Despite widespread agreement that tackling environmental impact should be a priority for business, many companies are choosing the narrow course of action of targeting their carbon footprint, rather than the more comprehensive strategy of integrating environmental concerns into their strategy and policy.
Most organisations are also failing to gathering information about the ethical dimensions of business management. Few collect information to manage performance against ethical goals.
The Chartered Institute of Management Accountants (CIMA) and the UK’s Institute of Business Ethics (IBE) conducted a survey in 2008 (Managing Responsible Business), in which 84% of respondents agreed that business had a moral obligation to help address global issues such as climate change and poverty.
Of the respondents, 68% believed that the question of environmental impact will only become more urgent, highlighting the fact that this is an issue companies cannot afford to ignore.
Nearly 80% of respondents said their organisation was taking steps to reduce environmental impact. But in 89% of cases, these steps focus on reducing their carbon footprint, for example by improving energy efficiency, reducing international travel or recycling waste.
Far fewer are making long-term commitments, such as integrating environmental concerns into strategy (54%) or implementing an environmental policy (62%).
(Click image to enlarge)
Exhibit 1: Taking action to reduce environmental impact
In a 2007 study, more FTSE350 companies (21%) reported making operational energy efficiency and environmental impact reductions than, for example, making longstanding commitments (9%) or monitoring company progress (7%).
This reinforces the 2008 survey’s findings, which indicate that businesses are failing to take the necessary steps to manage their environmental performance, despite its growing importance.
Less than half of those that are taking any steps to reduce environmental impact (42%) are reporting externally on their performance. Even so, CIMA and the IBE expect reporting on environmental performance to become more prevalent as environmental issues become more important.
Companies may be missing out on opportunities to beat the competition and boost the bottom line.
A separate CIMA survey of economic trends found that 85% of FTSE350 finance directors were convinced that there are business opportunities in developing environmentally friendly products. By contrast, less than half (43%) of those who are addressing their environmental impact in this survey have done so by integrating environmental considerations into product development.
Environmental concerns and opportunities are still not part of the product development and innovation process in the majority of cases, even where companies are taking steps to reduce their carbon emissions.
Opportunities exist, but few businesses are embracing green innovation. They need to move beyond carbon reduction in order to create competitive advantage in this area.
Larger organisations are more likely to address environmental impact than SMEs. Of the respondents, 87% of those from companies with over 5,000 employees say that their organisation has taken steps to improve their environmental performance, compared with 71% of SMEs.
This could reflect the greater resources available to the largest companies, or it could be due to the existence of environmental regulation that applies only to larger companies.
Alternatively, larger companies might be going green because they are under greater stakeholder pressure to do so. Their environmental impact is likely to be much bigger, and more conspicuous, than that of SMEs. This means they have a greater job to do to manage stakeholder concerns and might be under more pressure from them to take action.
The CIMA survey into economic trends shows that, for UK finance directors, the onus is on large companies to take action on the environment. The study found that the majority of UK finance directors (72%) thought that business should be doing a lot more for the environment, compared with less than one in three (28%) who thought the same of SMEs.
In the 2008 survey, one in five (20%) SMEs have not started to address environmental issues, compared to only 1 in 20 of the largest companies (over 5000 employees).
Large companies are being held accountable for their environmental impact, but overall few businesses are taking the right steps to manage this.
Recent media focus on climate change and reducing CO2 emissions has been taken on board, and as a result many large companies are trying to lower their carbon footprint. While this is commendable, they are still not doing enough to manage their environmental impact at the strategic level.
They are not reporting on their progress and companies, particularly large ones, are not meeting stakeholder expectations. It is not only bad news for big companies: SMEs need to clean up their act too, and take more action on environmental degradation and climate change as these issues grow in importance.
Figure 2: Taking action on environmental issues
(Click image to enlarge)
Figure 3: Reducing impact on the environment
Managing business ethics
The 2008 survey also found that most organisations were not gathering information about ethical management. Despite almost three quarters having a code of ethics or equivalent, less than a third (30%) of companies actually collect information to manage their performance against their ethical goals.
There are signs that companies are considering their performance in relation to ethical standards. Over half (56%) have key performance indicators, or KPIs. However, they are still not demonstrating a considered and strategic approach.
Companies have not implemented the necessary information gathering systems to ensure they live up to their stated ethical standards. They are at risk of poor ethical performance or even scandal and the ensuing reputational damage this would bring. Corporate responsibility has been steadily moving up the agenda, but companies are still failing to manage these issues effectively.
Public reporting on ethical performance is also sporadic. Only 35% of companies report publicly on their corporate responsibility or ethics. Although they have a stated standard of business conduct, they are neglecting to report their performance against these and so cannot be held accountable.
(Click image to enlarge)
Figure 4: Managing ethical performance and corporate social responsibility
In recent years, codes have become more common and even enshrined in legislation. The 2008 survey showed that many companies have a code, but are failing to collect or analyse information about their performance against it.
Failing to manage ethical issues effectively can affect financial performance and can leave organisations vulnerable to reputational risk.
Once reputation has been destroyed, it is difficult to repair, and public trust is hard to win back. By failing to evaluate their ethical performance, companies risk facing real damage to the bottom line when poor ethical practices are uncovered.
Relatively few respondents see this pattern changing in the near future. Fewer than one in five (19%) think their organisation will begin to collect in the next two or three year; the same number as said that their company would not.
But almost half (48%) believe collecting ethical management information would benefit their organisation. Finance professionals can see the value of managing ethical performance, but it appears their employers have not yet recognised the potential benefits.
Company size affects how likely an organisation is to report and/or collect ethical management information. The difference is striking: 19% of SMEs collect ethical management information compared with 44% of organisations with over 5000 employees.
The pattern is even more pronounced when it comes to reporting. Whereas only 17% of SMEs report publicly, 61% of very large organisations (over 5000 employees) do the same.
It is possible that this effect of company size is due to larger companies being more likely to be listed and so more likely to produce public financial accounts into which corporate responsibility and ethical information can be fed. They may also be bound by legislation that requires them to disclose social and environmental information, such as the UK Companies Act 2006, which applies to medium and large quoted companies.
Exhibit 5: Collecting ethical management information in the future
Reporting ethical performance
Most of the largest companies do collect and report ethical management information, so those who do not are at risk of being viewed as lagging behind their peers. A minority of 13% do not collect or report.
These companies are not managing their ethical performance and risk suffering commercially as a result, because ethical lapses can impact on financial performance. There are strong arguments in favour of the view that managing non-financial, ethical, impacts is simply part of good business management.
Ethical management information is normally gathered as part of regular management processes and is considered at the highest levels of the company. Ethical performance data tends to be collected annually or quarterly, where it is collected at all.
(Click image to enlarge)
Exhibit 6: Effect of company size on ethical performance management
Anecdotal evidence suggests that general management information is usually gathered more frequently than this, but it is still encouraging that in 67% of cases it is collected as part of regular management processes.
The finding implies that many of those companies that are addressing their ethical performance are doing so as part of core business, rather than as an add-on. In these organisations, managing ethical performance is integrated into the management of other aspects of performance.
It is also encouraging that ethical management information, when collected, is seen by senior people in the company. In the 2008 study, 86% of respondents report that data on corporate responsibility and ethics goes to senior management, and 68% say it goes to the board.
Those organisations that have taken practical steps to manage their ethical performance are considering the issues in the same way as they do other management information.
About the Author
CIMA, the Chartered Institute of Management Accountants, founded in 1919, is the world’s leading and largest professional body for management accountants, with 183,000 members and students operating in 168 countries, working at the heart of business.