State of Corporate Responsibility and the Environment, The
Assadourian, Erik
I. INTRODUCTION
The Georgetown International Environmental Law Review 2006 Focus Issue exploring the evolving nexus of corporate responsibility and the environment comes at a critical time.1 Transnational corporations wield ever increasing power in the global economy, stimulating increased consumption levels worldwide, including in major developing economies such as China and India.2 Meanwhile, the environment is becoming increasingly taxed as a result of this increased consumption and the continued growth of the human population. This introduction attempts to put the many articles featured in this issue in context by describing the current debates and developments in the field of corporate responsibility and the environment.
One such development, the Millennium Ecosystem Assessment (MA), is particularly salient. The results of the MA, a four-year comprehensive environmental analysis by 1360 of the world’s top scientists, were announced in March 2005.3 The MA warns that nearly two-thirds of the ecosystem services-such as provision of fresh water and the regulation of climate and air quality-on which human society depends are being degraded or used unsustainably, a trend that could “grow significantly worse” over the next fifty years if human society does not alter its course.4 As the MA Board of Directors noted, human activity, including the pursuit of economic gain, “is putting such strain on the natural functions of Earth that the ability of the planet’s ecosystems to sustain future generations can no longer be taken for granted.”5
The degradation of these systems does not just threaten to reduce the quality of life for humanity, it “will also profoundly affect businesses.”6 The deteriorating condition of ecosystems may intensify many of the risks and costs of doing business: it may reduce availability of key resources and ecosystem services; it may force a heightening regulatory oversight; it may alter customer and investor preferences; and it may jeopardize the availability of capital and insurance.7
The MA argues that it is imperative that the members of the business community-especially corporations, as the dominant business institutions-take a leading role in creating a sustainable society.8 In addressing the volatile and long-standing debate about whether corporations owe a duty to become more sustainable and socially responsible beyond their basic duty to comply with the law or whether their sole duty is to legally maximize profit, no matter the long-term societal cost, the assessment claims that the two goals are not mutually exclusive. Indeed, the MA concludes that either corporations become more sustainable and responsible or their bottom lines will decline as the global environment degrades.9 Some corporate executives are in agreement. For example, DuPont Chairman and CEO Charles Holliday, Jr., notes that “[b]usiness will not succeed in the twenty-first century if societies fail or if global ecosystems continue to deteriorate.”10
Research and corporate experience points out, however, that becoming a “responsible corporation” does not necessarily entail financial sacrifices and quite often improves financial performance.11 While there is no one universal definition of corporate responsibility, for the purposes of this introduction corporate responsibility means that a corporation acts in an ecologically sustainable and socially beneficial manner. More specifically, responsibility is taken to mean preventing ecological degradation, producing useful and healthy products, treating workers and host communities in a just and fair manner, and using the corporate mechanism to improve the well-being of society.
This introduction primarily discusses the current state of corporate responsibility: the arguments for increasing levels of corporate environmental responsibility, the barriers to these increases, and the roles of stakeholder engagement and governmental involvement in increasing corporate commitments to environmental responsibility. It concludes with an overview of the changes that have been made to date.
II. THE CASE FOR RESPONSIBILITY
A number of companies believe there are benefits associated with acting responsibly and are, in turn, investing in initiatives that reduce their environmental footprint, increase the transparency of their operations, or improve the well-being of their workers and surrounding communities. Yet this number represents only a small share of all companies: so far only 1783(12) of the 69,727 transnational corporations13 have even reported on social or environmental issues. This type of reporting is usually a first step along the road to becoming a responsible firm.
