Tag Archives: CSR

Social Responsibility Research in Total Quality Management and Business Excellence (Taylor & Francis Online)

 

This is a pre-publication version of an academic paper, entitled; “Measuring the corporate managers’ attitudes toward ISO’s social responsibility standard”, that was accepted by Total Quality Management and Business Excellence (Print ISSN: 1478-3363 Online ISSN: 1478-3371).

How to Cite: Camilleri, M.A. (2018). Measuring the corporate managers’ attitudes toward ISO’s social responsibility standard. Total Quality Management & Business Excellence. (forthcoming). http://dx.doi.org/10.1080/14783363.2017.1413344


Abstract

The International Standards Organisation’s ISO 26000 on social responsibility supports organisations of all types and sizes in their responsibilities towards society and the environment. ISO 26000 recommends that organisations ought to follow its principles on accountability, transparency, ethical behaviours and fair operating practices that safeguard organisations and their stakeholders’ interests. Hence, this contribution presents a critical review of ISO 26000’s guiding principles. Afterwards, it appraises the business practitioners’ attitudes towards social responsibility practices, including organisational governance, human rights, labour practices, the environment, fair operating practices, consumer issues as well as community involvement and development. A principal component analysis has indicated that the executives were primarily committed to resolving grievances and on countering corruption. The results suggested that the respondents believed in social dialogue as they were willing to forge relationships with different stakeholders. Moreover, they were also concerned about environmental responsibility, particularly on mitigating climate change and sustainable consumption. In conclusion, this paper identifies the standard’s inherent limitations as it opens up future research avenues to academia.

Keywords: ISO 26000; International Standards Organisation; Social Responsibility; Organisational Governance; Human Rights; Labour Practices; environmental responsibility; fair operating practices; consumer issues; community involvement.


Introduction

The International Standard Organisation’s ISO 26000 provides guidance on social responsibility issues for businesses and other entities. This standard comprises broad issues, comprising labour practices, conditions of employment, responsible supply chain management, responsible procurement of materials and resources, fair operating practices, recommendations for negotiations with interested parties as well as collaborative stakeholder engagement among other issues (Helms, Oliver, & Webb, 2012; Castka & Balzarova, 2008a, 2008b, 2008c). ISO 26000 is aimed at all organisations, regardless of their activity, size or location. Its core subjects respect the international norms and assist organisations on accountability, transparency and ethical behaviours.

The social responsibility standard has emerged following lengthy partnerships’ agreements and negotiations between nongovernmental organisations (NGOs) and large multinational corporations (Helms et al., 2012; Boström & Halström, 2010; Castka & Balzarova, 2008a, 2008b, 2008c). Prior to ISO 26000, there were other certifiable and uncertifiable, multistakeholder standards and instruments; the Forest Stewardship Council (FSC), Greenpeace, Rainforest Alliance and Home Depot, among others (Balzarova & Castka, 2012; Castka & Corbett, 2016a). At the time, many organisations adopted voluntary environmental and social standards, as well as eco-labels such as ISO’s 14000, FSC, Fair Trade or the US Department of Agriculture’s USDA Organic Labelling. Like ISO 26000, their regulatory guidelines and principles encourage organisations and their stakeholders to become more socially responsible and environmentally sustainable. However, despite there are many standards and regulatory instruments, private businesses do not always provide credible information on their eco-labelling (Darnall, Ji, & Vazquez-Brust, 2016).

For this reason, environmental NGOs are putting pressure on national governments for more stringent compliance regulations on large undertakings to adhere to certified standards or ecolabels (Schwartz & Tilling, 2009). This approach could possibly inhibit the businesses and other organisations to reveal relevant information about their social responsibility and stakeholder engagement (Castka & Corbett, 2016b). Notwithstanding, there is still limited research and scant empirical evidence on how businesses are resorting to ISO 26000’s principles in their responsible managerial practices (see Hahn, 2013; Hahn & Weidtmann, 2016; Claasen & Roloff, 2012; Castka & Balzarova, 2008a, 2008b)Therefore, this contribution provides a review of the socially responsible standard’s guiding principles and appraises the executives’ attitudes towards ISO 26000. Firstly, it examines relevant theoretical insights and empirical studies on the managerial perceptions towards responsible organisational behaviours. Secondly, it sheds light on the development of ISO’s standard on social responsibility and its constituent elements. Thirdly, this paper reveals the managers’ perceptions of ISO 26000’s core topics, including organisational governance, human rights, labour practices, the environment, fair operating practices, consumer issues as well as community involvement and development. This research uses a principal component analysis (PCA) to obtain a factor solution of a smaller set of salient variables from ISO 26000’s core issues. The findings identify specific socially responsible activities which are being emphasised by the companies’ executives. The results suggest that the respondents were committed to improving their relationships with employees, marketplace as well as political and community stakeholders.

Literature review

The managerial perceptions of social responsibility

Several empirical studies have explored the managers’ attitudes towards and perceptions of corporate social responsibilities (Carollo & Guerci, 2017; Eweje & Sakaki, 2015; Moyeen & West, 2014; Fassin, Van Rossem, & Buelens, 2011; Pedersen, 2010; Basu & Palazzo, 2008; Nielsen & Thomsen, 2009 and Perrini, Russo, & Tencati, 2007, among others). A number of similar studies have gauged corporate social responsibility by adopting Fortune’s reputation index (Fryxell & Wang, 1994; Griffin & Mahon, 1997; Stanwick & Stanwick, 1998), the KLD index (Fombrun, 1998; Griffin & Mahon, 1997) or Van Riel and Fombrun’s (2007) RepTrak. Such measures required executives to assess the extent to which their company behaves responsibly towards the environment and the community (Fryxell & Wang, 1994). Despite their wide usage in past research, the appropriateness of these indices is still doubtful. For instance, Fortune’s reputation index failed to account for the multidimensionality of the corporate citizenship construct, and is suspected to be more significant of management quality than of corporate social performance (Waddock & Graves, 1997). Fortune’s past index suffered from the fact that its items were not based on theoretical arguments, as they did not appropriately represent the economic, legal, ethical and discretionary dimensions of the corporate citizenship construct.

Other academics, including Pedersen (2010), identified a set of common issues that were frequently used by managers when describing societal responsibilities. This study reported that managers still had a relatively narrow perception of societal responsibilities. Generally, they believed that CSR involves taking care of the workforce, and to manufacture products and deliver services that the customers want, in an eco-friendly manner. The managers who participated in Pedersen’s (2010) study did not believe that they had responsibilities towards society on issues such as social exclusion, Third World development and poverty reduction, among other variables. In a similar vein, Eweje and Sakaki (2015) pointed out that corporate social responsibility involved volunteering, diversity in the workplace and work–life balance. They contended that these are important areas that merit more attention, particularly for those businesses that are willing to prove their credentials. Moreover, Moyeen and West (2014) noticed that sustainable development and environmental issues often remained on the periphery of the managers’ understandings and perceptions of CSR

ISO’s social responsibility standard

In 2010, the development of ISO 26000 has represented a significant milestone in integrating socially and environmentally responsible behaviours into management processes (Toppinen, Virtanen, Mayer, & Tuppura, 2015; Hahn, 2013). ISO 26000 was developed through a participatory multi-stakeholder process with an emphasis on participatory decision-making and

democracy (Hahn & Weidtmann, 2016). For instance, the International Labour Organization (ILO) had established a Memorandum of Understanding (MoU) to ensure that ISO’s social responsibility standard is consistent with its very own labour standards. In fact, ISO 26000’s core subject on ‘Labour Practices’ is based on ILOs’ conventions on labour practices, including

Human Resources Development Convention, Occupational Health and Safety Guidelines, Forced Labour Convention, Freedom of Association, Minimum Wage Fixing Recommendation and the Worst Forms of Child Labour Recommendation, among others. Moreover, ISO’s core subject on ‘human rights’ is based on the Universal Declaration of Human Rights (adopted by the UN General Assembly in 1948).

