social revolutions of the 1960s, companies’ view of their place in the world was firm-centric. In this world, existence was solely motivated by profits; good behavior was simply to avoid government fines. Later, punishment avoidance was replaced by the recognition of the corporation as an agent within a larger economic system with its own accepted order and normative behavior. It wasn’t until the late nineties that corporations began to adopt principles of corporate social responsibility (CSR) “en masse”. And not until the beginning of the 21st century did CSR start to become a corporate imperative.

As with children, we would expect corporations to advance to a third and higher level of social and corporate consciousness – true corporate citizenship. This level is characterized by the acceptance of higher universal principles for conducting business. One that views company performance not just through the lens of profits and standard practice, but through an established sense of corporate purpose and values, a corporate “raison d’etre” – that includes its impact (contributions and detractions) on stakeholders and society.

From moral conscience to triple bottom line

It would be unreasonable for companies to engage in corporate citizenship on purely altruistic grounds; pure altruism is best left to philanthropic donations. Rather, “third level” companies have advanced in their moral development and are searching for a guiding purpose that informs business strategy, drives stakeholder engagement, and supports society’s progress. And with good reason, companies with a declared purpose perform better overall.4

“Do the Right Thing:” how a strong corporate purpose can lead to better performance

  • The drive to serve real human needs leads to innovation and new business opportunities
  • Reducing waste leads to increased efficiency and cost savings
  • Engaging in social themes provides visibility and brand differentiation
  • Customer engagement for better products and services
  • Employee engagement and attraction of talent
  • Long-term thinking leads to overall risk reduction
  • Creating goodwill provides social capital in times of crises

It would be unreasonable for companies to engage in corporate citizenship on purely altruistic grounds; pure altruism is best left to philanthropic donations.

But how can companies best define their purpose? Vision and mission statements are notorious lofty and vague. Fortunately, help has arrived. The UN’s Sustainable Development Goals (SDGs)5 as shown later, provide a common framework and vocabulary that can help firms align their CSR and business knowhow with society’s priorities. And with their increasing prominence, the SDGs’ influence on future business regulations will only increase—a fact companies can`t afford to ignore.

What’s more, SDGs represent a huge investment opportunity. It is estimated that successfully achieving the SDGs will require an average USD 5-7 trillion per year over the next 12-15 years through 2030.6

Sustainable Development Goals: combining Purpose with Opportunity

From hollow talk to real metrics: measuring the benefits for investors and society 

The SDGs offer a comprehensive framework that is broad enough to cover the full range of causes (e.g. humanitarian, ecological, economic) yet specific enough to guide companies on the exact criteria needed to achieve each goal. Specificity is important especially for corporations as they seek to clearly identify, measure and ultimately report the impact of their CSR contributions.

The SDGs offer a comprehensive framework that is broad enough to cover the full range of causes yet specific enough to guide companies on the exact criteria.

For investors, equally important are the availability of systematic reporting tools that measure corporate progress towards goals and targets. However, not all SDGs are easily transformable into neat, quantifiable KPIs. Moreover, sizeable differences separate industries with respect to SDG focus and degree of scale. Therefore, it’s important that companies focus on those SDGs that are close to their core business.

Although SDG references in company reports have increased substantially since 2015, evidence is largely anecdotal and difficult to compare. To account for these data deficiencies, we adapted the 2017 questionnaire to push companies to address how they are using SDGs within their CSR strategy and more specifically, how they are measuring their performance and impact based on key social and business indicators (KPIs). The information collected can ultimately be integrated into the investment process, to optimize overall impact of an investment portfolio.

It’s important that companies focus on those SDGs that are close to their core business.

Results from the: CSA/DJSI 2017 campaign

The 2017 RobecoSAM Corporate Sustainability Assessment (CSA) questionnaire, asked companies whether they have a group-wide strategy that provides guidance to their corporate citizenship activities; and to indicate how this strategy aligns with their overall corporate strategy and the SDGs.

Scoring was based on evidence of:

  • clearly defined and aligned corporate strategy (via business drivers) with SDGs
  • defined qualitative or quantitative KPIs to measure corporate contributions to SDGs

Which SDGs get the most attention: a closer look at industry focus

The data reveals some interesting correlations between SDGs and specific industries.