Like any investment, increasing corporate responsibility does not come without cost. With investment dollars limited, new corporate responsibility initiatives compete with traditional initiatives based on perceived return on investment. Still, evidence that corporate responsibility is a sound investment continues to grow. In 2003, researchers examined the links between corporate social and environmental performance and corporate financial performance.14 They analyzed the results of 52 studies containing more than 33,000 observations and demonstrated a positive relationship between financial performance and social and environmental performance.15 Moreover, the study found that many of the negative or non-significant findings of earlier studies could be explained by researcher errors.16
Corporate social and environmental performance correlates with financial performance for many reasons. First, by shrinking waste output and production inefficiencies, companies can reduce both environmental impacts and overall costs-and in the process increase competitiveness.17 Many companies, such as 3M,18 British Petroleum (BP), DuPont, and IBM, have cut their costs by hundreds of millions of dollars by reducing waste output.19
Second, responsible companies are able to attract and retain a higher-quality workforce. According to a 2004 survey, eighty-one percent of Americans considered social commitment when selecting employers.20 Studies have also found that increased worker satisfaction, stemming in part from pride in social performance, actually increases productivity.21
Third, responsible companies arguably benefit in the marketplace, enjoying improved reputations for treating their workers fairly, being eco-friendly, or for their philanthropic activities. These companies also reduce the risk of being targeted by activist organizations when they are perceived as responsible. Such activist campaiging is designed to, and is often effective in, tarnishing a brand or reducing customer loyalty by exposing a company’s environmentally-destructive practices.22
A fourth benefit is that responsible corporations can reduce risk exposure in several key areas. These include, inter alia, reducing the risks of being subjected to new regulations, being pressured to change policies by concerned investors, and being affected by increasing business costs.23 While for years corporations avoided new regulations by voluntarily improving standards-often in ways that were more industry-friendly and on a timeline easier for the affected companies to implement-today regulators are using the threat of new regulations to pressure corporate action.24 Socially responsible investors are similarly applying pressure to corporations, either by divesting from companies viewed as irresponsible or by demanding policy changes in order to preemptively respond to a threat-for example, insisting that corporations create strategies to reduce emissions of climate-changing gases.25 With a growing proportion of investment capital being held by socially responsible investors, ignoring shareholder demands is an increasingly significant risk.26
Banks and insurers are also starting to pressure companies to become more responsible.27 With increasing worldwide storm cleanup costs, in part because of climate change, some insurance companies are demanding that corporations provide strategies to reduce climate change.28 Swiss Re, for example, has started altering its insurance rates depending on companies’ environmental impacts and their associated risks.29 Banks, too, are increasing scrutiny of companies’ business plans before providing loans. Thirty-one major financial institutions with holdings of trillions of dollars have adopted the Equator Principles, a set of guidelines in which banks agree to examine more closely the environmental impacts of projects they capitalize.30 If these principles are adopted more broadly, companies could find their access to capital reduced if they do not attempt to minimize the ecological impacts of new projects.
Fifth and finally, being a responsible company may provide increased access to completely new markets. As Stuart Hart, professor of management at Cornell University, notes, “few executives realize that environmental opportunities might actually become a major source of revenue growth.”31 In 2004, General Electric (GE)-the world’s ninth largest corporation32-launched its “Ecomagination” plan, which commits GE to doubling its investments in green technology research over the next five years to an annual US$1.5 billion.33 In addition, the company plans to launch new green products such as diesel-electric hybrid locomotives and more efficient jet engines.34 It has also promised to reduce its own greenhouse gas emissions by one percent by 2012, even as the company plans to grow significantly during that time.35
While the environmental and public relations implications of this initiative are clearly beneficial, the primary motive is financial. As GE CEO Jeffrey Immelt explained, “we are launching Ecomagination not because it is trendy or moral but because it will accelerate our growth and make us more competitive.”36 By 2010, GE hopes to post US$20 billion in revenues generated from Ecomagination products.37
Increasing responsibility does not always increase short-term profits. Some pollution control measures add costs, as does increasing wages and benefits to workers. Moreover, corporations may have to forgo some irresponsible business opportunities that competitors would be willing to undertake.38 In the long run, however, being more responsible may help corporations outcompete rivals by staying ahead of tightening regulations, reducing usage of increasingly costly inputs, and attracting investment dollars from concerned consumers.
Currently, most corporations making an effort to become more responsible are primarily focused on reducing the adverse impacts of their business activities, whether on consumers, communities, employees, or the environment. Reducing environmental and social impacts is undoubtably a step toward improved corporate responsibility. However, considering that the majority of the world’s ecosystems are being used unsustainably, simply polluting less, that is, increasing “eco-efficiency,” will not create a sustainable economy over the long term. Rather, business practices will have to strive to become “eco-effective.”