The standard comprises seven essential areas in the realms of social responsibility: organisational governance, human rights, labour practices, environment, fair operating practices, consumer issues, and community involvement and development (ISO, 2014). ISO’s goal is to encourage organisations to integrate their guiding principles on social responsibility into their management strategies, systems and processes. Therefore, ISO 26000 assists in improving environmental, social and governance communications and also provides guidance on stakeholder identification and engagement (Camilleri, 2015a). It advises the practising organisations to take into account their varied stakeholders’ interests. According to Castka and Balzarova (2008a, p. 276), ‘ISO 26000 aims to assist organisations and their networks in addressing their social responsibilities as it provides practical guidance on how to operationalise CSR, by identifying and engaging with stakeholders and enhancing credibility of reports and claims made about CSR (Hąbek & Wolniak, 2016). Therefore, this standard has the potential to capture the context-specific nature of social responsibility.

ISO 26000 has been characterised as an evolutionary step in standard innovation because it is suitable for organisations of all sizes and sectors. This standard has unique features regarding authority and legitimacy (Hahn, 2013). Its guidelines describe social responsibility as ‘the actions a firm takes to contribute to “sustainable development”’ (Perez-Baltres, Doh, Miller, & Pisani, 2012, p. 158). Hahn (2013) suggested that ISO 26000 offers specific guidance on many facets of CSR, as it helps responsible businesses in their internal and external assessments and evaluations. Furthermore, when the organisations adopt ISO 26000, they could signal their social responsibility credentials and qualities to their marketplace stakeholders (Graffin & Ward, 2010). This way they may also reduce information asymmetries among supply chain partners (King, Lenox, & Terlaak, 2005).

ISO 26000 provides a unilateral understanding of social responsibility across the globe. It acknowledges that ‘social responsibility should be an integral part of the businesses’ core strategy (ISO, 2014). A wide array of social responsibility practices and stakeholder management issues are addressed in ISO 26000. This standard aims to unify and standardise social responsibility; it also acknowledges that each organisation has a responsibility to bear that are relevant to its business (Hąbek & Wolniak, 2016; Hahn, 2013). Notwithstanding, there are different industries, organisational settings, regional or cultural circumstances that will surely affect how entities implement the ISO standards ‘recommendations on responsible behaviours’.

The corporate culture is an important driver for socially responsible activities. Therefore, CEOs play a key role in giving their face and voice to their corporate sustainability agenda (Waldman et al., 2006; Caprar & Neville, 2012). Hence, ISO 26000 can be used as a vehicle for CSR communication. Hąbek and Wolniak (2016) suggested that this standard is rooted in a quality management framework, as it holds potential to enhance the credibility of the corporations’ social responsibility claims. Similarly, Moratis (2015) argued that the concept of credibility relates to scepticism, trust and greenwashing. Other research has demonstrated that some stakeholders have used standards to enhance their credibility, learning and legitimacy (Hąbek & Wolniak, 2016; Boström & Halström, 2010). Consequently, the organisations that are renowned for their genuine CSR credentials could garner a better reputation and image among stakeholders. This will ultimately result in significant improvements to the firms’ bottom lines. An organisational culture that promotes the sustainability agenda has the potential to achieve a competitive advantage, as businesses could improve their long-term corporate financial performance (Eccles, Ioannou, & Serafeim, 2012) via the development of valuable, rare and non-imitable organisational resources and capabilities (Barney, 1986). Eccles et al. (2012) analysed the financial performance of firms with either high or low sustainability orientation. The authors found that firms with a high sustainability orientation were associated with distinct governance mechanisms for sustainability, longer time horizons and deeper stakeholder engagement, as they dedicated more attention to non-financial disclosures. Their adoption of the sustainability standards, such as ISO 26000, can also be interpreted as a signal of a responsible corporate culture (Waldman et al., 2006).

On the other hand, many academic commentators argue that ISO 26000 has never been considered as a management standard. The certification requirements have not been incorporated into ISO 26000’s development and reinforcement process, unlike other standards, including ISO 9000 and ISO 14001(Hahn, 2013). In its present form, ISO 26000 does not follow a classical plan–do–check–act–type management system approach as it is the case for ISO 14001 (Hahn, 2013). Arimura, Darnall, and Katayama (2011) reported that the facilities that were certified with ISO’s 14000 were 40% more likely to assess their suppliers’ environmental performance and 50% more likely to require that their suppliers undertake specific environmental practices. Nevertheless, Arimura, Darnall, Ganguli, and Katayama (2016) argued that although ISO 14001 was a certifiable standard, the facilities that were adopting it were no more likely to reduce their air pollution emissions than noncertified ones.

Rasche and Kell (2010) admitted that the responsibility standards can never be a complete solution to the perennial social and environmental problems; they argued that the standards have inherent limitations that need to be recognised. Certain prestandardisation preparations may have created boundaries which have restricted the stakeholders’ influence. Suchman (1995) described the pre-standardisation phase as an effort which embedded new structures and practices into already legitimate institutions. During the pre-standardisation discussions among stakeholders, there were differing opinions and not enough consensus over ISO 26000’s certification (Mueckenberger & Jastram, 2010). Other authors declared that the certification of standards does not necessarily lead to improved performance (Aravind & Christmann, 2011; King et al., 2005). The development of ISO 26000 involved lengthy, multi-stakeholder corroborations that did not necessarily ensure legitimacy or guarantee that the standard could be considered as an enforceable instrument for industry participants. Balzarova and Castka (2012) also pointed out that the scope of the ISO 26000 standard was unclear as the actual implications for social and environmental improvement were still unknown. Many stakeholders, including chief executives, should have been in a position to leverage their arguments during the pre-standardisation arrangements (Balzarova & Castka, 2012). The responsible businesses could have discussed possible avenues for the standard’s reinforcement. For instance, those organisations that are in complete compliance with ISO 26000 are not required to disclose their social responsibility reports and to make them readily accessible to stakeholders (Balzarova & Castka, 2012). This contentious issue could lead organisations to not fully conform themselves to this uncertifiable standard.

Different industry representatives were (and are still) concerned that costly certification requirements could overburden organisations, particularly in emerging economies. The organisations’ stakeholders, including their employees, may be against the introduction of new standards as they could affect their firms’ bottom lines. When the standards are enforced, industry stakeholders need to comply with their requirements. The companies will usually have to absorb the cost of compliance with the standards (Delmas, 2002). Moreover, the standards may also lead to the creation of trade barriers and to significant increases in production costs (Montabon, Melnyk, Sroufe, & Calantone, 2000). Notwithstanding, when introducing new standards, the standard setters’ external audits could reveal regulatory non-compliance among adopting organisations (Schwartz & Tilling, 2009; Delmas, 2002). As a result, the industries’ implementation of a new standard such as ISO 26000 could be time-consuming because it may require holistic adaptations to change extant organisational processes. The standardisation of social responsibility has also been criticised for being costly and thereby difficult to implement, especially among the smaller companies (Toppinen et al., 2015).

Ávila et al.’s (2013) survey indicated that ISO 26000’s themes were under-represented, particularly those involving labour practices and the environment. The authors posited that the organisations that were supposedly following ISO 26000 have often faced difficulties in incorporating the social responsibility throughout all organisational mechanisms, processes and decisions. Ávila et al. (2013) argued that the businesses’ unsatisfactory engagement with consumer issues was even more serious, as they justify the organisations’ existence. It may appear that Ávila et al.’s (2013) research participants were only concerned about their corporate image (as they were supposedly implementing the social responsibility concept and its premises). Evidently, these firms were less interested in undertaking necessary actions to ensure truthful and fair compliance with ISO 26000.

Methodology

This research has explored the senior executives’ stance on ISO’s social responsibility standard. The respondents were all employed by listed companies in a small European member country. They were expected to indicate their attitudes towards and perceptions of ISO 26000’s core topics, including organisational governance, human rights, labour practices, the environment, fair operating practices, consumer issues as well as community involvement and development. The questionnaire’s design, layout and content were consistent with the social responsibility standard. Respondents were asked to indicate the strength of their agreement or disagreement with ISO 26000’s subjects. The survey instrument made use of the five-point Likert scaling mechanism, where a numerical value was attributed to the informant’s opinion and perception. The responses were coded from 1 (strongly disagree) to 5 (strongly agree) with 3 signalling indecision. Such symmetric, equidistant scaling has provided an interval level of measurement.

