In case it isn’t already obvious, I’m going with a poker analogy on this one. Apologies in advance – the analogy is going to get stretched quite thin.
CSR Budgets – The Hole
It is very difficult to find companies that are are talking about:
- whether CSR makes money,
- which parts of CSR are most profitable, and
- how much money CSR makes (or costs, as the case may be).
Almost no-one else is effectively measuring, or in most cases even looking for, the value that CSR creates. It is even rarer to be able to identify what organisations are spending on CSR and their ROI metrics. I’m not saying that they aren’t measuring some good stuff – there are lots of KPIs in their reports and companies are more transparent than ever – but companies aren’t publicly connecting CSR investments with returns. My sense is that most of them aren’t doing it in private either.
Not measuring the value created by CSR is rather like not looking at the Hole (the two face down cards) you are dealt in poker. You can’t know whether your betting strategy is right.
CSR Budgets – The Flop
Almost every company listed on the FTSE 100 and NASDAQ 100 has a CSR report. There are exceptions here and there, including companies that have merged and are still getting to grips with the change/merger of their accounting years, but on the whole everyone at the big end of town is talking about sustainability, whether in their Annual Reports (integrated reporting) or through a separate report. With a raft of research this decade that concludes that proactive management of CSR creates financial value for companies (↑ revenue, ↑ EPS and ↑ share price), it’s hard to see why they wouldn’t issue CSR reports. But within those reports it’s not easy to find hard metrics on the extent of CSR budgets and very rare to find a return on CSR investment. And the reports themselves are often the biggest item in CSR budgets.
CSR Budgets – The Turn
Besides the usual CSR suspects (M&S, Unilever, InterFace Flor and a few others more recently like asda – see previous post) no-one is talking about the size of their CSR investment or their returns from CSR. Those companies will tell you that putting a figure on CSR activity isn’t easy to do. But they will also say it is worth doing so and fundamentally changes the perception of CSR within the business. Especially among hard-nosed finance types. Even Private Equity got the memos that CSR creates financial value. A perhaps surprising 80% (according to PwC’s Putting a price on value Report) are measuring some ESG metrics. But less than 15% of PE houses are measuring value created from any kind of CSR. A smaller number again are presumably doing so across all of CSR.
CSR Budgets – The River
Materiality in the sense of legally required disclosure to the market of certain risks (plenty more on materiality of CSR issues here) hasn’t traditionally included CSR issues. But now that Coca-Cola has disclosed a CSR issue (water shortage and competition) as a material business risk in it’s 10-K Form, we can expect more companies to follow with CSR issues of their own. It also indicates that CSR risks and opportunities are becoming increasingly important, and although many single issues don’t get over the threshold of legal Materiality, the sum of CSR issues is likely to be quite a big number. Which is why it’s surprising that more companies aren’t trying to be clear that they understand their CSR issues better then their competitors as a way to highlight share growth upside.
CSR Budgets – The Showdown
Everyone agrees that CSR is creating some kind of value, but few stick their necks out and say how. Exactly how CSR creates value will vary from industry to industry and even across companies within the same industry. Failing to explain how CSR creates value is like not showing your hand at the end of a round of poker.
It’s a bit like the player who refuses the Showdown and says “Trust me, I know what I’m doing, my hand is better than yours.” I wouldn’t trust a poker player like that and I find it increasingly difficult to trust a company that can’t show me how CSR creates value and also how much value it creates.
Companies care about CSR, otherwise they wouldn’t publish CSR reports. Investors care about CSR, otherwise there wouldn’t be a Socially Responsible Investment Industry (from which springs, you guessed it, Awards for the best SRI analysts, companies, personalities, etc…). Private Equity even care about CSR, otherwise PwC wouldn’t go to the trouble of surveying them for their Putting a price on value. The trouble is, none of those groups have easily found a way to talk to the others about CSR in a way that clearly shows how it creates value for them. Measuring the value created by CSR and talking about it unifies all of those groups.
CSR Budgets – The Muck
Of course I’m not saying that companies should throw in their hand when it comes to CSR. I just think they should stop playing poker and get back to what they do well – Measure and Manage. To coin a horribly worn-out management-ism:
You can’t Manage what you don’t Measure.
Happily, I’m all out of poker terms.
And rubbish management-speak.
CSR Budgets – Why you need to spend more
CSR Budgets have been increasing in the last decade, and seem set to continue to rise. That seems like a good idea given that companies that manage their CSR issues are financially stronger. But within expanding CSR Budgets, it’s not clear that companies are effectively allocating resources to create the most value from what is a relatively small spend (for most organisations).
My suspicion (and experience) tells me that if companies turn their minds to measuring the value created by CSR, then they come up with a surprising large figure (like £138m. return on a £40m. investment – thanks M&S). Not only will the cost/benefit equation show that CSR is worth investing in, very likely CSR Budgets will increase as a result.
A big chunk of CSR budgets is wasted, but a bigger and more directed spend will lead to bigger financial rewards for most companies. Measuring current costs of the way business is done in an organisation can be tricky to sell internally, but unless such legacy costs are measured, management cannot definitively track the value from CSR changes. In order to quantify the effect of CSR, companies probably need to spend a bit more on measuring current costs and calculating the effects of any changes. Once that is done aggregating a big number from the value created by CSR is easy.
Many organisations are gambling when it comes to CSR, but with some effort could be certain that their bets on CSR are well founded.
Fabian Pattberg has some thoughts about CSR Budgets and how to keep them.