Quality education (SDG 4) turned out to be the most popular—a surprising result given it doesn’t intuitively match with the business drivers of all industries. However, further analyses revealed that in many cases, companies equated their own corporate communications with “quality education.” Moving forward we will apply more stringent criteria and reporting indicators to the CSA questionnaire.

Top 4 SDGs across all industries

  1. Quality Education – SDG 4
  2. Good Health & Well-being – SDG 3
  3. Sustainable Cities & Communities – SDG 11
  4. Decent Work and Growth – SDG 8

Most industries address SDGs to some degree.

More expectedly, Health & Well-being (SDG 3) was cited by health care sector companies and their corresponding KPIs also logically aligned with key business drivers (e.g. number of people treated). The SDG focus of other sectors followed similar comprehensible alignments:

  • sustainable cities (SDG 11) => in the real estate sector
  • affordable clean energy (SDG 7) => in the utility sector
  • financial inclusion and reduced inequalities* (SDG 10) => in the financial sectors

* e.g. through micro-financing schemes 

Decent work and growth (SDG 8) garnered attention mostly because it is a generic business benefit that is applicable to virtually all companies. We judged its explicit mentioning by companies as an indication of a weakness in or total absence of other good SDG-related programs and metrics. 

Our results confirm those of academic studies that show similar correlations based on high-level industry tagging of SDGs. However, we carry the analysis further by complementing this approach with SDG data supplied directly by companies themselves.7 In addition, our direct access to company responses grants us the ability to carefully analyze and sift soft responses that lack meaning and impact from those provided by leading companies who have embraced SDGs as a tool for enhancing their CSR contributions and vice versa. Moreover, our strong relationships with participating companies, allows us to further engage and influence those who are lagging with respect to peers.

The implications for investors

For investors interested in targeting specific SDGs, we looked at the distribution of industry sectors across all 17 SDGs. The data confirms our initial hypotheses (overweight of clean energy in the utility sector or good health in the health care sector), but more importantly, data like these will help us design targeted SDG investment products. 

For example, investors interested in access to SDG 7-clean and affordable energy, should overweight utilities. Likewise, exposure to SDG 2-zero hunger can be accessed through investments in the food & beverage or capital goods industry (which includes agriculture & farm machinery companies). At the same time, the data shows rather broad distributions of most SDG across all industries. In other words, most industries address SDGs to some degree. This is important, as investors aren’t forced to make undesired sector investments merely to gain access to select SDGs. Moreover, SDG targeting is possible without introducing large tracking errors.

Methods of quantifying SDG impact

Figure 4 shows to what degree companies are already using quantitative KPIs to link their corporate strategy to a SDG. More than half of all reporting companies (62%) claim to have at least one quantitative KPI for social impacts. A bit less than half of all companies (44%) also have a business KPI.

The availability of quantitative KPIs varies by industry and scope (business vs. societal), with consumer staples having the highest percentage (81%) for societal KPIs, and Real Estate having the lowest percentage (32%) for business KPIs. Although the expressive power of these KPIs still varies, it shows that companies are indeed trying to define measures. 

An illustrative example of KPIs for SDG 6 (water) provided by Suez (a global water utility) is the number of contracts for sustainable water services (business KPI) and number of people provided with water sanitation services in developing countries (social KPI). Another good example from Sanofi (a pharmaceutical company) for SDG 3 (health & well-being) is the number of malaria treatments sold to vulnerable populations for less than 1 USD, and number of people treated (social KPI).

As with the example directly above, for all sectors (besides Telecoms), it is apparently easier to quantitatively measure the social benefit than to link it to a quantitative business metric. For some KPIs documented by companies, there was a lack of any clear connection to business drivers. In other cases, there may be existing relationships, but companies found it difficult to articulate the connection. 

Given the increasing interest of investors for impact measures as well as the evidence of studies showing the performance benefits of companies that strategically align their purpose, companies will find it well worth the effort to identify and measure both business and societal KPIs as strategic metrics for stakeholders to use.