An online questionnaire link was sent electronically by means of an email, directly to the senior executives of all companies that were listed on the Malta Stock Exchange. There were numerous attempts to ensure that the questionnaire has been received by all email recipients. Many steps were taken to ensure a high response rate, which included reminder emails and numerous telephone calls. Eventually, there was a total of 374 (out of 1626) respondents who have willingly chosen to take part in this research. This sample represented a usable response rate of 23% of all targeted research participants. The surveyed respondents gave their socio-demographic details about their ‘role’, ‘age’, ‘gender’ and ‘education’ in the latter part of the survey questionnaire. The objective of this designated profile of owner-managers was to gain a good insight into their ability to make evaluative judgements in taking strategic decisions on social responsibility matters. Table 1 presents the profile of respondents who participated in this study.

 

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Following the data gathering process, the researcher carried out descriptive statistics to analyse the distribution and dispersion of the data. Afterwards, factor analysis (FA) data reduction techniques were used to achieve the desired reliability, timely and accurate assessment of the findings. Unless an instrument is reliable, it cannot be valid. The FA was developed to explore and discover the main construct or dimension in the data matrix. The primary objective of this analysis was to reduce the number of variables in the data-set and to detect any underlying structure between them (Hair, Anderson, Tatham, & Black, 1998). Therefore, FA identified the interrelationships among variables. FA extracted components to obtain a factor solution of a smaller set of salient variables which exhibited the highest variation from the linear combination of original variables (Hair et al., 1998). It then removed this variance and produced a second linear combination which explained the maximum proportion of the remaining variance. The first step was to decide which factor components were going to be retained in the PCA. This approach was considered appropriate as there were variables that shared close similarities and highly significant correlations. The criterion for retaining factors is that each retained component must have some sort of face validity and/or theoretical validity, but prior to the rotation process, it was impossible to interpret what each factor meant. The first component accounted for a fairly large amount of the total variance. Each succeeding component had smaller amounts of variance. Although a large number of components could be extracted, only the first few components will be important enough to be retained for interpretation.

The SPSS default was set to keep any factor with an eigenvalue larger than 1.0. If a factor component displayed an eigenvalue less than 1.0, it would have explained less variance than the original variable. Once the factors have been chosen, the next step was to rotate them. The goal of rotation was to achieve what is called a ‘simple structure’, with high factor loadings on one factor and low loadings on all others. The factor loading refers to the correlation between each retained factor and each of the original variables. With regard to determining the significance of the factor loading, this study had followed the guidelines for identifying significant factor loadings based on the specific sample size, as suggested by Hair et al. (1998).

Analysis

The survey questionnaires’ responses were imported directly into SPSS. After filtering responses and eliminating unusable or incomplete survey observations, a total of 374 valid responses were obtained. The managers of the listed companies were required to indicate their level of agreement with ISO 26000 core subjects. Reliability and appropriate validity tests have been carried out during the analytical process. Cronbach’s alpha was calculated to test for the level of consistency among the items.

Principal component analysis

Bartlett’s test of sphericity revealed sufficient correlation in the data-set to run a PCA since P< .001. The Kaiser–Meyer– Olkin’s Test (which measures the sampling adequacy) was also acceptable, as it was well above 0.5. With respect to scale reliability, all constructs were analysed for internal consistency by using Cronbach’s alpha. The composite reliability coefficient (Bagozzi & Yi, 1988) was 0.79, well above the minimum acceptance value of 0.7.

PCA has been chosen to obtain a factor solution of a smaller set of salient variables, from a much larger data-set. A varimax rotation method was used to spread variability more evenly among the constructs. PCA was considered appropriate as there were variables exhibiting an underlying structure. Many variables shared close similarities as there were highly significant correlations. Therefore, PCA has identified the patterns within the data and expressed it by highlighting the relevant similarities (and differences) in each and every component. In the process, the data have been compressed as it was reduced in a number of dimensions without much loss of information. From SPSS, the PCA has produced a table which illustrated the amount of variance in the original variables (with their respective initial eigenvalues), which were accounted for every component. There was also a percentage of variance column which indicated the expressed ratio, as a percentage of the variance (for each component). A brief description of the extracted factor components, together with their eigenvalues and their respective percentage of variance, is provided in Table 2 . The sum of the eigenvalues equalled the number of components. Only principal components with eigenvalues greater than 1 were extracted, and they accounted for more than 63% variance before rotation. The PCA analysis yielded 17 extracted components from ISO 26000’s 37 variables. These factor components were labelled following a cross-examination of the variables with the higher loadings. Typically, the variables with the highest correlation scores had mostly contributed towards the make-up of the respective component.

total variance

Discussion and conclusions

Many stakeholders, particularly the regulatory ones, from the most advanced economies are increasingly inquiring about the corporations’ responsible behaviours. Very often, multinational businesses are resorting to the NGOs’ tools and instruments, such as process and performance-oriented standards in corporate governance, human rights, labour, environmental

protection, anti-corruption as well as health and safety, among others (Camilleri, 2015a). In this light, ISO 26000 standard has been chosen to investigate company executives’ stance towards social responsibility practices.

This empirical research suggests that the respondents’ responsible and sustainable behaviours were both internally and externally focused. The managers indicated that they were paying attention to their human rights issues, labour and fair operating practices. Table 2 reported that the executives gave due importance to resolving grievances and anti-corruption within their organisation. This finding is consistent with other contributions which link CSR with the human resources management literature (Currie, Gormley, Roche, & Teague, 2016; Hahn, 2013; Wettstein, 2012; Pedersen, 2010; Ewing, 1989). The workplace conflict may be intrinsic to the nature of work, because employees and managers may have hard-to-reconcile competing interests (Currie et al., 2016). Ewing (1989) argued that companies develop grievance procedures to help them in their due processes. The author maintained that its development leads to better morale and productivity, fewer union interventions and less likelihood of being sued. However, grievance procedures could incur operating costs, often consume large amounts of previous time from executives and may open the door to chronic malcontents.

This study evidenced that the corporations’ managers were clearly against corrupt practices. Today’s listed businesses are increasingly expected to explain how they are fighting fraudulent activities and bribery issues. This study was conducted in a European Union jurisdiction which mandates a ‘comply or explain’ directive on non-financial reporting (Camilleri, 2015b). The European corporations are expected to be as transparent as possible, to disclose material information and to limit the pursuit of exploitative, unfair or deceptive practices (Camilleri, 2015b). Moreover, large organisations that are operating in member states (that have ratified the ILO’s conventions on labour rights) are morally and legally bound to promote fair operating practices and to engage in social dialogue. The findings suggest that the respondents were committed to forging relationships with different stakeholders, including suppliers and market intermediaries, the wider communities at large, as well as political groups, among others. Porter and Kramer (2011) contended that capable local suppliers foster greater logistical efficiency and ease of collaboration in areas, such as training, in order to boost productivity. Therefore, the success of every company is affected by supporting stakeholders and the extant infrastructure around it. The big businesses’ stakeholder engagement is rooted in institutional theory, as they are capable of aligning themselves with their broader context (Brammer, Jackson, & Matten, 2012). In fact, this study has also measured the respondents’ attitudes on social engagement (including the creation of jobs and skills development, the conditions of employment and the individuals’ civil and political rights) and on the subject of discrimination towards vulnerable groups, among other contingent topics. Moreover, the listed companies’ executives also indicated that they were concerned on environmental sustainability, particularly on global climate change. The corporations’ managers did not explain how they were committed to reduce the carbon footprint or prevent the emission of greenhouse gases. However, they may use new technologies, including renewable energy, water use and conservation. Alternatively, they could change older equipment to reduce pollution and make it more efficient and economical. The results suggest that respondents respected property rights, they utilised and consumed sustainable resources, and were concerned on protecting the natural environment.

Limitations and suggestions for future research

The extant literature has recognised this ISO 26000’s inherent limitations. For the time being, the businesses that are using this standard are not required to disclose material information on their social responsibility practices to stakeholders. One of the most contentious issues is that ISO 26000 still remains voluntary and uncertifiable. The practitioners may ultimately decide not to fully conform themselves with this standard, as they are not bound to do so. For this reason, ISO 26000’s role is still limited for regulators, standard-setting organisations and policy-makers.