Eco-effectiveness, as industrial design experts William McDonough and Michael Braungart explain, means redesigning goods and production processes to follow the laws of nature.39 Almost everything that companies produce is harmful at one level or another-whether because of dependence on fossil fuels for energy, petrochemicals for inputs, or pesticides and chemical fertilizers for cultivation. An eco-effective product is designed to produce no waste, being either perpetually recyclable or compostable, a model known as “cradle-to-cradle” (rather than being used once and then disposed of or incinerated, the so called “cradle-to-grave” model).40
Swiss textile maker Röhner’s effort to create an eco-effective fabric offers a good example of the complicated reformulation needed.41 In the early 1990s, the Swiss government classified the company’s fabric trimmings as hazardous waste because of the toxic chemicals in the dyes, which prevented disposal or incineration within Switzerland.42 Exporting the trimmings was too expensive, so Röhner had to find an alternative: the company began investing in the creation of an eco-effective fabric. After testing 8000 chemicals, they found 38 non-toxic alternatives that could produce the needed colors.43 Today, this fabric, which uses only organic ramie, pesticide-free wool, and the non-toxic dyes, produces no pollution during production and at the end of its life is fully compostable.44
In the future, corporations may similarly redesign products and services to be eco-effective. This redesign will be challenging, considering the large investments that corporations have made in their current means of production. Yet this transition will be possible if companies make deliberate efforts to create transparent long-term plans with specific interim goals that transform their production processes gradually. A few innovative companies have already started down this path, including the Fuji Xerox Company.45 In 1993, Fuji Xerox realized that simply recycling old photocopiers would not yield sufficient reductions in natural resource use, so the company started designing a photocopier with components that could be reused in future models. While it took significant effort to create parts durable enough to be reused in future models, by 2003 Fuji Xerox was reusing fifty-four percent of components in new copiers.46 Moreover, by increasing recycling of remaining non-reusable parts, the company has been able to reduce its waste production even further.47
Other companies are also innovating. Nike is trying to create a non-toxic, recyclable sneaker,48 while Fetzer Wines (a subsidiary of Brown-Forman) is striving to use only organic grapes by 2010.49 So far Fetzer has hit the eleven percent mark,50 while at the same time switching to one hundred percent renewable energy for electricity51 and reducing waste output by ninety-five percent since 1990.52
Yet these are companies that have much to gain by transforming, including reduced pollution, materials usage, and improved reputation. As there are alternative methods to create their products, they risk little if they can find a way to make the transition cheaply. Other companies whose businesses are more fundamentally unsustainable, such as those in oil production or mining, have a much larger challenge ahead: namely, reinventing their business models. The profits of these companies come from an infrastructure that they have already invested in-oil wells and pipelines, for instance. Even if they wanted to, managers could not shut down these operations without damaging their business models. Yet oil supplies will decline and carbon taxes will probably increase, so by ignoring renewable energy infrastructure, these companies risk being outcompeted and driven out of business by start-up renewable energy firms. As Stuart Hart notes, “for these firms, continued blind adherence to yesterday’s technology could spell doom, not just a missed opportunity.”53
III. BARRIERS TO RESPONSIBILITY
Most corporations face significant barriers to becoming more socially and ecologically responsible. Indeed, historically, many have struggled with simple legal compliance. Between 1975 and 1984, for example, sixty-two percent of Fortune 500 companies in the United States committed illegal actions.54
Three main barriers to greater corporate responsibility exist.55 First and foremost, there is a perception that shareholders expect consistent and everincreasing short-term financial gains. To suggest that corporations alone are at fault for their continuing shortsighted behavior would be naïve. Shareholders do exert pressure on corporations-often in ways that encourage maximization of profit. Investors often punish companies by selling stock if quarterly profits do not reach expected levels. Thus, companies feel pressure to maximize short-term returns even at the expense of societal or environmental well-being and sometimes even at the expense of the obeying the law.
In the United States, the law defends the judgment of corporate managers in choosing what to spend revenue on-that is, it is corporate managers’ prerogative to sacrifice profit to improve environmental performance, raise wages, or increase philanthropic contributions.56 Yet pressure from shareholders, analysts, and boards of directors to maximize profit can overwhelm this legal freedom. A cursory examination of stock price effects when companies announce lower than expected quarterly earning reveals the extent to which company managers are currently under pressure to turn short-term profits. If this profit-driven shareholder pressure is to be countered, a new type of shareholder pressure will be needed, potentially through the mobilization of consumer groups, nongovernmental organizations (NGOs), and socially responsible investors.
Second, true environmental and social costs are not captured in current accounting methods or are distorted by perverse subsidies and taxes. According to an analysis by Ralph Estes, a former business professor at American University, if U.S. corporations had to pay all of the externalized costs that their business activities generate, such as workplace injuries, medical care required by the failure of unsafe products, and health costs from pollution, they would have owed US$3.5 trillion in 1995, four times more than the US$822 billion they earned in profits that year.57 A more recent analysis found that if the companies listed in the Financial Times Stock Exchange 100 stock index had to pay the externalized economic costs of their carbon emissions, estimated at the time at about US$36 per ton by the British government, they would lose twelve percent of their earnings.58
Real costs of doing business are skewed even further by the more than US$1 trillion in subsidies that businesses receive worldwide each year.59 These subsidies, which account for roughly four percent of the gross world product,60 support some of the more environmentally-destructive sectors, including agriculture, energy, road transportation, mining, and manufacturing. Many of these subsidies stimulate overproduction, lock in existing technologies, and thus have adverse effects on the environment. A 1992 World Bank study found that removing global energy subsidies could reduce world carbon output by nine percent.61
Between the failure to price goods accurately and skewing prices through government subsidies, corporations are largely insulated from market forces vis-à-vis the environmental impacts of their activities. If fossil fuels were priced more accurately, corporations’ choices would adjust in response to price shifts; certain sectors would fade while others would bloom. Instead, artificial prices encourage unsustainable business practices and prop up certain sectors.