Challenges and next steps

From murky alchemy to an evidence-based approach 

SDG categories were introduced into the 2017 CSA campaign, and so far we have learned that participating companies already use them - but often with a large dose of discretion. In addition, many companies still struggle to define quantifiable metrics. Therefore, it is important

Ultimately, there should be a set of standardized KPIs that can be shared among investors.

to have a critical look at the reported KPIs to avoid the risk of corporate window dressing. In any case, companies need to prepare themselves for a much higher level of scrutiny. While it still seems to be permissive to provide a murky mix of loosely measured and intuition-driven SDG “alchemy”, investors in the future will expect much more quantitative “investment-grade” evidence.

To turn SDGs into sharper tools, companies and investors need to find Key Performance Indicators (KPIs) that are powerful, comparable and specific enough to be usable for investment decisions. The most challenging task is the quantification of impacts. Until companies have had the chance to design more sophisticated tools, investors may have to settle with more qualitative parameters and categorical datasets that give data ranges (high/medium/low impact or excellent, average, bad, etc.) rather than precisely quantified metrics (see Figure 2).

However, with the wealth of company-specific data collected, we can now define best practices per industry and use these as future benchmarks. Moreover, peer benchmarking will increase competition (and peer pressure) among companies to improve not only data quality but social impact. Ultimately, there should be a set of standardized KPIs that can be shared among investors. In a separate paper we describe RobecoSAM’s efforts to benchmark SDG impact for investment products and client portfolios. 8

Looking Ahead

Corporate Citizenship has come a long way in recent decades moving from an isolated, back-page component of corporate reports towards a more integrated visible component of overall corporate strategy. Given the ways in which corporate stewardship (if aligned correctly with business drivers) can support business innovation, reduce risks, and increase brand differentiation, “doing the right thing” is not just an option, but a commercial advantage and corporate imperative.

Doing the right thing” is not just an option, but a commercial advantage and corporate imperative.

In addition, expectations from consumers, regulators, and investors are changing and corporations are increasingly expected to not only furnish products and services but do so in an equitable manner that makes a net positive contribution to the communities in which they operate. Year-end financials are no longer the sole measure of performance—how you get there is also important.

The SDGs provide a systematic framework, common language, and global acceptance that can help companies align CSR initiatives not only with their internal business objectives but also the challenges prioritized and valued by wider society—including responsible investors. The data so far shows companies are already integrating and reporting SDGs within their wider CSR programs. However, the data also shows that specific, objective, and trackable measures, like KPIs, could be more effectively used to benefit CSR programs as well as company performance. In future, soft metrics need to be hardened and strengthened by critical public discourse (just like profit and growth numbers) in order to solidify into real tangible metrics, and to make SDG reporting “investment grade“. 

Through the CSA we will continue to push for more rigor from firms with respect to KPIs, CSR programs, and SDG focus. 

Soft metrics need to be hardened and strengthened by critical public discourse to make SDG reporting "investment grade"

As Kohlberg theorized, just as children experience stages of moral development, so do firms. Through the CSA, Dow Jones Sustainability Index (DJSI), our SI research, and ongoing dialogues with companies, we hope to facilitate the process by identifying those companies who, through their corporate citizenship, not only fulfill their corporate duties but also provide and develop opportunities that create real value for society.

1 ”Don’t be evil” Google’s corporate code of conduct motto from 2000-2015. It was replaced by “do the right thing” in 2015 following its re-structuring under Alphabet Inc.
2
Lawrence Kohlberg (1927-1987), a twentiethcentury American academic considered the founder of the moral development branch of Psychology.
3
Levels presented here are a simplified version of Kohlberg’s moral development model. In reality, each level consisted of several underlying stages.
4
Harvard Business Review and EY Beacon Institute, “The Business Case for Purpose”, 2015
5
Information on UN Sustainability Goals is available at http://www.un.org/ sustainabledevelopment/ development-agenda/
6
United Nations Global Compact, Private Sector Investment and Sustainable Development, https://www.unglobalcompact.org/docs/publications/Private_Sector_Investment_and_Sustainable_Development.pdf
7
Schramade, W. “Investing in the UN Sustainable Development Goals: Opportunities for Companies and Investors”, Journal of Applied Corporate Finance, Vol. 29, No. 2, Spring 2017.
8 RobecoSAM Insight 10/2017: “Accelerating Impact: Advancing SDGs through Investing”.

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