In a nutshell, this paper has advanced an empirical study that explored the business executives’ appraisal of social responsibility practices. It has employed ISO 26000 as a comprehensive measure for organisational governance, human rights, labour practices, the environment, fair operating practices, consumer issues, and community involvement and development. Moreover, this contribution has critically analysed key theoretical underpinnings and previous empirical studies on the social responsibility standard. Further research may yield other conclusions about how responsible organisations and corporations could use this standard to appraise their social responsibility endeavours. Future studies could explore different stakeholders’ views, other than the corporation executives’ stance on ISO 26000 subjects. Academia could utilise ISO’s broad standard as a measure for social responsibility behaviours. Moreover, qualitative research could clarify in depth and breadth how organisations are mapping their progress and advancement in the implementation and monitoring of the standard’s responsible initiatives. Future research could identify certain difficulties in incorporating the social responsibility standard throughout the organisational systems and processes.

Acknowledgements

The author thanks this journal’s editor and his anonymous reviewers for their insightful remarks and suggestions.

Disclosure statement

No potential conflict of interest was reported by the author.

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The conceptual developments that paved the way for Integrated Reporting

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The International Integrated Reporting Council’s <IR> Framework’s broader view of value creation and its multiple capital concept calls for an enhanced stewardship of the organisations’ capitals; whilst promoting a better understanding of the interdependencies between the capitals (IIRC, 2013, p.8). Relevant theoretical perspectives as well as sound empirical research suggest that the practicing organisations’ underlying motive behind their non-financial disclosures is to maximise their financial capital and profit. This argumentation is synonymous with many conceptual theories in academic literature that seek to justify the rationale for voluntary, integrated reporting (Adams et al., 2016; Idowu et al., 2013; Deegan, 2002, Suchman, 1995; Scott, 1995; Eisenhardt, 1989):

  • The Agency Theory

In the twentieth century, corporations were clearly distinguishing the difference between ownership and control of wealth. The business owners were considered as principals as they employed executives (agents) to manage their firms. The latter executives acted as agents for the principals, and they were morally responsible to maximise their shareholders’ wealth (i.e. the prinicipals’ wealth). The executives have accepted their agents’ status because they perceived the opportunity to maximise their own utility. The agency theory suggests that the company executives and their principals are motivated by opportunities for their own personal gain (Eisenhardt, 1989). Rightly so, the principals may invest their wealth in profitable companies and design governance systems in ways that maximise their investments. On the other hand, agents accept the responsibility of managing their principals’ undertakings to secure their employment prospects.

However, at times, there may be interest divergence between the managers and their principals. There may be situations where the agents may feel constrained by their principals’ imposed structures and controlling mechanisms (Davis et al., 1997). This matter could lead to unproductivity outcomes and will ultimately bring significant losses to the principals themselves. In the event where the agent would have no discretion at all, the firm would be owner-managed. In this case, having a situation where principals are autocratic towards their agents could result in serious repercussions for the businesses’ prospects. The crux of the agency theory is that principals are expected to delegate authority to agents to act on their behalf (Ness & Mirza, 1991). It is this delegation that at times allows agents to opportunistically build their own utility at the expense of the principals’ utility. This happens when there are unaligned objectives; where managers may be motivated by their individualistic, self-serving goals, rather than being stewards for their principals (Eisenhardt, 1989).

  • The Stewardship Theory

The stewardship theory is the collective-serving model of behaviour that is driven by the organisations’ intrinsic values and a genuine desire to do what is best for society and the planet (Donaldson & Davis, 1991). The stewardship behaviours benefit principals through the positive effects of profits on corporate dividends and share prices. Consequently, the stewards place higher value on cooperation than defection (these terms are also found in the game theory), because they perceive greater utility in cooperative behaviours. Stewardship theorists assume that there is a strong relationship between successful organisations and their principals’ satisfaction. The stewards protect and maximise their shareholders’ wealth because by so doing, they maximize their utility functions toward principals.

Stewards who successfully improve their organisational performance will also satisfy other stakeholder groups who have their own vested interests. Therefore, pro-organisational stewards are motivated to maximise organisational performance, whilst satisfying the competing interests of shareholders. The utility that they gain from pro-organisational behaviours is higher than the utility that could be gained through individualistic, self-serving behaviours. This theory suggests that stewards believe that their interests are aligned with those of the corporation that engaged them (Muth & Donaldson, 1998). Ideally, the stewards ought to be committed to improve their organisational performance rather than satisfying their personal motivations. This theory’s ideals are closely aligned with <IR>’s principles for value creation. IIRC’s <IR> Framework emphasises the stewardship of multiple capitals, including; financial, manufactured, intellectual, human, social and natural capital.  In the past, the accountability of social and environmental capitals has often been found to be completely lacking in financial reporting (Adams et al., 2016; Muth & Donaldson, 1998). In addition, some anecdotal evidence suggests that companies are not always presenting a true and fair view of their negative impacts. On the other hand, there are other organisations who may be reluctant to promote their responsible and sustainable behaviours. This may be due to a lack of awareness on the business case for such activities. The motivations for undertaking stewardship behaviours, including; material ESG initiatives (that may be reported within integrated reports) seem to fall into two increasingly converging camps: doing good practices (this is consistent with the predictions of the stewardship theory) or doing well (this is consistent with both institutional and legitimacy theories).

  • The Institutional Theory

Different components of the institutional theory explain how certain processes become established as authoritative guidelines for societal behaviours. Very often, structures and institutions are created, diffused, adopted, and adapted over space and time; and eventually they may also fall into decline and disuse. Unlike the efficiency-based theories which focus on profit maximisation or on the interactions between markets and governments, the institutional theory considers a wider range of variables that could influence the decision-making processes in organisations.

This theory clarifies how firms respond to their institutional environments in which they operate. Stakeholders, including; governments, regulatory authorities, non-governmental organisations (NGOs), and organisations within the supply chain can exert their influence on any business. Scott (1995) held that, in order to survive, organisations must conform to norms and rules that are prevailing in their operating environment. Their compliance with the institutions’ formal regulations and ethos will earn them legitimacy among stakeholders (Beck et al., 2015; Dacin, 1997; Deephouse, 1996; Suchman, 1995). The institutional theory’s applications have expanded even further; as more research is showing how the institutions effect organisational behaviours, particularly on CSR issues. Historically, the notion of CSR has emerged from the institutionalised forms of social solidarity from liberal market economies. The institutional theory offers promising ways of investigating what lies at the heart of the publics’ concern. Therefore, corporations may be influenced by the institutions’ voluntary principles, policies and programmes. Their responsible behaviours have often been triggered by socio-political forces and pressure groups. In this case, CSR practice rests on the dichotomy between the corporations’ voluntary engagement and their socially binding responsibilities (Brammer et al., 2012). The fact that CSR is ‘voluntary’ is a clear reflection of the practicing organisations’ institutional context. Alternatively, CSR may be driven by legal, customary, religious or other defined institutions.

Undoubtedly, numerous institutions have played a dynamic role, both individually and collectively in the development of integrated reporting. While governments have been the primary force for the promotion of financial reporting standards through security exchange commissions; other institutions like IIRC or GRI have facilitated the growth and diffusion of ESG reporting among practicing organisations. For the time being, it may appear that there is a demand for CSR reporting mechanisms by marketplace stakeholders. For this reason, corporations are communicating their ESG credentials (Camilleri, 2015a). This way, they are accountable and transparent about their modus operandi with regulators, industry, and stakeholder groups. Moreover, the corporations continuous engagement with external institutions, particularly multi-governmental organisations, social and environmental NGOs as well as the standard-setting organisations have brought valuable principles and guidelines in the realms of sustainability reporting (Camilleri, 2015a).

Isomorphism has been constructed in conjunction with the applications of the institutional theory (Erlingsdottir & Lindberg 2005; Dacin, 1997; DiMaggio & Powell, 1991). This concept has largely been propagated through global cultural and associational processes. Isomorphic developments arise when ideas or innovations travel and are adopted in different contexts (Harding, 2012; Dacin, 1997; Deephouse, 1996).. For instance, despite all possible configurations of local economic forces, power relationships, and forms of traditional culture it might consist of, a previously-isolated island society that has made contact with the rest of the globe would quickly take on standardised forms that are similar to a hundred other nation-states around the world (Meyer, Boli, Thomas & Ramirez, 1997). Similarly, the notion of isopraxism refers to ideas that are translated and modified by different actors to suit their own needs.

