Why we need to tighten the screws on business for sustainability

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Although voluntary initiatives are commendable and help corporate leaders inch closer to sustainability, they are not enough. The world needs more than just a minor percentage of companies committed to making a significant impact on social and environmental conditions. The most effective means of effecting change is not gentle cajoling or allowing companies to self-regulate; it’s pressure.

Thousands of companies have joined hundreds of voluntary sustainability initiatives that have produced varying degrees of impact. The United Nations Global Compact, arguably the largest such initiative, has convinced more than 8,000 companies to commit to 10 principles of labor and human rights, environmental protection and anti-corruption. The ethical production certification known as Fairtrade has attracted roughly 7,000 companies. We will continue to need such efforts.

Companies always will want to demonstrate their leadership and improve their performance by joining prominent initiatives. But with millions of companies worldwide, these programs are just scraping the surface. And they’ve been around for 15 years or more. Progress, but not nearly quickly enough.

Pressure, in the form of supplier requirements, shareholder resolutions, product boycotts, vocal advocacy, media attention and regulations, can do more to move companies along the path to sustainability than voluntary initiatives ever will.

That pressure addresses not just the leaders, but also the laggards — the companies that likely never would sign on to a voluntary initiative. If we leave it up to companies to undertake internal social and environmental improvements on their own accord — because there’s a business case behind it or it’s just the right thing to do — we’ll wait a long time.

Supplier requirements

Because of its impressive magnitude, the pressure from companies on their suppliers (not to be confused with consumer pressure on retailers and producers) has perhaps the biggest effect on improving corporate sustainability.

When we see Wal-Mart requiring its 100,000-plus suppliers to disclose their sustainability performance for use in Wal-Mart’s decision making, we realize the impact can be colossal. Intel, HP and Procter & Gamble also require supplier self-assessments using scorecards. Many companies require their suppliers to comply with their supplier code of conduct or to undergo assessments, which often focus on human rights, ethics and the environment. Some companies go further. Witness: 

          Company                                                             Supplier Requirement

             EMC                                                          Release a public sustainability report

             Ford                                                                        Certify to ISO 14001

             IBM                                                      Adopt a sustainability management system

             Sprint                                                 Set public greenhouse gas reduction target

             Unilever                                              Comply with Sustainable Agriculture Code

Activist shareholders

Shareholder advocacy groups regularly pursue environmental and social objectives through dialogue with companies. If dialogue fails, they often turn to shareholder resolutions that can appear in the company’s annual proxy circular. Companies do their best, such as agreeing to modify their practices, to avoid having a resolution come to vote. Companies prefer routine annual general meetings, without distractions such as shareholder resolutions.

One of the more popular focus areas for resolutions is disclosure, so investors can review comparable information for multiple companies and more rigorously analyze risk. I’ve personally been involved in responding to resolutions calling for better disclosure. In all cases, companies ended up improving their disclosure.

Another shareholder lever is divestment. Apartheid and tobacco were earlier targets; now fossil fuels are in the crosshairs. While some argue that divestment is ineffective in prompting change, even as a symbolic gesture it can damage corporate reputation and the ability to attract employees.

Regulations

It’s safe to say that almost all companies accept regulations as a part of doing business. They know that staying in compliance is essential to retaining their license to operate. The fear of receiving a fine or penalty as a result of not maintaining compliance drives many environmental and safety programs.

Nobody would argue when environmental regulations first became prevalent in the 1970s that they weren’t necessary to protect the air, water and land. The same can be said about the adoption of labor laws. As we encounter new workplace dynamics and understand even more about the environment, there is a clear role for improved or additional regulations.

Outlawing PCBs and ozone-depleting substances were tough but essential moves for ensuring environmental protection. After understanding more about hydraulic fracturing of horizontal oil and gas wells, perhaps we are at a time when expanded regulations can restore public trust.

The California Transparency in Supply Chains Act requires disclosure on child and forced labor, and the Dodd-Frank Act requires reporting on the use of conflict minerals. These are just two regulations that require disclosure on issues that were previously uncontrolled, and likely would have gone only lightly addressed without regulations.

Leading companies have taken action on climate change in the past 20 years, but it’s clear that we’ll need regulations to ensure that significant economy-wide action is taken.

Advocacy efforts

Good old-fashioned pressure from well-known advocacy groups such as Greenpeace, Friends of the Earth and Amnesty International, and lesser-known groups formed by students and other concerned citizens, have had tremendous success throughout the years in putting an end to irresponsible practices.

Long ago there were the anti-whaling and anti-sweatshop movements. And real change happened. More recently, Johnson & Johnson removed a formaldehyde-releasing preservative in its baby products after a report from the U.S. Campaign for Safe Cosmetics revealed to the public the danger of these products.

Most of the time, companies would rather stay below the radar and avoid the media attention that boycotts and protests bring. Quick action, as Johnson & Johnson undertook less than three weeks after the report’s release, helps to minimize bad press.

Pressure works

When a shareholder resolution is put forth, a company’s investor relations department jumps. When a major B-to-B customer asks for a company’s position on human rights, staff are sent scrambling. If a division receives a regulatory fine, board members’ ears perk up. Contrast these responses with the yawns heard when the sustainability department announces the opportunity of participating in another voluntary initiative. Pressure works.

We can’t wait for millions of companies to join voluntary efforts — they need a push.

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