Let's walk the talk on corporate integrity

Ethics is becoming an industry. There are now more than 400 consultancies, at least 15 award schemes and at least one conference or seminar a week devoted to corporate social responsibility (CSR). Peter Mason, editor of Ethical Performance Newsletter, the industry insiders' guide, says the number of consultancies tackling ethics has grown dramatically in the UK and Europe over the past four years.

But people are starting to wonder if this is making any difference to the social and environmental performance of companies. Far from providing solutions to global problems, CSR seems more successful at spawning its own business than at helping corporations tackle things like climate change or labour standards.

The value of these consultancies can be quite high, especially if they net the business of a big multinational. Retainers paid by a FTSE 100 company usually exceed £1m a year for the lucky firm, says one insider.

CSR is now dominated by consultants specialising in PR and communications. When the Institute for Public Relations started up a "CSR Network" late last year, discussing subjects such as the social report, it attracted over 220 members.

By some measures, this effort is working. A study by Next Step and corporateregister.com last month found that almost all FTSE 100 companies now issue some information on their social and environmental performance, with 72 producing a standalone report.

But, argues Nick Robins from Henderson Global Investors, "there's a big difference between reporting and disclosure, and there are very few good examples of the latter". In fact, he adds, "the growth in the consulting industry around CSR reporting may well be getting in the way of good practice and diverting resources from real progress".

Tom Burke, visiting professor at Imperial College London, sees the number of consultancies and codes of conduct as a sign that the issue is now important. But others maintain that, beyond mere "consciousness raising", the apparent ethical benefits bear little resemblance to what's happening on the ground.

BP, often upheld as the oil sector's leader in CSR for breaking ranks and accepting the Kyoto Protocol, has a barrage of critics at its doorstep for its dubious responsibility practices. It wasn't enough that it retreated from its "Beyond Petroleum" rebranding two years ago, after activists at the company's AGM revealed that it had no intention of reducing its production of fossil fuels. In January, Henderson Global Investors pulled out of BP following health and safety problems in Alaska. And now a group of non-governmental organisations is taking a case to the UK Government under the OECD Guidelines on Multinational Enterprise, which provides a code for appropriate behaviour. They claim, among other things, that BP evaded labour, tax and environmental laws in the development of a pipeline running through Azerbaijan, Georgia and Turkey.

The case is part of the wider concern felt about voluntary codes of conduct that have dominated the CSR agenda and form the bread and butter of most consultancies. For example, the flagship UN Global Compact has been heavily criticised for not offering any way to ensure companies comply with the code, allowing many to claim progress on social issues while avoiding accountability.

"While the voluntary codes of conduct have provided an entry point for campaigning groups," says Nick Hildyard from The Corner House, a lobby group working to expose the shortcomings of efforts like the OECD Guidelines, "they're no substitute for accountability under the law".

Businesses may not be able to avoid such issues for much longer. Proposed legal changes recommend that companies report on their "social and environmental" impact where it is material to their operations.

But it is unlikely this will be enough, says Danny Graymore of Christian Aid. He cites British American Tobacco as a case in point. An investigation by Christian Aid found that farmers contracted to BAT in southern Brazil suffered a series of health and environmental problems. The company spent £500,000 last year producing its social report, but these problems go largely unreported.

The PR industry tends to drive superficial attempts at demonstrating corporate social responsibility. But compan- ies are seeing how misguided these efforts can be. Cadbury Schweppes was hauled over the coals last month for a marketing campaign offering kids the chance to exchange vouchers from Cadbury's chocolate for school sports equipment.

Critics, including the National Union of Teachers and the Food Commission, pointed out the hypocrisy of pushing sugar to get fit. In particular, they noted that schoolchildren would need to eat 5,440 chocolate bars to earn the most expensive piece of equipment: a set of posts for a volleyball net.

But the bigger issue for Cadbury's would probably be something deeper. "It would be of more value for the corporate sector to turn its attention to the structural causes of poverty, such as low prices for commodities and the tiny share of market value received by small farmers," says Kevin Watkins, research director of Oxfam.

The reason why some companies continue to have a conflict between their espoused CSR values and what's happening on the ground is simple: profit can conflict with ethics and integrity. "Pressures on the ground to deliver projects on time and on budget can lead to people cutting corners," argues Mr Robins at Henderson.