Isomorphism and its related notion, isopraxism are potentially helpful for framing our interpretation of why corporate reporting approaches may converge (or not) over time. For example, the principles-based and non-mandatory <IR> Framework could potentially create explicit and implicit reporting norms that shape the non-financial information of organisations that ought to be communicated through their integrated reporting. In this sense, isomorphism may be useful to understand how and why the disclosures of ESG content can become widely accepted across companies, over time (Adams et al., 2016; Deephouse, 1996). In a similar vein, isopraxism has been used to describe instances where identifiable institutional forces lead to new and different actions within specific organisational and social instances. Therefore, isopraxism suggests that organisations may be intrigued to move toward more integrated approaches to reporting. At times, legitimate organisations may be willing to voluntarily disclose their adapted ESG reports, out of their own volition. However, they may not necessarily label them ‘integrated’, or join the IIRC’s <IR> Framework (Erlingsdottir & Lindberg 2005; Harding 2012).

  • The Legitimacy Theory

Very often, the institutional environments provide regulatory frameworks and may be considered as a considerable breath of narratives pertaining to non-financial disclosures, in different jurisdictions. Hence, there is a possibility that responsible organisations will become legitimate if they comply with relevant societal rules that are found in the countries where they operate (Beck et al., 2015; Deegan, 2002). The stakeholders perceive that organisations are legitimate when “their actions are desirable, proper, or appropriate within some socially-constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p. 574). This conception suggests that the role of the legitimacy theory is to justify the organisations’ behaviour, particularly when they implement and develop social and environmental initiatives. It goes without saying that the stakeholders will recognise those legitimate organisations that are upholding their social contract in accordance with the expectations of society. Therefore, the drivers of institutional legitimacy may be influenced by the organisations’ external environment; according to the culturally-defined values and beliefs. On the other hand, stakeholders will severely sanction irresponsible organisations when they do not respect social norms and ethical values.

Suchman (1995) described legitimacy as an operational resource assuming a “high level of managerial control over legitimating processes” (p. 576). Others suggested that legitimacy is strategic as it emanates from recurring conflicts between management and stakeholders (Dacin, Oliver & Roy, 2007; Suchman 1995). Organisational legitimacy could be achieved by forging strong relationships with external stakeholders (Camilleri, 2017). For this reason, organisations may decide to change and adapt their corporate disclosures according to their stakeholders’ expectations to achieve legitimacy. On the other hand, changes in disclosure patterns may be driven by internal decisions on materiality. Corporate reporting could be considered as a mitigating factor that is driven from inside the organisation (Campbell & Beck, 2004). Therefore, the managers’ agenda is to strategically enhance their legitimacy through stakeholder engagement. They may also make financial and ESG disclosures widely available to interested parties to achieve legitimation. This position is consistent with <IR>’s framework. Within this context, the <IR> framework provides significant support to organisations who are willing to disclose their non-financial reports. However, when organisations utilise IIRC’s framework for their very first time, they may inevitably have to adapt their financial and ESG reports as per <IR>’s recommended framework. Hence, <IR>’s reporting guidelines provide a passive avenue for institutional legitimsation. It is through the development of such guiding principles that society and external stakeholders are continuously influencing organisations to restore their ethical and social disclosures (Campbell & Beck, 2004).

The conditions for legitimacy are often constructed by responsible organisational behaviours. For example, relevant research on the legitimacy theory reported that there were organisations who were voluntarily disclosing their non-financial reports. Companies were seeking external legitimation by reporting their environmental performance (Brown & Deegan, 1998). Other corporations who decided to follow GRI’s reporting guidelines or resorted to the <IR>’s framework were increasingly aligning their internal reflections with external outputs (Beck et al., 2015). Initially, the rationale behind their integrated reporting was to improve their organisations’ external legitimation among stakeholders. However, at a later stage they realised that their external reports were informed by their organisation’s strategic positioning, and not constrained by the promulgation of the voluntary guidelines (Beck et al., 2015). Evidently, more organisations are conforming to the prevailing definitions of legitimacy through their disclosures of responsible and sustainable actions. Consequently, these responsible organisations’ leadership sets the agenda for stakeholder engagement and ESG reporting. The underlying objective is to build or enhance reputation (Aerts & Cormier, 2009) that will positively impact on the organisations’ capital flows.

 

This is an excerpt from my latest working paper, “Theoretical Insights on Integrated Reporting: Valuing the Financial, Social and Sustainability Disclosures”.

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Integrated Reporting: Valuing the Financial, Social and Natural Capital

The end of year financial statements usually focus on financial capital, whereas organisational performance relies on resources – such as the expertise of people, intellectual property that was developed through research and development, and interactions with the environment and the societies in which they operate.  In this light, Integrated Reporting (<IR>) was developed to fill such reporting gaps. The IR Framework categorises different stocks of value, including; Financial Capital; Manufactured Capital; Intellectual Capital; Human Capital; Social (and Relationship) Capital; as well as Natural Capital.

 

 

The International Integrated Reporting Council (IIRC) has promoted the concept of integrated thinking and reporting. In 2013, the International Integrated Reporting Council (IIRC) released a framework for integrated reporting. By doing so, IIRC has paved the way for the next generation of annual reports that enable stakeholders to make a more informed assessment of the organisation’s strategy, governance, performance and prospects. IIRC has aligned capital allocations and corporate behaviours with the wider goals of financial stability and  sustainable development. Its framework established the following ‘Guiding Principles’ and ‘Content Elements’:

Guiding Principles

  1. Strategic focus and future orientation –gives an insight of the organisation’s strategy;
  2. Connectivity of information – provides a holistic picture of the combination, inter relatedness and dependencies between the factors that affect the organisation’s ability to create value over time;
  3. Stakeholder relationships – describes the nature and quality of the organisation’s relationships with its key stakeholders;
  4. Materiality – discloses relevant information about matters that substantively affect the organisation’s ability to create value over the short, medium and long term;
  5. Conciseness – provides sufficient context to understand the organisation’s strategy, governance and prospects without being burdened by less relevant information;
  6. Reliability and completeness – includes all material matters, both positive and negative, in a balanced way and without material error;
  7. Consistency and comparability – ensures consistency over time and enabling comparisons with other organisations to the extent material to the organisation’s own ability to create value.

Content Elements

  1. Organisational overview and external environment – What does the organisation do and what are the circumstances under which it operates?
  2. Governance – How does an organisation’s governance structure support its ability to create value in the short, medium and long term?
  3. Business model – What is the organisation’s business model?
  4. Risks and opportunities – What are the specific risk and opportunities that affect the organisation’s ability to create value over the short, medium and long term, and how is the organisation dealing with them?
  5. Strategy and resource allocation – Where does the organisation want to go and how does it intend to get there?
  6. Performance – To what extent has the organisation achieved its strategic objectives for the period and what are its outcomes in terms of effects on the capitals?
  7. Outlook – What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and future performance?
  8. Basis of preparation and presentation – How does the organization determine what matters to include in the integrated report and how are such matters quantified or evaluated?

The ‘Guiding Principles’ underpin the preparation of an integrated report, whilst, the ‘Content Elements’ are the key categories of information that should be included in an integrated report according to the IR Framework. There are no bench marking for the above matters and the report is primarily aimed at the private sector; but IR could be adapted to the public sector and to not-for-profit organisations. The IIRC has set out a principle-based framework rather than specifying a detailed disclosure and measurement standard. This way each company sets out its own report rather than adopting a checklist approach. Hence, the report acts as a platform which explains what creates value to the business and how management protects this value. This gives the report more business impetus rather than mandating compliance-led approaches.

For the time being, the integrated reporting is not going to replace other forms of reporting but the vision is that large undertakings, including corporations, state-owned entities and government agencies, among others, may be expected to pull together relevant information already produced to explain the key drivers of their non-financial performance. Relevant information will only be included in the report where it is material to the stakeholder’s assessment of the business. The term ‘materiality’ suggests that there are legal connotations that may be related to environmental, social and governance (ESG) reporting, Yet, some entities out of their own volition are already including ESG information in their integrated report.

