Understanding Corporate Social Responsibility
Corporate social responsibility (CSR) is the idea that businesses have some responsibility towards the places and societies in which they operate. Companies that practise CSR—and these days, that is increasingly most businesses—want to have a positive impact on the world, rather than only operating to create a profit. The precise actions taken vary widely between businesses, but the focus is generally on people or societies, economic issues and the environment.
CSR has many benefits to businesses and the wider world. Its increasing importance has had some interesting consequences, including inaccurate claims of action, and tighter regulation on reporting. This page explains what is meant by CSR, and discusses some of the associated issues.
Defining Corporate Social Responsibility
There are several different precise definitions of CSR (see box). However, they all share a common understanding of the broad basis of the concept.
Definitions of corporate social responsibility
“A management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders.”
The United Nations Industrial Development Organization (UNIDO)
“A self-regulating business model that helps a company be socially accountable to itself, its stakeholders, and the public.”
Corporate social responsibility, or CSR, is generally seen as a business strategy, or framework within which to develop that strategy. It is also widely agreed to be about holding the business to account for its impact on the world. UNIDO states that it is how companies achieve a balance between social, environmental and economic issues.
This concept is known as the Triple Bottom Line.
These three issues are also the basis of sustainability, and there is more about them in our page on Understanding Sustainability.
UNIDO suggests that important CSR issues include stakeholder engagement, labour standards and working conditions, employee relations, community relations, social equity, gender balance, human rights, environmental management, responsible sourcing and supply chain management, and good governance.
CSR vs Environmental, Social and Governance (ESG) Issues: What’s the Difference?
While considering definitions, it is worth looking at the differences between CSR and another common abbreviation in this field: ESG, which stands for environmental, social and governance issues.
Environmental, social and governance issues are the framework against which investors measure businesses and investments.
This has been described as CSR in a measurable form—and certainly many of the key CSR issues set out by UNIDO are issues that interest investors.
The key difference seems to be that CSR is a business strategy, and ESG covers the formal measures or standards used to assess companies against investor and stakeholder expectations, regulatory requirements, and CSR commitments.
UNIDO also points out that corporate social responsibility is not simply an issue for large corporations.
Bigger businesses may have more money to spend on social projects, but smaller businesses can also adopt ethical and sustainable practices from a very early stage in their development.
Four Types of Corporate Social Responsibility
Corporate social responsibility is generally separated into four different types:
1. Environmental responsibility
Environmental responsibility stems from the view that companies should have as little impact on the environment as possible.
It is perhaps the most common—and certainly the best-known—form of CSR. Companies wishing to show greater environmental responsibility might:
Reduce their use of potentially harmful or polluting substances such as single-use plastics, for example, by finding and using alternatives;
Reduce their use of natural resources such as water, for example, by exploring alternative production methods, or cleaning and recycling grey water for some processes;
Reduce their use of energy, or move to renewable sources, for example by investing in solar panels or wind farms, or planning delivery routes to minimise the distance travelled;
Reduce the amount of travel by their staff to reduce their carbon footprint, for example, by increasing the use of video-conferencing;
Increase the amount of waste that they recycle, for example, by separating waste; and
Offset any negative impact through investment in environmental schemes.
An alternative term
Some companies and commentators use the term ‘environmental stewardship’ to describe better environmental responsibility.
2. Ethical responsibility
Ethical responsibility is when a company aims to operate in a fair and ethical way.
Companies taking ethical responsibility will try to treat all their stakeholders fairly, including employees, investors, suppliers, contractors and customers. They might, for example:
Source goods using ‘fair trade’ standards;
Take steps to ensure that none of their raw materials are produced using child labour, or in ‘sweatshops’; and
Set their own wage standards to ensure that all their workers earn a living wage.
Ethical responsibility is generally more important for companies that operate across different jurisdictions. Under these circumstances, there is a question of fairness and parity between employees in different locations.
3. Philanthropic responsibility
Philanthropic responsibility is when a business actively aims to make the world a better place.
This has a long history in business, back to the Quaker business owners of the 1800s. Consider, for example, George Cadbury, who built high quality houses for his workers near his factory, sited within a pleasant environment that people would want to live in.
Other ways that businesses can show philanthropic responsibility include:
Donating a portion of the company’s earnings to charities. For example, many UK retailers use the website easyfundraising.org.uk to allow their customers to channel donations to their chosen worthy causes;
Creating a charitable trust or foundation to manage donations and corporate volunteering. For example, the Cadbury Foundation continues George Cadbury’s philanthropic work today, by helping local schools, charities, people and businesses; and
Giving your staff dedicated time off for volunteering. For example, accountancy firm KPMG allows its UK staff six ‘volunteering days’ each year, which staff can use to support their chosen causes.
4. Economic responsibility
Economic responsibility means making sure that the business can continue to operate in the long term, but without having an impact on the other areas mentioned above.
It may sound like corporate social responsibility is always going to cost money. However, there is considerable evidence that in fact, it provides huge economic benefits to companies through:
Reducing the costs associated with production and distribution, for example, by using less packaging, or reducing transport costs;
Increasing staff productivity, because employees feel valued, and are prepared to reciprocate by putting in more effort; and
Improving the brand or company reputation, and enabling the company to charge higher prices (known as an ‘environmental premium’).
Problems Associated with Corporate Social Responsibility: Greenwashing
CSR therefore has huge benefits to both companies and their stakeholders.
However, this has its downsides. For example, it has created incentives for businesses to ‘game the system’, by exaggerating their claims, or even adopting the language of CSR, but not the actual practices.
The term ‘greenwashing’ was coined in the 1980s by writer Jay Westerfield to describe a mismatch between what a company said, and what it actually did. He was struck by the disconnect between a hotel business that was asking guests to help it avoid laundering towels every day—but at the same time, was building and expanding more over virgin land.
Greenwashing is a huge issue (see box), affecting consumers everywhere.
How big a problem is greenwashing?
EU research undertaken to support new regulations shows that:
- Over half of environmental claims contain misleading or unsubstantiated information;
- 40% of environmental claims are not supported by evidence;
- There is little or no verification available for half of ‘green’ labels;
- Nearly one-third of EU citizens have come across misleading statements on products’ environmental effects.
This is a problem, because people are prepared to pay more for more ethically produced or environmentally friendly products.
Governments at all levels around the world have therefore started to act to reduce the potential for greenwashing. For example, the EU Green Claims Directive will give regulators the power to fine companies found guilty of making misleading environmental claims.
It also seems likely that consumers themselves will become more savvy about environmental claims, and start to question those that are not backed up by clear evidence.
A Final Thought
Over the last 20 years or so, corporate social responsibility has become far more than a ‘nice to have’.
Increasingly, it is an essential part of operating as a business—and reported on to stakeholders through formal documents akin to financial reports. These reports allow investors and others to get a clearer picture of how the business operates as a whole, and not just economically. This can only be a good thing in helping to hold businesses to account for their impact on the world and the societies in which they operate.