In trying to develop legislation to overcome the weaknesses of the voluntary approach, business has remained largely on the sidelines. Brian Shaad is co-ordinator of the Corporate Responsibility Coalition, a group of over 40 organisations, which has proposed a Bill calling for mandatory disclosure on social and environmental issues. He reports that he still can't get into the CBI for a meeting.

Mr Burke at Imperial College says that companies should be wary of avoiding the discussion, as they will ultimately "get the legislation they deserve".

In the meantime, the corporate sector seems content to use the PR industry as mediators to help define society's expectations. But given the constant criticism of their social and environmental performance, one would expect business to see things in a new light.

Deborah Doane is the head of corporate accountability at the New Economics Foundation.

The fund management industry hasn't had much to shout about during the stock market falls of recent years. But one company has been bucking the trend: Isis Asset Management.

Why? It is the market leader in socially responsible invest- ment (SRI), an area that has proved extremely resilient in turbulent times for the markets. Ethical funds have shed their tree-hugging image. These days, everyone wants to be socially aware.

According to Lipper, the research house, US investors poured more than $1.5bn (£940m) into SRI funds during 2002, while mutual fund sales overall fell by more than $10bn over the same period. In the UK, there are now well over 50 SRI funds to choose from. Eiris, Europe's leading provider of ethical investment research, says the value of these funds now amounts to £3.5bn.

But not all the funds are the same. In fact, SRI creates con- fusion because the investment policies adopted by different fund managers have evolved over time and the application of SRI varies hugely.

When the idea of ethical investment was originally conceived early in the last century, companies involved in alcohol and gambling were shunned. As SRI developed, the list of "unethical" activities expanded to include tobacco, defence, nuclear power and pornography.

But this process of elimination, or "negative screen- ing", was thought by many to be too simplistic. This led to an alternative strategy, favouring companies that offered solutions to social and environ- mental problems. Businesses that rank highly here include those involved in healthcare, education, infrastructure and renewable energy.

Such "positive screening" has also had its critics, who have claimed that rewarding the good and punishing the bad is still too crude. This has resulted in the adoption of the "engagement" process that lies at the core of many SRI strategies.

Engagement aims to promote superior corporate practice by involving the business in dialogue and debate. "We should support companies which aim to make a positive contribution to society, while encouraging those which are at present unacceptable to improve," was the aim of Friends Provident when it launched Stewardship, the UK's first ethical fund, in 1984. Stewardship, worth £1bn, is now managed by Isis, which is applying SRI to the entire £20bn under its management.

Following the success of Stewardship, a plethora of ethical funds have been launched. The creation of SRI indices like FTSE4Good has also raised the profile of ethical investment.

Nearly all of these funds incorporate "negative screening", "positive screening" and "engagement" to some extent, but there are many grey areas. "Some funds have pretty strict negative criteria", says John Fleetwood, a director at financial adviser Ethical Money. "But with positive screening, there is a lot of disparity in terms of what they invest in. They say they seek to, or prefer to, invest in environmentally progressive companies, but most of the funds are invested in more conventional stocks."

With all this money flowing into SRI, are businesses being more socially responsible? There have been cases where shareholder pressure has influenced a company's decision. In 2001, GlaxoSmithKline took the South African government to court over the pricing of drugs used for the treatment of Aids. But the company was encouraged by shareholders to consider the risk to its reputation since it was being criticised for denying patients access to potentially life-saving drugs.

GlaxoSmithKline eventually withdrew from the court case. And last month, it announced it was reducing the price of its main Aids drug, Combivir, by nearly 50 per cent in developing countries.

Investors can also show their disapproval of company actions by exercising the ultimate threat: selling the shares. This is what Henderson Global Investors did with Railtrack. "We bought the shares as an infrastructure investment," says Nick Robins, head of SRI research. "But after Hatfield, the situation became very different. Having met management, it became clear the company had serious structural issues with regard to safety. This wasn't just an SRI issue, it was an investment issue."

BP was another share sold by Henderson. "We were alerted to a resurgence of safety issues in the Alaskan operations," says Mr Robins. "Our investigations raised concerns for us to suspend the company's approval status. That doesn't mean we no longer see them. Engagement is an ongoing process."

But Karina Litvak, head of SRI at Isis, disagrees with the policy of publicly selling out. "We are not into naming and shaming," she argues.

SRI's influence is not something that can be ignored. Money continues to flow into SRI, and fund managers with an expertise in this area continue to benefit. That's good news for the leading players, but bad news for the corporations that refuse to be engaged.