In sum, the integrated reports aim to provide an insight into the company’s resources, relationships (that are also known as the capitals) and on how the company interacts with its external environment to create value.

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Special Offer > Get 20% off this Springer business textbook on Corporate Social Responsibility

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*This offer is valid from 1st April to 1st May 2017.

This business text-book can be purchased from Springer or Amazon.

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About Mark Anthony Camilleri, the Author of Springer’s Corporate Sustainability, Social Responsibility and Environmental Management

The University of Malta’s promising academic, Dr Mark Anthony CAMILLERI lectures in an international masters programme run by the University of Malta in collaboration with King’s College, University of London. Mark specialises in strategic management, marketing, research and evaluation. He successfully finalised his PhD (Management) in three years time at the University of Edinburgh in Scotland – where he was also nominated for his “Excellence in Teaching”. During the past years, Mark taught business subjects at under-graduate, vocational and post-graduate levels in Hong Kong, Malta and the UK.

Dr Camilleri has published his research in reputable peer-reviewed journals. He is a member on the editorial board of Springer’s International Journal of Corporate Social Responsibility and Inderscience’s International Journal of Responsible Management in Emerging Economies. He is a frequent speaker and reviewer at the American Marketing Association’s (AMA) Marketing & Public Policy conference, in the Academy of International Business (AIB) and in the Academy of Management’s (AoM) annual gatherings. Mark is also a member of the academic advisory committee in the Global Corporate Governance Institute (USA).

Dr Camilleri’s first book, entitled; “Creating Shared Value through Strategic CSR in Tourism” (2013) was published in Germany. This year Springer will publish his latest book; “Corporate Sustainability, Social Responsibility and Environmental Management: An Introduction to Theory and Practice with Case Studies” (2017). Moreover, he edited a U.S. publication, entitled; “CSR 2.0 and the New Era of Corporate Citizenship” (2017). His short contributions are often featured in popular media outlets such as the Times of Malta, Business2Community, Social Media Today, Triple Pundit, CSRwire and the Shared Value Initiative.

Mark’s professional experience spans from project management, strategic management, business planning (including market research), management information systems (MIS), customer relationship and database marketing to public relations, marketing communications, branding and reputation management (using both conventional tools and digital marketing).

His latest book can be purchased from https://www.amazon.co.uk/Corporate-Sustainability-Responsibility-Environmental-Management/dp/3319468480 or http://www.springer.com/gb/book/9783319468488

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The Responsible Management of Marketplace Stakeholders

Excerpt from: Camilleri, M. (2017). The Rationale for Responsible Supply Chain Management and Stakeholder Engagement. Journal of Global Responsibility, 8(1).

supply chain
(source: GreenBiz)

Generally, firms are becoming more proactive in their engagement with responsible supply chain management and stakeholder engagement. Very often, corporate responsible behaviours could form part of their broader strategic commitment toward stakeholders (Zhu, Sarkis and Lai, 2013; Walker, Di Sisto and McBain, 2008; Walker and Preuss, 2008), This contribution is based on the premise that corporations could make a genuine and sustaining effort to align their economic success with corporate social responsibility in their value chain.

The corporations’ differentiated strategies as well as their proactive engagement in responsible supply chain practices can lead them to achieve a competitive advantage in the long term. In this case, firms may have  sophisticated responsible procurement processes in place. Therefore, they could be in a better position to support their different suppliers. On the other hand, there could be low‐cost producers that may be neglecting socially responsible supply chain management. In a similar vein, niche operators may not necessarily adopt responsible supply chain practices. Nevertheless, such firms tend to exhibit stronger ties with their suppliers; they may be relatively proactive vis-a-vis their socially responsible behaviours.

Previous studies indicated that there are significant gaps between policy and practice
(Govindan, Kaliyan, Kannan and Haq 2014; Preuss, 2009; Yu, 2008; Egels-Zanden, 2007), For the time being; firms may (or may not) be inclined to implement responsible supply chain and manufacturing processes on a voluntary basis. However, the big businesses are increasingly becoming aware that they are susceptible to negative media exposure, stakeholder disenfranchisement, particularly if they are not responsible in their supplier relationships (or if their social and environmental policies are not fully-implemented),

Arguably, a differentiated strategy can serve as a powerful competitive tool in the global marketplace as the customers’ awareness of social and responsibility rises. Notwithstanding, many stakeholders are increasingly becoming acquainted with fair trade and sustainability issues; as empowered consumers and lobby groups could enforce firms to invest in a more responsible supply chain.

Undoubtedly, there are opportunities for the proactive firms who are keen on integrating
responsible practices into their business operations. It is in these firms’ interest to report about their responsible supply chain management, social performance and sustainable innovations to their stakeholders. The corporations’ environmental, social and governance disclosures will help them raise their profile in their value chain.

The responsible businesses can possibly achieve a competitive advantage as they build (and protect) their reputation with stakeholders. Of course, there are different contexts and social realities. The global supply chain and the international NGOs also play a critical role in the enforcement of responsible behaviours in the supply chain.

In conclusion, this paper contended that the responsible supply chain management as well as forging stakeholder relationships with suppliers and distributors enable businesses to create shared value to society and for themselves.

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Measuring the Corporations’ Environmental, Social and Governance Performance

respinv

SRI and sustainability ratings depend on the choice of the reference index one uses. Typically, SRI indices constitute a relevant proxy for the performance that is achievable through a sole focus on improving diversification within an SRI universe (Le Sourd, 2011). A large number of SR contractors, analysts and research firms are increasingly specialising in the collection of environmental, social and governance information as they perform ongoing analyses of corporate behaviours. Many of them maintain a CSR database and use it to provide their clients with a thorough ESG analysis (including proxy advice), benchmarks and engagement strategies of corporations. They publish directories of ethical and SRI funds, as they outline their investment strategies, screening criteria, and voting policies. In a sense, these data providers support investors in their selection of SRI funds.

  • SRI Indices, Ratings and Information Providing Contractors

KLD / Jantzi Global Environmental Index, Jantzi Research, Ethical Investment Research Service (Vigeo EIRIS) and Innovest (among others) analyse the corporations’ socially responsible and environmentally-sound behaviours. Some of their indices (to name a few) emphasise on the impact of products (e.g. resource use, waste), the production process (e.g. logging, pesticides), or proactive corporate activity (e.g. clean energy, recycling). Similarly, social issues are also a common category for these contractors. In the main, the SRI indices benchmark different types of firms hailing from diverse industries and sectors. They adjust their weighting for specific screening criteria as they choose which firms to include (or exclude) from their indices. One of the oldest SRI indices for CSR and Sustainability ratings is the Dow Jones Sustainability Index. The companies that are featured in the Dow Jones Indices are analysed by the Sustainable Asset Management (SAM) Group (i.e. a Swiss asset management company). Another popular SRI index is FTSE Russell’s KLD’s Domini 400 Social Index (also known as the KLD400) which partners with the Financial Times on a range of issues. Similarly, the Financial Times partners with an ESG research firm (i.e. EIRES) to construct its FTSE4 Good Index series.

Smaller FTSE Responsible Investment Indices include the Catholic Values Index, the Calvert Social Index, the FTSE4Good indices, and the Dow Jones family of SRI Indices, among others. The KLD400 index screens the companies’ performance on a set of ESG criteria. It eliminates those companies that are involved in non-eligible industries. Impax, a specialist finance house (that focuses on the markets for cleaner or more efficient delivery of basic services of energy, water and waste) also maintain a group of FTSE Indices that are related to environmental technologies and business activities (FTSE Environment Technology and Environmental Opportunities). The Catholic Values Index uses the US Conference of Catholic Bishops’ Socially Responsible Investment Guidelines (i.e. positive screening approach) to scrutinise eligible companies (e.g., corporations with generous wage and benefit policies, or those who create environmentally beneficial technologies). This index could also exclude certain businesses trading in “irresponsible” activities. Calvert Group’s Calvert Social Index examines 1,000 of the largest US companies according to their social audit of four criteria: the company’s products, their impact on the environment, labour relations, and community relations. The latter “community relations” variable includes issues such as the treatment of indigenous people, provision of local credit, operations of overseas subsidiaries, and the like. The responsible companies are then featured in the Index when and if they meet Calvert’s criteria. This index also maintains a target economic sector weighting scheme.

