From environmental, social and governance programs to increased focus on diversity, equity and inclusion, the call is clear: a cultural shift is underway. Whereas business models of the late 20th century saw profitability as the base upon which other aspects of business rested, the script has flipped. In today’s economy social responsiveness and profitability are intertwined.
Where, then, does that leave financial leaders at this cultural crux? Many would argue at the very center. A study of over 200 S&P 500 firms found a positive link between CFO financial expertise and corporate social responsibility (CSR). Another found CFOs report much greater alignment between company social practices and financial objectives when finance teams are directly involved. How, then, can CFOs best approach the intersection between finance and social responsibility, aiming to do good while still attending to fiscal oversight?
ESG and CSR
Most CFOs will by now be familiar with environmental, social and governance (ESG) programs. These programs aim to measure company performance on issues like climate impacts, diversity of leadership and employee health and safety.
ESG programs are centered on gathering and analyzing data, with the goal of continual improvement – and reporting these outcomes to consumers and stakeholders. By comparison, corporate social responsibility focuses more on less-measurable features such as meaningful employee engagement and experience – including volunteering, charitable efforts and labor conditions.
So, while the two might intersect, ESG focuses on instituting frameworks with assessment – and oftentimes, regulations, compliance and risk management – in mind. CSR means interweaving social and environmental concerns into business practices and stakeholder relations in a way that is self-driven and self-regulated.
Some examples of high-profile companies with publicized CSR efforts include: Lego, which has made strides toward sustainable packaging; Dr. Bronner, which has touted wage equity; Ben and Jerry’s, with a push to prioritize fair-trade ingredients; TOMS, where charitable giving is part of the company’s business model; and Patagonia, which has dedicated resources toward environmental conversation efforts.
The Connection Between Profitability & Responsibility
According to Doreen Remmen, CFO at the Institute of Management Accountants, the idea that a trade-off exists between CSR and profitability is an outdated myth. Remmen states that strong CSR translates into more efficient operations and increased profitability because it spurs innovation and creativity. In other words, taking social and cultural factors into account when it comes to fiscal decision-making lends a new, and often a valuable, lens to how companies work.
Consumer trends support that stance. Among consumers, 80% report a higher likelihood of buying products labeled as environmentally friendly. An analysis by Kantar found that when company branding is tied to social purpose at high levels, brand value increased 175%, which was more than double that of companies with weaker alignment. In addition to increased sales and profits, CSR-focused companies enjoy reduced employee turnover. That’s because, like buyers, employees want to feel good about lending their resources to ethical, responsible companies.
In general, customers are increasingly interested in brands that take socially responsible stances. According to a study from the International Journal of Law and Management, companies with younger assets have gotten the memo, demonstrating stronger CSR performance than those with older assets, perhaps because of slower adoption or because of the cost required to update outdated facilities and processes. Any short-term gains saved by not integrating CSR, however, may result in long-term loss as the public weathervane continues to demand more social responsiveness. CSR may also serve as a valuable risk reduction tool, helping to ensure that companies keep equity, inclusion and people-centric thinking at the forefront of business decision-making. According to Project ROI, CSR practices can reduce systematic risk by 4%.
While some regard CSR as a short-lived trend, it’s important to note that socially conscious business decisions and strategies have their roots in the 1960’s.
Steps You Can Take
The journey to integrating CSR into business practices will look different for each company. That’s because CSR involves tailoring employee and community engagement to company values – including answering questions about who your company is. How does your company’s mission and brand intersect with the needs of its people, the communities it serves and the broader underlying culture?
Tangible examples include partnering with Human Resources to increase employee engagement through feedback gained through surveys and aligning community involvement like volunteering and charitable donations with organization mission and values. Finance can play a key CSR role in gathering and assessing data related to the financial impact of retention and turnover, environmental efforts including recycling and carbon footprint, diversity metrics and community engagement, especially in light of public demand for increased transparency about these types of initiatives and their impacts.
And while ESG is only one part of CSR, establishing ESG frameworks can also lead to greater involvement and investment in social initiatives. That’s because ESG centers on metrics, and when social programs are measured and assessed cultural factors can be tied to the bottom line, bolstering accountability and visibility.
Companies may want to dedicate resources toward collaborative CSR teams. Importantly, finance leaders should have a seat at the table, infusing conversations about what can be done with an eye on the financial sustainability of activities. Finance leaders can also help track how profitability and social responsibility correlate to meet increasing public interest in what businesses are doing for their people and the planet.
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