How CSR is making it onto the books

People in charge of businesses mostly have good hearts, like everyone else. But they also need to turn a profit.

In some cases, it's possible to be environmentally friendly while saving money at the same time. Reconfiguring your data centre to use less energy at a time when power costs are spiralling is a no-brainer, for example. But what about those other environmentally friendly measures that may be more complex and costly, without any immediate financial return?

Companies wanting to do the right thing have to walk a thin line between responsibility to the environment, and responsibility to investors. In situations where those two requirements don't complement each other, but instead work against each other, senior managers are placed in a difficult position. Analysing suppliers to find out who is the most environmentally friendly, and mandating purchases only from them, is likely to carry a significant financial and managerial cost, for example. Other financial initiatives may similarly carry an adverse effect, rather than a positive one, on the bottom line.

Squaring this circle requires firms to attach a financial value to the environmentally responsible initiatives that undertake. But how can such initiatives be rewarded in accounting terms? Is there anyway to include corporate social responsibility on the balance sheet and claw back some financial reward for choosing socially responsible but costly activities?

Not according to Professor David Crowther, who specialises in CSR at De Montfort University. "There's no way of saying 'we spent extra money but it can be offset in some way to show a net benefit'," he says. Instead, he argues that the best thing that you can do is to rely on some sort of quality model that can at least demonstrate your CSR to customers, even if it doesn't net you direct financial rewards.

But there hasn't been such a CSR kitemark, say experts. There has been no international regulatory group responsible for dictating corporate responsibility. Security exchanges dictate financial requirements, and financial analysts use detailed models to analyse companies against them, because everyone understands and profits from increased profits. But the main way of benchmarking companies' social responsibility in the past has been to rely on their corporate sustainability report - a phenomenon that has grown since the mid-90s.

Part of the problem is that CSR is a generic term that can be interpreted in many different ways. Some people focus on the human rights aspect, for example, whereas others are more concerned with environmental considerations. This means that any sort of quality benchmark has to be very broad if it is to encompass the whole concept. "It falls down to the readers of the reports to use their own benchmarks and values to determine how they want to perceive an organisation against a particular set of metrics," says Cathy Cobey, a senior manager at Ernst & Young and a co-leader of the firm's Canadian sustainability assurance and advisory services group.

Nevertheless, more ways are developing to include CSR on the balance sheet in a structured, universally agreed way. For example, the Global Reporting Initiative (GRI) is a UN-sponsored initiative to create reporting guidelines for sustainability within business. It publishes a sustainability reporting framework that enables companies to lay down in accounting terms what they have been doing to make themselves more socially responsible and environmentally aware. This provides a benchmark enabling companies to compare each other, and for customers to evaluate their suppliers.

"The first step is to produce a consistent group of indicators that everyone will agree to use," agrees Cobey. "The GRI is a good start internationally, in terms of trying to design a set of common indicators. They originally developed it more generically, and are now trying to create more industry-specific indicators."

Ernst & Young also works with the AA1000 series of standards, produced by UK-based non-profit AccountAbility. Similar to the framework provided by the GRI, these standards are designed to promote social and ethical accounting and reporting. GRI is often used to indicate the metrics that a company has included in a report, says Cobey, who sees AA1000 as an auditing tool. "We use the AccountAbility standards as a standard that we follow as auditors - not on what the metrics are, but on how you report on those metrics." The two go hand in hand, she says.

But how valid are these reporting standards, given they are still voluntary, and not enforced by a regulatory body? "Validity comes from usage and they're slowly gaining acceptance," says Crowther, adding that large companies are now adopting the standards, which will set an example for others.

Ultimately, Cody says that the best way to gain financial reward from sustainable business activities is to create situations in which both investors and environmental or ethical advocates win. Including sustainability considerations during the R&D process for a product can make it both profitable and environmentally friendly, for example, she says.

Acting ethically can also have effects in different ways. Even if you can't reap direct financial rewards from CSR accounting, you can at least describe what you have done to help reduce business risk. "Over the last ten years, people have been trying to prove a link between socially responsible activity and the bottom line, and it's difficult to do," says Crowther. "But the evidence is building that you can say if you engage in this kind of stuff it has a financial benefit to you."

For example, showing that you are at less risk of litigation through violation of environmental standards will please investors, says Cobey, adding "Ernst & Young has found that the intangible piece of an organisation's evaluation plays a significant part in their overall stock valuation." She cites benefits including cost reduction, which can be gained from activities as simple as disposing of your technology by reselling it, rather than simply recycling equipment that still has years of life left. "That way, you are getting a financial benefit on your statements, but doing so through acting environmentally."

We're a long way off from having a mandated accounting standard that takes into account the external and hidden costs incurred by unsustainable activity. But hopefully by developing ways to demonstrate what firms are doing to improve their ethical and environmental position, they will be able to glean indirect rewards from the marketplace.