Other smaller indices include; Ethibel Sustainability Index for Belgian (and other European) companies and OMX GES Ethical Index for Scandinavian companies, among others. Generally, these SRI indices are considered as investment benchmarks. In a nutshell, SRI Indices have spawned a range of products, including index mutual funds, ETFs, and structured products. A wide array of SRI mutual funds regularly evaluate target companies and manage their investment portfolios. Therefore, they are expected to consider other important criteria such as risk and return targets. For instance, iShares lists two ETFs based on the KLD Index funds, and the Domini itself offers a number of actively managed mutual funds based on both ESG and community development issues (such as impact investments). In addition, there are research and ratings vendors who also manage a series of mutual funds, including Calvert and Domini.

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The Development of Responsible Investing

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Given the growing importance of responsible investing, it could be surprising that there is still no consensus of what the SRI term means to the investors (Sparkes & Cowton, 2004). The roots of the SRI notion can be traced back to various religious movements. Back in 1758, the Religious Society of Friends (Quakers) prohibited members from participating in the slave trade. At the time, one of the founders of Methodism, John Wesley outlined his basic tenets of social investing. He preached about responsible business practices and to avoid certain industries that could harm the health and safety of workers. Hence, the best-known applications of socially responsible investing were initially motivated by religion (Sparkes, 2003). This may well reflect the fact that the first investors to set ethical parameters on investment portfolios were church investors in the U.K., U.S., and Australia (Sparkes & Cowton, 2004). The churches also played a prominent role in the development of ‘ethical’ investment products (Benijts, 2010; McCann, Solomon & Solomon, 2003; Lydenberg, 2002). Sparkes (2001) defined the ethical investments as the exercise of ethical and social criteria in the selection and management of investment portfolios, generally consisting of company shares. However, he argued that ethical investing could have been more appropriate to describe non-profitmaking bodies such as churches, charities, and environmental groups (rather than companies). The author went on to suggest that value-based organisations applied internal ethical principles to their investment strategies.

Very often the ‘ethical investment’ has been considered as perfectly synonymous with the ‘socially responsible investment’ term including in the dedicated academic journals where one might expect that the concepts are clearly defined (Capelle‐Blancard & Monjon, 2012). Schueth (2003: 189) also noted that ‘the terms social investing, socially responsible investing, ethical investing, socially aware investing, socially conscious investing, green investing, value-based investing, and mission-based or mission-related investing all refer to the same general process and are often used interchangeably’. Likewise, Hellsten & Mallin (2006: 393) have used the terms “ethical investments” and “socially responsible investments” interchangeably. However, it may appear that there seems to be a progressive decline in the use of the term ‘ethics’ within the SRI debate. In part, this may reflect the fact that many people felt uncomfortable about using the word ‘ethical’ to describe investment matters. “Any individual or group who truly care about ethical, moral, religious or political principles should in theory, at least want to invest their money in accordance with their principles” (Miller, 1992, p. 248). The original ‘ethical investors’ were church investment bodies. It is only in the past decades that such a perspective has been explicitly reflected in dedicated SRI retail funds (Sparkes & Cowton, 2004). Since their inception in the U.S. (1971) and in the U.K. (1984) the basic model that was used by SRI retail funds has been to base their ‘ethics’ upon an avoidance approach; whereby, responsible investors avoided having shares in unethical companies (Schepers & Sethi, 2003).

 

SRI has evolved during the political climate of the 1960s as socially concerned investors were increasingly addressing equality for women and minority groups (Schueth, 2003). This time was characterised by activism through boycotts and direct action that has targeted specific corporations (Rojas, M’zali, Turcotte & Merrigan, 2009; Carroll, 1999). Yet, there were also interesting developments, particularly when trade unions introduced their multi-employer pension fund monies to targeted investments. During the 70s, a series of themes ranging from the anti-Vietnam war movement to civil rights, to issues related to equality rights for women, have served to escalate the sensitivity to some issues of social responsibility and accountability. These movements broadened to include management, labour relations and anti-nuclear sentiment. Trade unions also sought to leverage pension stocks for shareholder activism on proxy fights and shareholder resolutions (Guay et al, 2004; Gillan & Starks, 2000; Smith, 1996).

In 1971, Reverend Leon Sullivan (at the time he was board member for General Motors) had drafted a code of conduct for the practicing business in South Africa; which became known as the Sullivan Principles (Wright & Ferris, 1997; Arnold & Hammond, 1994; Sullivan, 1983). However, relevant reports that documented the application of the Sullivan Principles revealed that the US companies did not lessen their discrimination toward the native South African people. Thus, there were US investors as well as large corporations who have decided to divest from these ‘irresponsible’ companies. In 1976, the United Nations has also imposed a mandatory arms embargo against South Africa (Nayar, 1978). The ranks of the socially concerned investors had grown dramatically through the 1980s as millions of people, churches, universities, cities and states were increasingly focusing their pressures on the white minority government (of South Africa) to dismantle the racist system. The subsequent negative flow of investment eventually forced a group of businesses, representing 75% of South African employers, to draft a charter calling for an end to the apartheid. While the SRI efforts alone did not bring an end to discrimination, it has mounted persuasive international pressure on the South African business community.

Advances in the SRI agenda were being made in other contexts. By 1980 presidential candidates; Jimmy Carter, Ronald Reagan and Jerry Brown advocated some type of social orientation toward investments in pension funds (Gray, 1983; Barber, 1982). Afterwards in the mid to late 1990s there were health awareness campaigns that effected the tobacco stocks in the US (Krumsiek, 1997). For instance, the California State Teachers’ Retirement System (CalSTRS) removed more than $237 million in tobacco holdings from its investment portfolio after 6 months of financial analysis and deliberations (Reynolds, Goldberg & Hurley, 2004). Arguably, such a divestment strategy may have satisfied the ethical principal of non-harming, but did not necessarily create a positive social impact (Lane, 2015).

During the late 1990s, SRI had also focused on the sustainable development of the environment (Richardson, 2008; Brundtland, 1989). Many investors started to consider their environmental responsibility following the Bhopal, Chernobyl and Exxon Valdez incidents. The international media began to raise awareness on the global warming and on the ozone depletion (Pienitz & Vincent, 2000). It may appear that the environmental protection and climate change issues were becoming important issues for many responsible investors. However, it may appear that businesses have failed to become more sustainable in their ecological dimension as the human ecological footprint exceeds the Earth’s capacity to sustain life by 60% (Global Footprint Network, 2016). At the same time, global resource consumption and land degradation is constantly impacting on the natural environment; as arable land continues to disappear. Evidently, the world’s growing populations and their increased wealth is inevitably leading to greater demands for limited and scarce resources. These are some of the issues that have become somewhat important rallying points for many institutional investors.

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Responsible Investing: Making a Positive Impact

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Impact investing is one of the fastest growing and promising areas of innovative development finance (Thornley, Wood, Grace & Sullivant, 2011; Freireich & Fulton, 2009). This form of socially-responsible investment (SRI) also has its roots in the venture capital community where investors unlock a substantial volume of private and public capital into companies, organisations and funds – with the intention to generate social and environmental impact alongside a financial return.

The stakeholders or actors in the impact investing industry can be divided into four broad categories: asset owners who actually own capital; asset managers who deploy capital; demand-side actors who receive and utilise the capital; and service providers who help make this market work.

Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate; depending on the investors’ strategic goals. Bugg-Levine and Emerson (2011) argued that impact investing aligns the businesses’ investments and purchase decisions with their values. Defining exactly what is (and what is not) an impact investment has become increasingly important as it appears that the term has taken off among academia and practitioners.

The impact investments are usually characterised by market organisations that are driven by a core group of proponents including foundations, high-net worth individuals, family offices, investment banks and development finance institutions. Responsible entities are mobilising capital for ‘investments that are intended to create social impact beyond financial returns’ (Jackson, 2013; Freireich & Fulton 2009). Specific examples of impact investments may include; micro-finance, community development finance, sustainable agriculture, renewable energy, conservation, micro-finance and affordable and accessible basic services, including; housing, healthcare, education and clean technology among others.

