Comments from ACCA to the Department for Business Innovation and Skills (BIS), 27 September 2013.
In summary, ACCA believes the following.
ACCA recommends the following.
Question 1: What more could Government do to encourage a greater number of companies to adopt internationally recognised principles and guidelines in their own corporate responsibility policies? How might Government, in a light touch way, measure this take-up?
Ultimately, Government is in a very strong position to increase the amount of companies adopting internationally recognised principles and guidelines in their corporate responsibility policies. This could be achieved through some form of benchmark which companies could sign up to. A compulsory approach might achieve the objective of increasing the number of companies following international CR principles and guidelines, but would likely be unpopular with the business community.
A lighter touch approach could be to issue a guidance paper, demonstrating how the adoption of internationally recognised principles and guidelines can help companies comply with current and future regulations, such as those proposed by BIS relating to narrative reporting regulations or those proposed by the European Commission relating to non-financial disclosure requirements for all large companies in the EU, through an amendment to the Accounting Directives. The Government could maintain a register for companies to declare their adoption to guidelines and standards. This might be compulsory for listed or large companies and voluntary for others – thus supporting both record keeping and measurement.
A more ambitious alternative would be to explore the potential of something like the B-Corp movement of businesses which started in the US in 2007 to encourage and recognise socially responsible business conduct. To become B-Corp certified, companies have to undergo self-assessment and have their social and environmental credentials independently verified. The momentum created by this movement has led in turn to the creation by many US states of a new corporate form in law. Those states’ legal systems now allow for an ‘opt-in’ for companies whereby directors’ fiduciary duties are expanded and the purpose of the corporation becomes expressly to create a material positive impact on society and the environment taken as a whole. There is a growing community of more than 830 Certified B-Corps from 27 countries and 60 industries.
In terms of measurement, the Government could liaise with bodies such as the UNGC, GRI or the OECD to determine how many UK based companies have signed up to a particular initiative following Government calls to do so. There are also specialist consultancies that track corporate sustainability reporting, such as CorporateRegister.com. The UK Government could engage such a consultancy to track the level of sign up of UK companies over time. The Government could run an annual survey of corporates to determine the level of support within the UK business community for internationally recognised principles and guidelines.
Question 2: Should Government encourage more sector-specific initiatives and, if so, how might it do that? Do different sectors need different levels of Government support and involvement?
Government should encourage more sector-specific initiatives, as they tend to be more focussed in nature and provide companies with guidelines on issues that are more material to their specific business impacts. Such initiatives tend to be more practical, which is beneficial to companies.
The UK government should look at which sectors are of particular importance to the UK from an environmental, social and economic perspective – taking into account foreign based companies that are listed on the London Stock Exchange – and develop targeted plans accordingly. Government should consider sectors that have a high sustainability impact, including human rights (especially companies in the extractives industry).
The Government should look to engage with industry bodies and industry focussed investor groups as they also work on a sectoral basis.
Some sectors will need greater levels of government support and involvement due to the varying nature and scale of the social and environmental impacts of companies operating in different sectors. Clearly companies operating in higher impact sectors will require a greater level of Government support and involvement.
Question 3: Are comparable, voluntary metrics on social and environmental aspects desirable? What might be the costs and benefits of this? What role should Government play in determining what these metrics might be and how might we encourage more businesses to adopt them?
Comparable metrics on social and environmental aspects are desirable for a number of reasons. Stakeholders, especially investors, are better able to assess the performance of companies in relation to one another and factor non-financial considerations into their decisions. Companies can also benefit, as they will be able to benchmark their performance against competitors thus determine how well there are performing from an environmental and social perspective, as well as potentially increase their competitive advantage through good performance. It is important to take a more holistic approach to reporting, considering how ESG related matters impact on business strategy. The IIRC provides a good example of how to make such connections.
In terms of costs and benefits, it will be necessary to determine which methodologies for measuring environmental and social performance represent best practice and therefore should be applied across the board. Those not already using such methodologies may incur compliance costs due to the change in methodology. The benefits of greater comparability are noted above.
Government should not develop new metrics, due to the large amount already available to companies. Instead, metrics should be selected from the existing pool and referenced within new rules and regulations around non-financial reporting, or in supporting documentation.
Government should look to learn from previous metrics initiatives to understand what works and what does not work when looking to promote the use of comparable, voluntary metrics. Examples include the Global Reporting Initiative and the International Integrated Reporting Council. SASB in the United States is also developing indicator sets on a sectoral basis, so the UK Government may wish to adopt such an approach.
