CSR – ESG: No box-ticking Exercise
Corporate Social Responsibility (“CSR”) and Environmental, Social and Governance (“ESG”) are leading capital investor criteria today. At the same time, they are still critically discussed in association with claims that they are largely symbolic and “greenwashed” measures—good for company image, but little else. Yet there is growing global recognition that the private sector’s actions and leadership are critical to the fight against climate change, amongst other challenges. The issues are at the top of mind for corporate leaders, regulators and commentators, warranting an ongoing reflection as to where the search for sustainable capitalism is headed.
This post will provide some background on the evolution of CSR / ESG before delving into a case study to consider corporate disclosure regulations as a specific avenue for legal reform. The outlook is an ambivalent one, with all strategies currently leaving something to be desired and prompting further work to ensure that a pursuit of sustainable governance and investment is not a box-ticking exercise.
Historical Evolution
Although the idea of CSR dates back almost a century, it still has no consistent definition. Beginning in the 1930s, CSR gained traction in the 1970s. By 2000, CSR had become a regular expectation. Today, it is widely acknowledged that companies cannot simply pursue profits without considering their wider impact—yet practically speaking, corporations remain constrained by the need to make profits and stay competitive. Moreover, Canadian corporate law offers little instruction about what corporations should do. Although the Canada Business Corporations Act (“CBCA”) states that directors may consider not only their shareholders but a variety of interests, including broad ones such as the environment, that “may” is key. The CBCA enables a broader, more altruistic vision of CSR. Yet do corporations act on this?
To some extent. As corporations increasingly embrace CSR, including everything from increased disclosure and giving to charities, to actively promoting entrepreneurship, rendering education more accessible or reducing carbon emissions, it is worth remembering that many are likely only doing it insofar as it pays to be good.
Two broad models of CSR today include (1) stakeholder responsiveness, which broadens responsibility towards corporate stakeholders, and (2) corporate altruism, where the aim is “to improve social welfare rather than directly satisfy a stakeholder demand”. As the first model ignores many of the interests who could benefit the most from CSR–society’s most vulnerable and in need–CSR ideally embraces the latter one. In practice, however, corporations are limited by what pays; although it may pay to respond to stakeholders, even distant ones, pure corporate altruism is not clearly generally profitable. Thus, most corporations have no reason to go beyond stakeholder responsiveness.
This is where concepts like Creation of Shared Value (“CSV”) and the Triple Bottom Line come in to emphasize that corporations should look beyond their immediate profits, not to detract from, but rather to maximize, their own success. CSV encourages corporations to create value for themselves and for society simultaneously. This includes action at the level of products, value chain and business environment. For example, producing healthy food not only generates profits but creates value for consumers. The Triple Bottom Line explicitly tells corporations to consider Planet and People as well as Profits. By suggesting that corporations should, or perhaps even have no choice but to, consider the social and environmental dimensions of their impact, these theories represent a paradigm shift towards a world in which corporate purpose is no longer merely about profit maximization.
Another more recent advent is the emergence of ESG criteria during the 1990s. This metric emphasizes corporate activities’ impact on financial performance. Whereas the CBCA enables CSR and ESG but does not regulate them, ESG criteria could theoretically go further than CSR by allowing investors to pseudo-regulate corporations by managing their ESG risks. This is accomplished for instance by screening investments for their performance on ESG factors. However, it too is critiqued: not all ESG factors are quantifiable, data limitations and selective metrics by ESG rating organizations make comparisons challenging, and many investors lack the knowledge necessary to enforce ESG targets in their investments. Ultimately, throughout all these methods, profits continue to define—and necessarily limit—how much companies will do in the name of sustainability.
Case Study: Facebook and Corporate Social Responsibility
A quick look at Facebook illustrates this well. Facebook presents itself as a purpose-driven corporation focused on human connection and advancing CSR, and features strongly in ESG portfolios. It has also marketed itself as a leader in sustainability, claiming 100% renewable energy across its “global operations” and setting an ambitious net-zero target by 2030. However, its image is rosier than reality. For all its talk of bringing people together, Facebook has also been criticized for enabling teen suicide, propagating fake news, and condoning violence on its platform. Some investors were horrified to hear it qualified for their ESG portfolios.
Furthermore, its sustainability claims might be more about greenwashing than making a real difference. When Facebook does not wish to reduce emissions directly, it can simply purchase carbon offsets to meet its targets. Its ambitious targets should be further qualified through a detailed reading of what they actually entail. Currently, Facebook may use 100% renewable energy across “global operations”, but this only includes scope 1 and 2 emissions—in other words, it conveniently ignores 99% of Facebook’s supply chain emissions. It is interesting to situate Facebook’s example in a broader context. Notably, in Canada, ⅔ of major Canadian corporations fail to incorporate scope 3 emissions, which often represent large portions of their total emissions. Although Facebook’s net-zero by 2030 target does include scope 3 emissions, what exactly this entails is difficult to determine. In sum, Facebook’s CSR- or ESG- bona fides are debatable.
Corporate Disclosure to the Rescue?
At its best, ESG gives ordinary investors a voice in corporate accountability. However, it can be difficult for them to really exercise this voice without adequate knowledge about what commitments they are holding corporations accountable to. Recent securities litigation illustrates this well. Notably in Canada, RBC purportedly supports global plans to reduce greenhouse gas emissions and reach net-zero emissions by 2050. Yet its fossil fuel financing actually increased from 2020 to 2021! This is disappointing to investors at RBC who thought the bank was ESG-friendly, and has prompted an investigation by the Competition Bureau.
Unfortunately, Canadian corporate disclosure practices, meant to provide investors with information on publicly-traded companies they might invest in, are very permissive. The only requirement is disclosure of “material information that, if omitted or misstated, would likely influence investor decisions”. There is “[n]o bright-line test” to meet this criterion and no separate requirements to ensure environmental and social goals are met. A Task Force on Climate-Related Financial Disclosures is working to improve this by providing investors with greater clarity. However, proposed requirements, set to be introduced in 2024, are not as ambitious as they could be. Ultimately, corporations maintain discretion to act as they see fit and argue what they consider to be “material information” necessary to disclose.
The Way Forward
In light of the potentials as well as pitfalls of both CSR and ESG outlined here, what lies ahead? As members of the generation now moving into professional life, there appears to be (too) little cause for optimism regarding the state of regulation and what is being developed in the short run. The existing and dominating strategies are lacking in boldness. This is particularly disappointing given that CSR and ESG are no longer niche concerns, but have solidly entered the mainstream debate around the role of corporations and corporate law with a view to sustainable governance practices for the future.
Going beyond the less-than-helpful categorization of law being “hard” or “soft” and lamenting the enforcement challenges associated with the latter, a step forward would be to consider CSR, ESG, and other corporate strategies, coupled with mandatory law, as complementary tools. In light of the existential urgency of addressing climate change today, we believe it is the right moment to collectively move towards more impactful regulation, even if some of it might be qualified as corporate ‘self-regulation.’