The third barrier involves corporate influence in society. Corporations have exerted influence over institutions of governance, academia, civil society, and the media in order to increase short-term gains rather than to push for a more sustainable, more responsible business system. Because of their size and the amount of wealth they control, they have significant power over these other societal institutions. Indeed, if the revenues of governments and the largest corporations are compared, seventy-seven of the top one hundred revenue producers worldwide are corporations.62 These corporations often direct portions of their revenue toward lobbying the government, supporting universities or NGOs, and even toward creating advocacy groups, primarily for initiatives that benefit their short-term interests.63
Although these corporations could use some of this influence to push for measures that would maintain the natural systems on which they depend, the pressure to profit in the short term causes the majority to use their influence to achieve immediate benefits, such as increased subsidies, weakened regulations, and tax breaks. Bayer AG, for example, spent the past five years lobbying the U.S. government to allow the continued use of its antibiotic Baytril for use in chicken farming, even after research showed that the drug’s use is a threat to human health.64 In 2004, businesses spent about US$1 billion in the United States on political contributions and another US$2 billion on lobbying.65
Corporations’ influence often extends much further than simply lobbying governments. Whether it is by affecting media accounts through threatening to withdraw advertising dollars,66 funding academic research programs,67 setting up advocacy groups to skew the debate on climate change,68 or spending billions in direct advertising to convince consumers that they need certain products that may be unnecessary or even harmful,69 corporations exert a strong influence over society and often have used this influence to improve their own interests in ways that do not also benefit larger society.
IV. STAKEHOLDER ENGAGEMENT
Until demand for perpetually increasing short-term profits is eclipsed by demand for sustainable long-term value, corporations’ capacity to change will remain limited. Stakeholders, including investors, NGOs, and activists, as well as communities, labor groups, and consumers, are playing an increasingly important role in changing this balance.
A. SOCIALLY RESPONSIBLE INVESTORS (SRI)
As shareholders recognize that the lasting value of their investments depends on how companies address long-term risks like climate change and toxic chemical releases, they are becoming a powerful force for change.70 More investors, from mutual fund companies to big institutional investors like the pension fund systems of New York City71 and the state of California,72 are increasingly engaging with companies to encourage them to adopt policies that address long-term risks.73 These investors are acting on their right to “dialogue” with management, express their concerns, and ask corporations to take action.
Just putting issues on the table is sometimes enough to trigger a response. When such requests fail, investors can increase pressure by filing shareholder resolutions, which are motions that demand specific corporate policy changes. While resolutions are non-binding, companies often agree to policy changes in order to maintain good relationships with shareholders and avoid bad publicity. Indeed, the most successful resolutions are not those that actually come to a vote (because most shares are held by non-voting institutions and the resolutions are non-binding), but the ones withdrawn by those who filed them because management has agreed to act on the issue.
In 2004, according to the Investor Responsibility Research Center, investors filed 327 resolutions regarding social or environmental issues with U.S. companies-twenty-two percent more than in the previous year.74 They subsequently withdrew eighty-one of these after companies agreed to address the issues raised, ranging from animal welfare and climate change to political contributions and global labor standards.75
A particularly impressive investor initiative occurred in May 2005 at the United Nations. Under the auspices of the Investor Network on Climate Risk (INCR),76 hundreds of major investors, collectively controlling assets of US$3.2 trillion77 (US$600 billion more than the total funds invested globally in actual SRI funds78), gathered to discuss how to press companies to address climate change and its associated financial risks. At the end of the day, the INCR members pledged not only to invest US$1 billion in clean energy companies,79 but also to increase pressure on companies to disclose their climate impacts and how they are dealing with those impacts.80
SRI will have to become the norm if it is to become an even more effective force for change. Although most major investors, such as universities and pension funds, do not consider social responsibility criteria when choosing investments, this trend is beginning to change in some countries. In the United Kingdom, for example, pension funds have been required since 2000 to disclose the extent to which their investment portfolios take into account environmental and social concerns, a law that has triggered similar initiatives in Belgium, France, Germany, the Netherlands, Sweden, and Switzerland.81 These simple law changes have started to establish SRI in the mainstream in Europe and could greatly enhance investors’ role in altering corporate behavior.
In the short term, the power of SRI continues to come from shareholder advocacy. But as more dollars, euros, yen, and yuan are directed toward sustainable companies, this will pressure unsustainable companies to improve their records in order to compete for capital, in turn helping to transform the role of the corporation in society. But even with a significant increase in socially responsible investing, shareholders alone cannot change the current trajectory; in the United States, the country with the most developed SRI community, socially responsible investors represent one-ninth of all investment dollars.82 To succeed, other stakeholders will need to play key roles as well.