Question 4: How might businesses demonstrate that the information they voluntarily capture and present is externally verifiable? What might be the costs and benefits of this?
The best way for a company to demonstrate that the information they voluntarily capture and present is externally verifiable is to have it externally verified, and to state publically that they have done so. In the absence of external verification, being transparent over the methodology used to capture non-financial information allows stakeholders to judge whether or not the information presented is complete and fairly represents the scale and scope of a company’s environmental and social impacts. Stakeholder engagement is critical when determining what to report on, a process that itself will demonstrate that the information captured is externally verifiable.
Greater transparency on a company’s disclosures is beneficial as it increases the level of trust in the data presented. If a company decides to seek external assurance, this perception is enhanced, although external verification, typically via an audit, comes at a cost.
Question 5: How might companies best manage their supply chains more effectively? How might Government help with this?
Companies should be encouraged to undertake exercises to map out their complete value chains to determine the nature and location of their material social and environmental impacts. Where material impacts are identified within their supply chains, they would need to determine the level of control they have to address them. For example, a company may identify human rights impacts within their supply chain through suppliers that serve a range of companies. In this case, the company should seek to engage their suppliers to address the issue – either individually or collaboratively. In some cases, it may be necessary to cease doing business with suppliers who demonstrate poor environmental or social performance. This could be achieved in part by imposing contractual requirements on their suppliers that reflect international standards, with suitable punishments for non-compliance.
Companies could empower and support workers (both direct employees and those working in their supply chain) to report environmental and social abuse, such as dangerous working conditions and enabling them to defend their rights via recognition of freedom of association and collective bargaining.
Companies should actively seek to source from suppliers who demonstrate good environmental and social performance. In the case of existing suppliers, companies should develop supplier scorecards to determine how well they are performing and actively work with suppliers to improve environmental and social performance.
Companies should work with industry or product sustainability initiatives, such as the Round Table for Sustainable Palm Oil (RSPO), that seek to address sustainability issues across an entire industry or product.
Government can support this process by setting a good example by addressing their own supply chain sustainability impacts. By doing so, Government will be able to develop and demonstrate best practice in the field of supply chain sustainability. Government should also look to actively endorse and support supply chain sustainability initiatives, such as the aforementioned RSPO. This can be done at the intergovernmental level, through UN meetings and conferences.
Question 6: Should companies be obliged to be more responsible for actions within their supply chain? If yes, how could this be achieved without legislation? What would the costs and benefits be?
The Bribery Act 2010 has already set a standard for the principle that parent companies should assume more responsibility for the actions of their subsidiaries and agents and thereby for the encouragement of ethical business practices throughout supply chains. While legal responsibility for the actions of supply chains should not be routinely contemplated, we agree in principle that parent companies should take an active interest in the standards of conduct of companies in their supply chains. This is of particular relevance when company supply chains are located in developing countries where there may be weak institutions and high levels of corruption.
In the absence of legislation, stakeholder pressure can be put on companies to improve their supply chain sustainability performance. Government should identify and expose instances of poor supply chain sustainability performance as well as identifying instances of good practice. As noted above, Government has its own supply chains, and therefore should seek to demonstrate best practice wherever possible.
Question 7: How might Government best support small business to adopt responsible business practices? What particular challenges does Government face in trying to achieve this? How might it overcome such challenges?
Whilst the individual impacts of an SME are relatively small in comparison to those of larger companies, the fact that SMEs make up the vast majority of companies mean that their collective impacts are very large. As a result, it is crucial that Government creates the necessary conditions for SMEs to adopt responsible business practices. Government could provide SMEs with guidance on how to incorporate responsible business practices into their operations, which demonstrate the various business benefits of taking such an approach. By providing practical case studies, SMEs will be able to see how other SMEs have sought to address their sustainability impacts.
Whilst Governments have a role to play in helping the SME sector adopt sustainable practices, its main challenge will be engaging what is often a very disparate business population that is more difficult to reach than large corporations. Therefore any efforts in raising awareness of the benefits and encouraging small business owners to adopt a sustainable approach to their business operations will be more successful if governments commit to working with and through organisations that are already known and trusted by SMEs, such as accountants.
Question 8: How might Government help SMEs publicise their responsible business behaviour?