Micro-finance institutions in developing countries and affordable housing schemes in developed countries have been the favorite vehicles for these responsible investments, though impact investors are also beginning to diversify across a wider range of sectors (see Saltuk, Bouri, & Leung 2011; Harji & Jackson 2012). Nevertheless, micro-finance has represented an estimated 50% of European impact investing assets (EUROSIF, 2014). This form of investing has grown to an estimated €20 billion market in Europe alone (EUROSIF, 2014). The Netherlands and Switzerland were key markets for this investment strategy, as they represented an estimated two thirds of these assets. These markets were followed by Italy, the United Kingdom and Germany.

Generally, the investors’ intent is to ensure that they achieve positive impacts in society. Therefore, they would in turn expect tangible evidence of positive outcomes (and impacts) of their capital. Arguably, the evaluation capacity of impact investing could increase opportunities for dialogue and exchange. Therefore, practitioners are encouraged to collaborate, exchange perspectives and tools to strengthen their practices in ways that could advance impact investing. The process behind on-going encounters and growing partnerships could surely be facilitated through conferences, workshops, online communities and pilot projects. Moreover, audit and assurance ought to be continuously improved as institutions and investors need to be equipped with the best knowledge about evaluation methods. Hence, it is imperative that University and college courses are designed, tested and refined to improve the quality of education as well as  professional training and development in evaluating responsible investments.

For evaluation to be conducted with ever more precision and utility, it must be informed by mobilising research and analytics. Some impact investing funds and intermediaries are already using detailed research and analysis on investment portfolios and target sectors. At the industry-wide level, the work of the Global Impact Investing Network (GIIN) and IRIS (a catalogue of generally accepted Environmental, Social and Governance – ESG performance metrics) is generating large datasets as well as a series of case studies on collaborative impact investments. Similarly, the Global Impact Investing Rating System (GIIRS) also issues quarterly analytics reports on companies and their respective funds in industry metrics (Camilleri, 2015).

For the most part, those responsible businesses often convert positive impact-investment outcomes into tangible benefits for the poor and the marginalised people (Garriga & Melé, 2004). Such outcomes may include increased greater food security, improved housing, higher incomes, better access to affordable services (e.g. water, energy, health, education, finance), environmental protection, and the like (Jackson, 2013).

Interestingly, high sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance (Eccles, Ioannou & Serafeim, 2012). This out-performance is stronger in sectors where the customers are individual consumers, rather than companies (Eccles et al., 2012).

It may be complicated and time-consuming to quantify how enterprises create various forms of humanitarian and environmental value, yet some approaches and analytical tools can help to address today’s societal challenges, including the return on impact investments in social and sustainability projects.

References

Bugg-Levine, A., & Emerson, J. (2011). Impact investing: Transforming how we make money while making a difference. innovations, 6(3), 9-18.
Camilleri, M. A. (2015). Environmental, social and governance disclosures in Europe. Sustainability Accounting, Management and Policy Journal, 6(2), 224-242.

Eccles, R. G., Ioannou, I., & Serafeim, G. (2012). The impact of a corporate culture of sustainability on corporate behavior and performance (No. W17950). National Bureau of Economic Research.

EUROSIF (2014). Press Release: 6th Sustainable and Responsible Investment Study 2014. Europe-based national Sustainable Investment Forums. http://www.eurosif.org/wp-content/uploads/2014/09/Press-Release-European-SRI-Study-2014-English-version.pdf (Accessed 14 May 2016).

Freireich, J., & Fulton, K. (2009). Investing for social and environmental impact: A design for catalyzing an emerging industry. Monitor Institute, January.

Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of business ethics, 53(1-2), 51-71.

Harji, K., & Jackson, E. T. (2012). Accelerating impact: Achievements, challenges and what’s next in building the impact investing industry. New York, NY: The Rockefeller Foundation.

Jackson, E. T. (2013). Interrogating the theory of change: evaluating impact investing where it matters most. Journal of Sustainable Finance & Investment, 3(2), 95-110.

Saltuk, Y., Bouri, A., & Leung, G. (2011). Insight into the impact investment market: An in-depth analysis of investor perspectives and over 2,200 transactions. New York, NY: J.P. Morgan.

Thornley, B., Wood, D., Grace, K., & Sullivant, S. (2011). Impact Investing a Framework for Policy Design and Analysis. InSight at Pacific Community Ventures & The Initiative for Responsible Investment at Harvard University.

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Creating Shared Value in Tourism and Hospitality

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Excerpt from: Camilleri M.A. (2015) Responsible tourism that creates shared value among stakeholders. Tourism Planning and Development. 13 (2) 219-235. Taylor and Francis. DOI: 10.1080/21568316.2015.1074100 http://dx.doi.org/10.1080/21568316.2015.1074100


 

The sustainable and responsible environmental practices leverage the tourism enterprises’ performance as innovations can help them improve their bottom-line. This research indicated that the investigated organisations were increasingly pledging their commitment for discretionary investments in environmental sustainability, including; energy and water
conservation, alternative energy generation, waste minimisation, reducing, reusing and recycling policies, pollution prevention, environmental protection, carbon offsetting programmes and the like.

Some of the interviewees have proved that they were truly capable of reducing their operational costs through better efficiencies. Nevertheless, there may be still room for improvement as tourism enterprises can increase their investments in the latest technological innovations. This study indicates that there are small tourism enterprises that still need to realise the business case for responsible tourism (Camilleri, 2015). Their organisational culture and business ethos will have to become attuned to embrace responsible behavioural practices.

The governments may also have an important role to play in this regard. The governments can take an active leading role in triggering responsible behaviours. Greater efforts are required by governments, the private sector and other stakeholders to translate responsible tourism principles into policies, strategies and regulations (Camilleri, 2014).

Governments may give incentives (through financial resources in the form of grants or tax relief) and enforce regulation in certain areas where responsible behaviour is required. The regulatory changes may possibly involve the use of eco-labels and certifications. Alternatively, the government may encourage efficient and timely reporting and audits of sustainability (and social) practices.

The governments may provide structured compliance procedures to tourism enterprises. Responsible tourism practices and their measurement, reporting and accreditation should be as clear and understandable as possible. The governments’ reporting standards and guidelines may possibly be drawn from the international reporting instruments (e.g. ISO, SA, AA and GRI).

Nevertheless, it must be recognised that the tourism industry is made up of various ownership structures, sizes and clienteles. In addition, there are many stakeholder influences, which affect the firms’ level of social and environmental responsibility. Perhaps, there is scope in sharing best practices, even with rival firms. It is necessary for responsible businesses to realise that they need to work in tandem with other organisations in order to create shared value and to move the responsible tourism agenda forward. Therefore, this study’s findings encourage inter-firm collaboration and networking across different sectors of the tourism industry.

There are competitive advantages that may arise from creating and measuring shared value. Evidently, there is more to responsible tourism than, “doing good by doing well”. As firms reap profits and grow, they can generate virtuous circles of positive multiplier effects. This paper has indicated that the tourism enterprises, who engage themselves in responsible and sustainable practices, are creating value for themselves and for society. In conclusion, this research puts forward the following key recommendations for the responsible tourism agenda:

  • Promotion of laudable business processes that bring economic, social and environmental
    value;
  • Encouragement of innovative and creative approaches, which foster the right environment
    for further development and application of sustainable and responsible practices;
  • Enhancement of collaborations and partnership agreements with governments, trade
    unions and society in general, including the marketplace stakeholders;
  • Ensuring that there are adequate levels of performance in areas such as health and
    safety, suitable working conditions and sustainable environmental practices;
  • Increased awareness, constructive communication, dialogue and trust;
  • National governments may create a regulatory framework which encourages and
    enables the implementation of sustainable and responsible behavioural practices by
    tourism enterprises.

 

References

Camilleri, M. (2014). Advancing the sustainable tourism agenda through strategic CSR perspectives. Tourism Planning & Development, 11(1), 42-56.
Camilleri, M.A. (2015) The Business Case for Corporate Social Responsibility. In Menzel Baker, S. & Mason, M.(Eds.) Marketing & Public Policy as a Force for Social Change Conference. (Washington D.C., 4th June). Proceedings, pp. 8-14, American Marketing Association. DOI: 10.13140/RG.2.1.2149.8328 https://www.ama.org/events-training/Conferences/Documents/2015-AMA-Marketing-Public-Policy-Proceedings.pdf

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