On September 18th, the U.S. Environmental Protection Agency charged Volkswagen with a violation of the Clean Air Act for intentionally installing software in some VW and Audi diesel engines that enabled the cars to perform better on emission tests than in actual driving.
The news came as a shock to owners, dealers and the public. The company announced a 6.7 billion euro charge to earnings to cover anticipated costs involved in handling the problem and, immediately, its share price dropped by almost one-third.
Within days, Martin Winterkorn, the chief executive officer resigned, saying that he would “accept responsibility” for the “irregularities that have been found in diesel engines.” The company’s executive committee of the supervisory board thanked Mr. Winterkorn for his contributions to the company and said he had “no knowledge of manipulation of the emissions data.”
As has become the rule in such events, Volkswagen has posted information about the incident on its website. For several days following that posting, that information co-existed with the company’s prior statements that declared its dedication to corporate social responsibility and environmental sustainability.
A brief excerpt stated:
At home in America and around the world, Volkswagen Group places environmental sustainability at the core of our operating philosophy. We don’t just talk about it, we take action, finding inventive ways to be responsible in everything we do – and everyone, including our employees, suppliers and sales partners, is equally committed to ongoing improvements and innovations. As a result, we are on our way toward our goal of becoming the world’s most environmentally sustainable automaker by 2018.
Those words have since been removed. An investigation into the entire affair is underway. Of course, it’s too early in the investigation to draw many specific conclusions, but it’s not too early to reflect on the potential broader implications for corporate social responsibility.
Those of us in public relations know just how controversial corporate social responsibility (CSR) has always been. It’s a debate as old as capitalism and there are those that still agree with the conservative economist, Milton Friedman, who famously declared “the sole purpose of a business is to make money for its shareholders.”
So, the rise in CSR activity over the past twenty years hasn’t occurred without generating some controversy. Despite that, every day it’s become increasingly evident that the public is demanding that business act more responsibly.
Product developers and marketers were the first to recognize this phenomenon many years ago. Today’s research consistently indicates that consumers’ CSR perceptions are tightly correlated with fundamental performance indicators such as purchase intent, willingness to recommend, positive word-of-mouth, and trust.
This is a global phenomenon. A new study from Nielsen reports that fifty-five percent of consumers across 60 countries are willing to pay more for products and services from companies committed to putting initiatives in place that have a positive social and environmental impact.
A growing number of corporate leaders understand this. Disney’s Bob Iger was representative of many of his fellow CEOs when he said, “Being a respected global citizen isn't just good for our employees and the communities in which we operate; it is critical to the growth and success of our business.”
The media itself understands this growing interest. Its audiences are interested in corporate social behavior, whether good or bad. They report it as news and develop it into feature content.
The annual ranking of the CSR performance of individual corporations is a prime example. Fortune’s “World’s Most Admired Companies” ranking has been so successful that they’ve recently added “The 100 Best Companies To Work For” and “The 100 Best Workplaces for Millennials.”
Ironically, Volkswagen was ranked number 43 by Fortune for 2015, down somewhat from number 36 last year, but still very respectable. In the automotive sector, they were number three behind BMW and Toyota. Fortune cited the company’s social responsibility efforts as one of the drivers behind their ranking.
With a company’s CSR performance becoming so important to its stakeholders, it’s not surprising that a large number of corporations are now issuing their own CSR performance reports. Twenty years ago, fewer than 30 companies worldwide, released this kind of data. By year’s end, that number will have climbed to more than 7,000, including 80% of the world’s largest 250 companies.
In a natural evolution, companies are also publishing formal corporate sustainability strategies. These detail the company’s policies, actions and investments on specific environmental, social and governance factors (ESG). The potential significance of these factors in evaluating corporate social behavior cannot be overestimated.
To underscore this from a financial and investment perspective, this past April, the Harvard Business Review reported the results of a groundbreaking study, “Corporate Sustainability: First Evidence on Materiality” conducted by Mozaffar Khan, George Serafeim and Aaron Yoon (March 9, 2015).
This analysis provides tangible evidence that companies making investments on ESG factors outperform their peers in terms of risk-adjusted stock price performance, sales growth, and profitability margin growth. And it offers valuable guidance to companies and investors in selecting strategically material ESG initiatives to maximize performance results.
As a result, meaningful CSR-spirited action is taking place everywhere as companies work as hard to burnish their corporate reputation today, as they do their brand image.
But, as the Volkswagen experience underscores, socially responsible corporate behavior is not just a matter of reputation; it’s a matter of corporate sustainability as well. And that makes it too important to be left to ‘trust us’ declarations; we don’t settle for them in evaluating a company’s financial performance, and we shouldn’t settle for them any longer in evaluating a company’s sustainability performance. We need metrics that go beyond ‘trust’ to actual evidence.
Fortunately, that’s a challenge currently being addressed by the Sustainability Accounting Standards Board (SASB). SASB is a new policy organization – and, for full disclosure, an RF|Binder client – that has been formed to develop and disseminate sustainability accounting standards that identify material ESG issues with financial implications and help public corporations disclose material, decision-useful information to investors.
With Michael Bloomberg as Chairman and former SEC Chairperson, Mary Shapiro, as Vice Chair, SASB is making its case aggressively. As they enter their next phase in 2016, SASB will have all of the processes in place that will enable corporations to begin to integrate this into their regular financial reporting.
SASB’s sustainability accounting standards will greatly improve the process of review and selection regarding appropriate ESG factors from both a company and an investor perspective. The standards will give the investment community the tools it needs to more easily evaluate sustainability exposure.
Certainly SASB’s timing couldn’t be better. This past May, CalPERS, the California-based company administering health and retirement benefits on behalf of more than 3,000 public school, local agency and state employers, announced that it will now require its investment managers to integrate ESG factors into their investment decision-making process.
But CalPERS is not alone. Recent data from The Forum for Sustainable and Responsible Investment (US SIF) identifies 308 money managers and 880 community-investing institutions that currently incorporate ESG issues into their investment decision-making.
That represents $4.80 trillion in assets under management, which is 3.4 times the corresponding figure for 2012, when money managers and community investing institutions held $1.41 trillion in ESG assets under management.
Those numbers alone signal a new phase in the evolution of corporate social responsibility and sustainability. Just as CSR is becoming increasingly important for public relations, it is becoming strategically material for investors.
By Joe Fisher, Vice-Chairman, RF|Binder