B. NCOS’DUAL ROLE: SUPPORT & PRESSURE
Nongovernmental organizations will be one of these stakeholders. Over the past twenty-five years, NGOs, which now total some 26,000 organizations globally, have become an increasingly powerful force.83 Some NGOs are engaging gently, through partnerships that support corporate efforts to increase responsibility, while others are using more aggressive methods-organizing massive activist campaigns to force corporations to change their priorities.
Environmental Defense is an example of the former, seeking out companies to help them to reduce their environmental impacts often while also reducing their costs.84 In 2000, Environmental Defense approached Federal Express (FedEx) with an offer to help lower the emissions of its delivery fleet. After realizing that this would provide cost savings and good publicity in addition to reducing pollution, FedEx agreed. By the end of 2002, a new hybrid truck design was selected and eighteen prototypes were put into service in Sacramento, New York City, Tampa, and Washington, D.C.85 Seventy-five more trucks will be on the roads in 2006.86 Each truck reduces emissions of soot by ninety-six percent and nitrogen oxides (NO^sub X^) by sixty-five percent and improves fuel efficiency by fifty-seven percent. As FedEx converts its 30,000-strong fleet over the coming years, the company will lower its environmental impacts considerably.87 The benefits of reducing FedEx’s environmental impacts may be far reaching. As Elizabeth Sturcken of Environmental Defense points out, “[tjhis project is serving as a catalyst for the entire shipping industry to convert their fleets.”88
Sometimes companies are the ones that seek out the NGOs. In the 1990s, Chiquita Banana suffered through a major labor strike, terrible publicity for its labor and environmental practices, and the destruction of a significant portion of its banana crops by Hurricane Mitch. The company realized that it needed to rebuild its brand and sought out a partnership with the Rainforest Alliance, an NGO that worked with the company to certify the health, labor, and environmental practices on its farms.89 By 2002, all of Chiquita’s farms, covering 25,000 hectares, were certified by the Rainforest Alliance, as were seventy-five percent of the bananas sold by the company in Europe and the United States.90
More often than not, though, corporate managers’ highest priority is not improving their companies’ social and environmental record. This can quickly change when their companies suddenly become the targets of bad publicity from a coordinated group of activists. With corporations spending a half-trillion dollars each year to create positive images through advertising,91 a sudden coordinated effort by activists to draw potentially negative publicity to corporations can raise environmental issues to the top of managers’ agendas.
This fear of negative publicity, and the connected loss of profit and stock value, are what makes these “corporate campaigns” so successful. Unlike traditional campaigns against companies, such as boycotts, labor strikes, and litigation, which remain important but often have limited objectives, corporate campaigns treat the targeted company more as a lever of change than as an end in itself.
When a coalition of NGOs and investors led by the Rainforest Action Network (RAN) targeted Citigroup (the largest bank holding company in the United States), its goal was to reduce overall exploitation of natural resources.92 But RAN did not go after mining and logging companies, because such companies are not in the public eye and depend on continued extraction to survive. RAN focused instead on the financial institutions that capitalize the mining and logging companies.93 Banks spend billions of dollars to maintain strong brands and customer bases. These assets are essential, and thus exploitable, vulnerabilities. In 2000, RAN asked Citigroup to adopt a green lending policy. Although the company initially refused, after more than three years of protests, shareholder actions, and various irritating tactics, Citigroup finally agreed to implement a new set of environmental lending standards.94
Once Citigroup adopted a green lending policy, its antagonistic relationship with RAN evolved into a collaboration to ensure adherence to its new standards-a partnership that provided free beneficial publicity to Citigroup.95 Meanwhile, RAN quietly drafted a letter to the second largest bank in the United States, Bank of America, asking managers to adopt a similar policy. Bank of America, having witnessed the disruption that committed activists could cause, realized that it was better to join the ranks of those banks with green lending practices.96 Bank of America’s decision left J.P. Morgan Chase as the next largest corporate lender, and it also soon followed suit.97 Together these three banks hold assets of almost US$4 trillion,98 and the lending of these assets is now conditioned on framework principles that take into account environmental impacts, in large part due to RAN’s corporate campaign.