Government could create a platform where SMEs could share best practice and practical advice on how to incorporate sustainability into their operations. The 10:10 campaign website is a good example of such a resource, where individuals and businesses can share their experiences on how to cut carbon emissions.
Government could participate in sustainability awards schemes for SMEs, either by partnering with existing awards or by hosting their own.
Question 9: What role does larger business have in supporting smaller business? Is there an imperative for larger businesses to support smaller businesses? How might Government enable this?
Larger businesses looking to manage their supply chain sustainability impacts have an important role to play in assisting the smaller businesses they work with. In areas where the responsibility of parents is already regulated, such as bribery, active intervention on the part of parent companies will be in the interests of those companies themselves. They should actively source from SMEs that demonstrate strong sustainability credentials, and work with those that are looking to improve their performance. There are some very good examples of where this takes place in practice, such as Innocent and McDonalds, who work with suppliers (usually farmers who supply agricultural products) to increase the carbon and water efficiency and reduce waste among other things.
Government could enable this process by setting an example. By working with the SMEs that are within its own supply chains, other large organisations will be able to see how to engage suppliers to adopt responsible business practices.
Question 10: What are the main barriers to businesses contributing more to social outcomes?
The level of knowledge and experience on how companies can address their social impacts is far behind that of their environmental impacts. This lack of knowledge and experience is the key barrier. There are some resources available to companies, such as the Ruggie Principles on Business & Human Rights, and the GRI social indicators, but their adoption and use in practice is still relatively low.
Some companies do not appreciate that they have a link, or a moral obligation to address their social impacts, which also acts as a barrier.
Short-termism also presents a barrier to businesses contributing to more sustainable outcomes in general and more social outcomes in particular. The pursuit of short-term profits has created a global ‘race to the bottom’ in which companies seek to source raw materials and to produce goods at ever lower costs.
Question 11: What more could Government do to make it easier for businesses to support social initiatives? How might Government showcase innovative approaches that others might consider adopting?
Government could identify good examples of companies addressing their social impacts and highlight them to others. The creation of corporate working groups looking to measure and manage social impacts would also be a positive step in the dissemination of social initiatives. Good examples could include companies signing up to the Living Wage campaign.
Government could host business focussed events and awards to showcase innovative approaches to addressing social impacts, as well as publishing reports and articles that explain the business benefits of addressing social impacts, using practical case studies wherever suitable.
Question 12: How might the relationship between business and society be strengthened? How might Government support this?
The first step would be to recognise that business and society are not separate entities, rather that the two are connected through a company’s employees, customers, suppliers, products, inputs and outputs. Recognising that business is part of society, it is clear that business has a direct responsibility to carefully consider and manage any impacts on social and environmental impacts.
Question 13: Is there any comment you wish to make on UK business and human rights generally?
UK business should seek to address its impacts on human rights, both at home and abroad. Companies should regularly assess their operations to identify any real or potential impacts on human rights, and develop policies and procedures to manage and mitigate human rights risk.
UK business should adopt internationally recognised human rights standards and principles (such as the UN Framework for Business and Human Rights) and actively work with human rights focussed initiatives to increase the level of corporate knowledge and experience in this under-researched area. This framework not only identifies what business should do, but also the various responsibilities of Government.
Question 14: Should corporate responsibility be recognised as a profession?
The creation of a professional body for corporate responsibility would encourage companies to operate to common standards, as well as recruit managers that have a sufficient level of knowledge and understanding of corporate responsibility to manage the various issues facing business today. This would lead to greater comparability across companies, and provide stakeholders in a company with a degree of assurance that corporate sustainability impacts are being managed by qualified individuals. A word of caution is needed though, as professionalization could lead to box-ticking if not managed effectively. As such, Government should not mandate professionalization but should be supportive of any voluntary initiatives that arise.
Question 15: What more can Government, business and others do to improve information available to consumers who want to take ethical considerations in to account? Does this differ between sectors?
Government, business and others (especially industry bodies) can work together to develop harmonise the ethical standards that companies should adhere to. There is a large amount of standards in operation, which leads to confusion over their quality and rigour.
It is also important to ensure that the ways in which companies communicate their ethical performance is transparent and consistent, to ensure that consumers can make informed purchased decisions based on ethical criteria.
The nature and scope of the issues facing companies operating in different sectors will vary, so it will be necessary to address each sector in turn.
It would also be possible for the government to support the development of a ‘transparency infrastructure’, in particular greater standardisation of traceability across all products. This might be in conjunction with BSI.