014: Corporate Social Responsibility and Socially Responsible Investment, Japanese-style

Tepco, Parmalat and Enron. These names, by the admission of senior executives in all companies, are now synonymous with corporate irresponsibility. Indeed, the issue of trust - in business, governments, media and pressure groups in particular - is perhaps one of the most urgent challenges of our time and one that has no borders. This was highlighted at the Davos Economic Summit in January 2003 and can also be seen in the broader context of confidence - by customers, employees, shareholders and also communities - in business policy and its translation into practice. Corporate social responsibility and socially responsible investment have provided opportunities for companies to align their activities with broader societal expectations. But there is still a view that this is window-dressing and does not go to the heart of the business. Corporate social responsibility (CSR) refers to business practices characterized by extensive disclosure and transparency, which companies initiate to fulfil ethical responsibilities towards employees, communities, and the environment. The emphasis is on creating not only sustainable shareholder value but also sustainable social value. Socially responsible investment (SRI) is an investment approach which, in addition to conventional financial criteria, evaluates and selects companies on the basis of social and ethical criteria such as legal compliance, employment practices, human rights, consumer issues, contribution to community, and environmental issues, while seeking stable returns. However, SRI also includes financing motivated by social justice and community contribution and the exercise of shareholders' rights.

A number of major global trends in CSR and SRI can be identified. There is a growing connection to corporate governance through reporting - for example in the U.K., changes to company law suggest that information about a company's relationships with its employees, as well as its policies and performance on environmental, social and community issues can be subjected to an informed assessment by investors and others. The G8 summit in Evian concluded that "sound social frameworks and attention to the long-term impacts, including on the environment, of investment decisions and business processes are also important for sustainable growth." There is also increasing development of major global voluntary standards such as ISO and OECD Guidelines for Multinational Enterprises. Though interest in SRI is increasing, more importantly social issues now increasingly influence mainstream investors such as Nomura, Nikko Salomon Smith Barney or Standard Life Investments.

These developments in CSR and SRI have now reached Japan. Some characteristics of CSR in Japan can be seen in the table below which compares categories for SRI in each of the financial centres of the U.K., U.S. and Japan. While U.K. and U.S. approaches emphasise human rights and excluded items, the criteria in Japan specify consumer orientation and disclosure. Most Japanese SRI funds include strong consumer corporate brands such as Sony and Toyota. This - together with a number of high profile scandals - has meant that corporate responsibility in Japan has been strongly associated with relationships with customers, as individuals make judgements about companies in relation to their "experience" as customers but in their "behaviour" as investors.

The weakest link in CSR and SRI in Japan is its international application. This is reflected in decisions by asset mangers to reduce their holdings in particular companies because of a shift to offshore manufacturing locations in more low-cost environments. Why should a company be any less responsible if it is closing down its operations in Malaysia and developing its activities - and employing local people - in Vietnam or India?

In fact, providing local producers with access to international markets is one way of reducing poverty. Support for small and medium-sized enterprise development can be an important part of the CSR commitment of large companies. And improvements in social and environmental impact can go hand in hand with improvements in quality and management. Supporting enterprise development through long-term trading relationships and community investment is one of the most important ways that internationally-listed companies can contribute to the fight against world poverty.

This is very relevant for Japan. Japan does not wholly accept the mainstream thinking of the Western aid community about development. It continues to believe that the East Asian development experience, to which Japan itself has made a significant contribution through aid, trade and investment, provides a useful model. Japan's aid programme focuses on growth strategies, including industrial promotion and infrastructure development. These are, interestingly, exactly the areas where there appears to be an emerging consensus in approaches by the U.K., the U.S. and Japan.

What is now needed is greater coordination between FDI and development assistance policies and practice. Efforts by governments, NGOs and donor agencies to build human capital typically lack the input of private sector expertise in countries that need that expertise most. There is an opportunity for large enterprises, impelled by skill shortages or social responsibility goals, to assist local firms and entrepreneurs in upgrading proficiency. There is also a role for partnerships in helping public institutions understand and adapt to the needs of local firms and larger companies. In a number of cases, Japanese corporate activities in poor countries are groundbreaking (such as Toyota's social investment in northern Pakistan). Japan has made strong commitment to promote development via the U.N. and also through the Japan Bank for International Cooperation (JBIC) and the Japan International Cooperation Agency (JICA). Top Japanese manufacturing companies have also made FDI in some of the poorest countries in Asia. These commitments generate real potential (and relatively little effort) for SRI in Japan to link better with aid programmes to increase capital flows to emerging markets and help build domestic capacity, reduce poverty and mitigate social risk. Indeed Vietnam is increasingly looking to foreign private sector companies to demonstrate their commitment to reducing poverty.

Despite a perception that Western SRI funds support global development, recent evidence suggests that they singularly fail to do so. For Japan, CSR and SRI would have enormous potential if it were to become more closely aligned to mainstream development issues. The reality is that in the short to medium term four countries in Asia will be of increasing importance to Japan for their combination of trade potential, manufacturing costs and the relative stages they have reached in economic and social development for regional security: China and India, but also Vietnam and Pakistan. These countries are also characterised by real and urgent challenges of social development and so provide an opportunity to rise to the challenge posed at Chatham House in January 2003 by Gordon Brown, the U.K. Minister of Finance, that "we should not judge our results just by the input and the community involvement we seek to have, but by the difference we make to poverty reduction on the ground in the developing world." In other words, corporate social responsibility needs to be measured by output not by input; not by the broadly defined contributions that companies make, but by the impact they make on reducing social risk and supporting sustainable development.

April 13, 2004