Each agreement yielded more environmental concessions from the bank than the agreement it succeeded. For instance, JPMorgan Chase agreed to stop financing projects in environmentally sensitive ecosystems and to require environmental impact assessments for all loans over US$50 million-two provisions not in earlier agreements.99
RAN’s strategic choices, including partnering with investors and corporate insiders, sequentially focusing on moving the policy choices of intermediary companies, and providing the companies with easy ways to cooperate, have leveraged its successes. For example, after Home Depot yielded to RAN’s demand to change its wood-buying practices in August 1999, it only took a month for Lowes, the second largest home improvement chain, to agree to a similar policy.100 Within nine months, eight of the ten largest home improvement chain stores in the United States had developed similar policies.101 Now this model is being applied to jewelry stores in order to reduce the environmental impacts of gold production,102 to coffee roasters to make coffee farming more equitable and sustainable,103 and to cosmetics companies to force them to purchase less toxic chemicals for their makeup.104
Beyond merely triggering defensive reactions, these campaigns can sometimes lead to more proactive solutions. The office supply store Staples, once the focus of a corporate campaign for its unsustainable paper purchasing practices, is now part of a coalition of businesses helping to design a comprehensive paperpurchasing guideline that it hopes corporations around the world will adopt.105
Perhaps stakeholder engagement, over time, will be enough to make corporations more environmentally responsible. Right now, however, some major corporations seem particularly uninterested in changing, even when aggressively targeted by NGOs, investors, and consumers. For years ExxonMobil, the largest oil company in the world, has been reluctant to make even minor investments in renewable energy technologies despite considerable activist pressure. Unlike other oil companies, ExxonMobil still does not acknowledge the realities of climate change.106 In 2005, the NGO and investor community renewed its efforts: staging protests, filing resolutions, and conducting boycotts.107 While ExxonMobil may continue to refuse to change, this stance might not come without loss-costing the company potential customers, employees, and societal goodwill.108
V. GOVERNMENT INVOLVEMENT
Since the first corporations were established in the 160Os, governments have been essential in ensuring that these business entities behave responsibly.109 Governments create regulations that dictate all aspects of corporate activities-from how much waste they can release to how much control they have over markets. Today, despite corporations’ influence over governmental bodies becoming ever more entrenched and the growing complexity of the technological age, policymakers can still play a role in shaping future corporate conduct. In addition to writing laws that respond to specific problems, such as the amount of mercury that power plants can discharge, governments have available to them tools that will enable responsible companies to compete with less responsible rivals-tools such as establishing the right market signals and promoting multilateral voluntary codes of conduct.
Without the right market signals, a corporation’s ability to act more responsibly is constrained, even when confronted by adamant stakeholders. For example, if a company makes a firm commitment to increase its usage of renewable biofuels to power its transport activities and the price of oil continues to be subsidized while the social and environmental costs of using oil are externalized, the company will have difficulty competing in the marketplace. Policymakers can level the playing field by creating more accurate price signals through measures like reducing subsidies and increasing taxes on pollution and finite resources.
As the removal of subsidies can damage certain sectors, affected industries are likely to resist, making it difficult to phase out subsidies. Governments may find it easier to pass broader tax reforms that internalize externalized costs but are either revenue-neutral or affect a broader group of industries. Sweden, for example, enacted a law in 1992 that charges utilities about five euros per kilogram of NO^sub X^ emissions they release.110 To minimize political resistance by utilities, the law specified that all levies received would be returned to utilities in accordance with how much energy they produced. As a result, the facilities that generated the most energy while producing the least NO^sub X^ benefited doubly-earning additional revenue while siphoning off profits from their competitors with greater NO^sub x^ emissions.111 By 1999, this law had helped reduce NO^sub x^ emissions at originally targeted facilities by thirty-seven percent.112
The European Union has also levied a new pollution tax on carbon emissions. With the Kyoto Protocol coming into force in early 2005, the European Union has to reduce carbon and other emissions that contribute to climate change by a total of eight percent below 1990 levels by 2012.113 To facilitate this reduction, the European Union created an Emission Trading Scheme for industries with significant carbon emissions.114 Some 13,000 industrial facilities and utilities will now have to reduce their emissions below their allotted level, trade credits with those that have already done so, or pay a fine of forty euros per ton (a fine that will increase to one hundred euros starting in 2008).115 This emission reduction scheme has already led to significant carbon trading between companies,116 at a price of about twenty-six euros per ton of carbon dioxide.117 While the price per unit reduction is still low, and the allowances are excessively generous, over time this trading scheme will reward companies that reduce carbon emissions while punishing those that do not.
