Tuesday, June 29, 2010

Canada's Top Performers in CSR: Lifting the Veil

Canadian Based Corporate Knights Research Group recently launched their annual report which ranks Canadian companies according to their commitment to corporate social responsibility and sustainability. Corporate Knights has developed a strong reputation as a source to which one can refer when evaluating the sustainability efforts of companies and even business schools in Canada. The Globe and Mail presented the results of their research in the following links. The links themselves are very informative for those of you wondering which companies are deemed leaders in Canada on the social responsibility front according to an independent third party. Thousands of potential and existing employees, shareholders, and other stakeholders refer to this ranking as a guide when developing their own evaluation of a company.

Report on Corporate Responsibility

However, the picture isn't as rosy as it may seem. This is the first of a series of three blog posts that aims to highlight some of the limitations of this reporting process that on the one hand inadvertently misleads readers and on the other paints a rather bleak picture of what we consider to be a leader in corporate social responsibility.

A hint of these limitations emerges when we consider that Corporate Knights’ gave Loblaw “top honours for corporate social responsibility” and ranked Bombardier “No. 1 for environmental practices”. I thought the two comments at the conclusion of the Bombardier article nicely captured the issue:

“…but when you stand back and figure it takes a thousand dead dinosaurs baked in the earth’s crust for a million years for enough fuel to make a flight on a little corporate jet from Toronto to Montreal, the term ‘environmental responsibility’ seems absurd”


“what total BS, Bombardier’s entire raison d’etre is building anti-environmental products”.

To understand the concerns, it’s important to start with definitions of sustainability and corporate social responsibility. Sustainability can be defined as the long-term maintenance of social, ecological, and economic systems. Examples of systems include the climate system, biodiversity, ocean systems, air systems, health systems, education systems, community systems, financial systems, social equity, and economic systems. To further define the concept, academic scholars tend to refer to 5 guiding principles that help maintain these systems: inclusiveness, connectivity, equity, prudence, and security. This means that commitment to sustainability is contingent on individuals or organizations considering multiple systems across both space and time, recognizing that these systems are interconnected and interdependent, avoiding and reducing inequity across geographic locations and generations, and keeping these systems resilient by preserving and maintaining them over time. Corporate social responsibility can then be defined as decisions and actions that ensure economic viability while operating within the capacity, or contributing to the integrity, of social, economic, and ecological systems by conforming to these principles.

Now let’s examine Bombardier and Loblaw (the two supposed leaders) against this sustainability backdrop. Three of the reasons Bombardier achieved top marks are because they reduced their water consumption by 35% relative to sales, energy consumption by 17% and GHGs by 10% between 2004 and 2009. There are three dangers associated with this performance measure. First, these are intensity based measures which preclude any consideration of absolute improvements. Energy, carbon, waste and water are measured based on a company’s output rather than against the available ecological carrying capacity afforded to the firm. Why is this an issue? Relying exclusively on intensity measures allows for an absolute increase in waste, carbon, and water and energy use despite the fact that a company may be more efficient. This means that companies merely have to use less energy and water and create less carbon and waste per unit of production rather than decrease these amounts in total. This is a major issue when we consider that scientists warn of the need to reduce, in absolute terms, 80% of carbon emissions by 2050 to avoid the 2 degree tipping point.

Second, Corporate Knights measures ecological performance against sales rather than against operational benchmarks. Bombardier’s overall GHG emissions may have increased by 25% but as a percentage of sales they may have decreased by 10%. This may not be because the company actually reduced its emissions but because sales may have increased dramatically on products and services that aren’t related to intense carbon emissions. Corporate Knights has no way of verifying this. What is more, similar to the creative accounting practices that companies have undertaken on the financial side, Corporate Knights can’t be sure that the company is recording revenue in the same period that it is recording the full emissions from that revenue. This means that we may not be seeing a true picture of the relative ecological costs of a given unit of sales.

Third, Corporate Knights compares company performance over different time periods and against other companies in their sector. For the first, rewarding companies on improvement over time means that those companies picking what we call the ‘low hanging fruit’ – simple changes that make significant improvements largely because the company’s performance was so poor initially – get the accolades while companies that started out with good sustainability performance and have no low hanging fruit are not recognized. For the second, while it’s always worthwhile to know which company is better than its competitors, this overlooks any measure of their absolute impact on systems, meaning that the best performer could still very well have a catastrophic impact on these ecological and social systems.

In my next two posts, I’ll dig deeper on two items. The second of this series will provide a more accurate measure of Loblaw’s CSR performance which would suggest that although they may be a leader among the small number of Canadian public grocery stores, they are far from adhering to principles of sustainability. In the third and final post of this series, I’ll discuss how the measures Corporate Knights uses is in no way representative of a company’s commitment to CSR and sustainability as I defined it above; suggesting that the claims made from the study may be misleading readers.

Stay tuned.

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