CSRHub Blog Research on ESG metrics and comments on sustainability best practice

The United Nations Development Program (UNDP) has been publishing an independent Human Development Report (HDR) for almost twenty years.  Its associated Human Development Index (HDI) is well-respected, broad (182 countries), and widely read (they translate it into a dozen languages).  In contrast, our CSRHUB ratings system has just recently launched and is not nearly as well known.  While we cover more companies (more than 5,500) and countries (66) than any other source of corporate social responsibility information, we can’t claim the same level of authority or readership as the HDI.

Further, our ratings describe company behavior—the HDI talks about countries.  Should there be a connection between these two data sets?  One could hypothesize either that countries with a good HDI score produce socially positive companies or that socially positive companies help foster a business climate in their countries that addresses human development.  Either way, we could see a correlation between our average Community rating (which contains information about community development, philanthropy, human rights, supply chain issues, and product quality) and the HDI.

We only have enough data to match up 52 of the 66 countries we cover, with the HDI information.  Still, a 50+ point data set should be enough to reveal if there is a meaningful relationship between two sets of data.  When we graph our 0 to 100 country score against the HDI’s 0.0 to 1.0 range, we see only a 3% correlation.  This suggests they may be no relationship between company behavior and country norms.

Notice the cluster of data points to the right and the long tail of points that stretches to the left?  Most of the points on the right (with good HDI values) are for developed economies.  The tail to the left includes smaller, less developed countries.  Many of the less-developed countries have only a few major publicly-traded companies.  The social standards set within these major companies may not be representative of the general level of social performance of companies in those countries.

If we remove countries where we have a small number (fewer than 20) of companies and exclude the still-developing economies of India and South Africa, we find a much stronger (27%) relationship between our community rating and the HDI.

The connection between these data sets is still not perfect.  For instance, our top three countries on the Community score within this set are France, the Netherlands, and the UK.  The top HDI scores for this set of countries are for Australia, Norway, and Canada.  We need to have more data points over a longer baseline (our site has only been up for about six months) before we can claim to have proven a relationship.  Still, it is encouraging to see signs of a connection between companies and their countries.

What about that tail of developing and smaller companies?  The Community scores in our system were generally better than the formula from the developed-company correlation would predict.  This suggests that the top companies in these countries have standards for their social performance that exceed what we might otherwise expect.  Perhaps this is due to these companies being exposed to pressure from overseas customers and investors, to perform better on human issues?  Many of these companies are listed on foreign stock exchanges and some have already started producing CSR reports.  (50% of the companies we cover in South Africa have done CSR reports, but only 10% of those in India.)

If companies follow the standards of their country—and improve as their countries improve—we should see the gap between the HDI score and our score close up, over time.  If countries follow the example set by their leading companies, we might see company scores continue to improve and the HDI/CSRHUB Community score gap stay the same.  We will try to revisit this analysis a year from now, and see how things have changed.

Can businesses maximize both their profits and the social benefits they create?  Or, do economic and social profits compete with one another?  100+ years of literature and lore have trained us to believe that businesses can’t optimize both their profits and their social benefits.  From Upton Sinclair (e.g., The Jungle) and Charles Dickens (A Christmas Story), through Erin Brockovich and The Informant!, we have heard of countless examples of horrors that can be caused by corporate greed and money-grubbing.However, a number of people seem to believe that this paradigm can be broken.

A few weeks ago, I attended a Harvard Business School of New York seminar called Green Private Equity: Investing in Our Future that discussed Private Equity’s involvement in encouraging sustainability.  The session was led by Diana Glassman of EBG Capital and the panel included one of McKinsey’s better-known former partners, Carter Bales.

I had known Carter when he was one of the top partners at McKinsey’s New York office.  I reconnected with him recently, when I learned that he had started a PE group targeted on sustainability and energy-efficiency issues called NewWorld Capital Group.  During the talk, Carter referred to the area he works in as “the Virtuous Quadrant.”  He seemed to believe that he could generate above-average returns, by investing in and supporting socially-positive businesses.

I came home and researched the term “virtuous quadrant.”  I was pleased to see that the first mention I could find was from a scientific paper on Land Use that was written in 1996 by another old friend of mine from McKinsey, Dr. Alistair (Ali) M. Hanna.  He used the term so casually that I suspect it may have been a term of art within at least the New York office of McKinsey for some time, before this.I’ve now found many mentions of the term, and a number of other articles and papers that support the thesis that lies behind it. For instance, two Swiss professors, Andreas Georg Scherer and Guido Palazzo, wrote a paper last September that contained references to around two hundred studies that support the view that “Many business firms have started to assume social and political responsibilities that go beyond legal requirements and fill the regulatory vacuum in global governance.”  (They don’t want links to their draft—I assume because it has not been published, yet.)

The Environmental Defense Fund has been spearheading an effort to get private equity firms to integrate CSR issues into their investment practices.  Our friend Greg Andeck at EDF sent me a recent New York Times article about how well KKR had done by encouraging its portfolio companies to set sustainability goals and Carter’s fund seems to be moving ahead well.  So, perhaps we are at a tipping point in how business people think about their role in society—and in what society expects and demands from businesses?  If so, I hope that CSRHUB can play a role in revealing this progress, through the ratings we generate and the information we expose.