An additional challenge is that as some countries improve their policies regarding corporate behavior, some corporations move their operations to countries with less stringent requirements. Without addressing these discrepancies, attempts to level the playing field will be significantly hampered. Many international efforts aim to target precisely these discrepancies. In 2000, the International Labour Organisation (a U.N. agency) updated the Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.118 This document provides voluntary guidelines regarding labor rights.119 The Global Compact, established in 1999 by the United Nations, is a voluntary agreement that encourages corporations to adopt a set of ten human rights, labor, and environment principles.120 The U.N. Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights is a non-binding measure that clarifies for businesses that they are obligated to respect human rights and contribute to their realization.121 Finally, another international effort is the OECD Guidelines for Multinational Enterprises.122 Revised in 2000, it too offers a set of voluntary standards to guide corporate behavior, regarding issues such as human rights, labor, the environment, bribery, and transparency.123 A review of the OECD guidelines, scheduled for 2006, could help enhance its role in being an effective tool in guiding corporations’ behavior.124
Yet all of these measures, being non-binding, are limited in their effectiveness, or, according to some critics, are actually inhibiting effective action.125 Binding treaties, conversely, can go far beyond voluntary guidelines, though they are much more difficult to enact. Kyoto and the recently passed Framework Convention on Tobacco Control, which requires ratifying countries to ban tobacco advertising, raise taxes, and other measures that will reduce tobacco sales and consumption, do show the feasibility of enacting international treaties to help regulate pollutants or entire industries.126
Without active government efforts to regulate corporate behavior at local, national, and international levels and to create market signals that reward corporate responsibility, corporations’ ability to become more responsible will likely be slowed. When governments build frameworks that hold corporations more accountable and force them to internalize external costs, not only does the market become more efficient, but the public gains a safer, cleaner, and healthier society.127
VI. WHERE CORPORATE RESPONSIBILITY STANDS TODAY
Today, trust in companies remains low in many countries. While trust levels are slightly higher than in 2000, when several major corporate scandals surfaced, many people remain wary of corporate motivations, seeing companies as driven primarily by greed and willing to exploit workers and the environment for their own short-term gain.128 This perception compromises corporations’ license to operate and makes them susceptible to activist campaigns that draw attention to particularly irresponsible actions.
The goal for increased corporate responsibility is to end the perceived conflict between societal benefit and corporate benefit and instead link the two concepts. This linkage is not a new idea; experts on corporations have advocated this stance for decades. In Concept of the Corporation, his 1946 classic analysis, the late Peter Drucker argued that while corporations should be allowed to profit from their activities, as profit is essential to their survival, this profit motivation should “not mean that the corporation should be free from social obligations. On the contrary it should be so organized as to fulfill automatically its social obligations in the very act of seeking its own best self-interest.”129
Some corporations already recognize that improving society is in their interest and are backing up these beliefs with their resources-a development that is often furthered when managers are personally committed to creating a responsible business, as can be seen in the evolution of companies such as Interface, S. C. Johnson and Son, Seventh Generation, and Green Mountain Coffee Roasters.130 Yet sustainable business leaders remain the exception rather than the norm. A new generation of sustainable business leaders is currently being trained and is just beginning to be placed into positions of responsibility. This trend is accelerating due to growth in sustainable business school programs and student groups like Net Impact, an organization of young business leaders “committed to using the power of business to improve the world” that has grown to over 10,000 members worldwide.131
Strategies that these sustainable business leaders are starting to use are varied, but two common ones include increasing transparency through increased reporting and lobbying for policy changes that improve society (as opposed to lobbying for laws that only improve their bottom line).
Especially after the wave of corporate scandals in recent years, increasing transparency has become a priority in many companies. Along with helping to alleviate public concern, increased transparency can help foster proactive change. By declaring long-term goals and a strategy to achieve them, companies often have more flexibility in pursuing these changes. As the Chairman of Royal Dutch Shell, Jeroen van der Veer, explains, “we have seen how, if done honestly, reporting forces companies to publicly take stock of their environmental and social performance, to decide improvement priorities, and deliver through clear targets.”132 By reporting, corporations admittedly expose their operations to more public scrutiny, yet they also increase trust among stakeholders (as long as they are actually working toward stated goals and not just making empty promises).
In 2004, 1783 transnational corporations or their affiliates filed reports on issues of responsibility, up from virtually no such reports in the early 1990s.133 These reports detail everything from labor standards and impacts on local communities to toxic releases and greenhouse gas emissions. Yet if less than 2000 transnational corporations are filing reports, that means more than 67,000 are not.134 Moreover, of the reports filed, many are very rudimentary-lacking in details, transparency, or inclusion of long-term goals.135 In 2003, less than forty percent of the reports received third-party verification.136
Still, there are some leaders in reporting. CorporateRegister.com, an online directory of corporate non-financial reports, including corporate social responsibility, sustainability, environmental, and social reports, categorized about a quarter of the 1783 reports published in 2004 as full sustainability reports, highlighting companies’ efforts on environmental, social, economic, and community issues.137 Many of the largest companies are also filing some type of responsibility report. About eighty percent of the one hundred largest companies listed on the London Stock Exchange (the Financial Times Stock Exchange 100 Index) now file a significant environmental or social report.138 And according to a 2005 survey by KPMG, a global network of professional firms providing audit, tax, and advisory services, fifty-two percent of the top 250 companies of the Fortune 500, a ranking of the top 500 U.S. public corporations as measured by gross revenue, filed such a report, up from forty-five percent in 2002.139
While growth in reporting continues, the pace is starting to slow.140 To maintain the rate of growth, the United States and other nations which have not yet done so might consider instituting mandatatory corporate responsibility reporting, a measure that several countries have already passed.141 In 2001, France did so when it passed the Nouvelles Régulations Économiques.142 Among other requirements, the statute obligates all companies listed on France’s national stock exchange to report “on how the company takes into account the social and environmental consequences of its activities.”143
Some companies are using responsibility reports not just as ways to declare immediate impacts, but to state long-term goals and their progress toward achieving them. For example, in 1998, BP set the goal of cutting its greenhouse gas emissions to ten percent below 1990 levels by 2010 and started publishing its annual releases. By 2001, BP had reached its goal, and in the process, the company saved US$650 million.144 Starbucks, a worldwide leading retailer of coffee has also used its annual reports to declare its commitment to reduce its environmental and social impact through the creation of a sustainable coffee supply. In 2004, 19.7 million kilograms of its coffee (14.5%) followed its rigorous Coffee and Farmer Equity (CAFE) standards, up from 6 million kilograms the year before.145 These standards, verified by an external auditor, award points for twenty-eight key sustainability indicators, such as the amount of water, energy, and pesticides used and how equitably the profits are distributed among workers. According to its reports, Starbucks’ goal is to increase the share of CAFE standard coffee to sixty percent by 2007.146
While the number of companies pursuing transparency measures has increased, very few corporations disclose the efforts they make to influence government, such as political contributions and lobbying expenditures. According to the 2005 report Influencing Power, forty-nine percent of Standard & Poor’s Global 100 companies provide no information on their lobbying strategies.147 While eight percent received the report’s second highest rating because they have systems to disclose lobbying activities, none received the highest rating, signifying that a company’s corporate values are judged to mesh with its public policy agenda. In other words, according to this report, even several of the most ostensibly committed companies are contradicting their own stated values by pushing inconsistent lobbying agendas.148
Along with influencing the political debate through lobbying expenditures, corporations often influence politicians through direct political contributions. The Center for Political Accountability, in a 2005 report investigating the political contribution policies of 120 companies, found that only one, Morgan Stanley, provided sufficient disclosures for its political contributions and its system to control where they go.149 Since then, five other companies have joined Morgan Stanley, though only after shareholders filed resolutions demanding increased disclosure. Now the boards of directors of all six will review the companies’ political contributions, and these contribution amounts and the rationales for these contributions will be posted on company websites.150
Right now, less than ten percent of the biggest and most scrutinized companies are transparent in their lobbying and political expenditures, let alone consistent in their policies.151 But as in the other arenas of corporate responsibility, a few companies can be identified as leaders. In November 2005, Goldman Sachs became the first investment bank to adopt an environmental policy, similar to those Citibank and other bank holding companies created after being pressured by NGOs.152 In addition, Goldman Sachs acknowledged that climate change “is a reality” and along with reducing its own carbon footprint pledged to lobby governments around the world to address climate change.153
Even a leading U.S. coal company, Duke Energy, announced in mid-2005 that it would begin lobbying for the institution of a tax on carbon emissions. Recognizing that climate change poses a significant threat and that regulation of carbon emissions seems inevitable, Duke Energy realized that it was in its own interest to help shape a national policy. As Duke CEO Paul Anderson noted, “The worst scenario would be if all 50 states took separate actions and we have to comply with 50 different laws.”154 These examples foreshadow a potential future where corporate lobbying works toward greater responsibility, not against it. Yet without policymakers and corporate leaders prioritizing the implementation of a transparent lobbying system, in which lobbying for laws that benefit society is rewarded, this future may prove difficult to achieve.
With ecological threats growing ever more urgent, for many, both within the corporations and outside them, the time to ask whether corporations should increase responsibility has passed. Yet corporations likely will not take the lead quickly enough without the right incentives and pressures. Consumers, citizens, and employees can play a role by supporting corporate leaders who step up to the challenge and punishing those who do not. Such basic actions as deciding which bank to place your savings account in, which shoes to buy, which companies to work for, and which political efforts and candidates to support can help reshape the market. But in the end, the success of these incremental efforts will be heavily dependent upon bold actions undertaken by governments, investors, and NGOs. The Georgetown International Environmental Law Review 2006 Focus Issue on corporate responsibility and the environment explores the evolving roles of NGOs, policymakers, legal advocates, and savvy business leaders in creating an environment where corporations can pursue long-term financial success in a socially and environmentally responsible way.
ERIK ASSADOURIAN*
* Erik Assadourian is a Research Associate at Worldwatch Institute. He can be contacted at eassadourian@worldwatch.org. This introduction is an adaptation of the author’s article Transforming Corporations, in STATE OF THE WORLD 2006, at 171 (Linda Starke ed., Worldwatch Inst. 2006). © 2006, Erik Assadourian
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