The truth about corporate ethics is still out there

For years, Volkswagen's record for ethics and sustainability were exemplary, at least according to the company's social responsibility reports. Then, the world learned that the company was cheating on emission tests.

British Petroleum changed its name to BP in 1998 and soon began promoting that it was moving Beyond Petroleum. The company portrayed itself as the world's socially responsible large oil company. Then the Deepwater Horizon exploded, and the world learned how the company prioritised profits over safety.

Both Volkswagen and BP were trying to win customers by joining the 93 per cent of Fortune 250 companies that report how well they treat the environment. They promise that they care about our community, our future. But too often, corporate social responsibility reports are nothing more than public relations exercises with little substance.

Volkswagen's deception gives cynics another reason to guffaw at the idea of mega-corporations balancing profit-making with protecting the environment and respecting societies expectations. But that shouldn't stop us from demanding that corporations respect the social contract that they provide goods and services in a way that doesn't come with societal costs.

Investors also should demand this, because there is growing evidence that companies that respect environmental laws and society's expectations can generate more profits. A movement is underway to require corporations to report their attempts to minimise environmental impacts in a more transparent and meaningful way.

Unfortunately, the world of corporate social responsibility is filled with bewildering acronyms and competing standards promoted by wild-eyed do-gooders or dissembling hucksters. Since all reporting is voluntary, there are no universal standards, and often only the most flattering data make it into company news releases.

Seeking the truth

That's why there are finance professionals whose spend every day seeking the truth. One of those people is Adam Kanzer, managing director of corporate engagement at Domini Social Investments, which has $US1.8 billion in assets under management.

"You are always going to have fraud. You are always going to have companies that simply lie, and it's really hard to find that," Kanzer told me on the sidelines of SXSW Eco, a sustainability conference in Austin where corporate social responsibility is a major theme this year.

Domini manages funds for investors who don't want to sacrifice their ethics to earn a high rate of return. Kanzer said the firm's analysts read corporate reports but also examine SEC filings, activist ratings and dozens of other sources before making investment decisions.

"Companies depend on governments, consumers, the environment and labour to succeed. If they don't manage those relationships well, something's going to break down," he said. "We see these things as indicators of quality management."

Model portfolios consisting of companies that take environmental, social and governance issues seriously can outperform benchmark indexes, according to data analysis firm FactSet. Depending on the portfolio's risk profile, responsible companies can beat benchmarks by 1 per cent to 2 per cent, analysts found.

The reason should be obvious: Waste and pollution increase costs and risks, while efficiency and cleanliness improve profitability. Consumers, particularly younger ones, also find responsible companies more appealing, which explains Volkswagen's and BP's marketing campaigns.

Domini did not invest in BP, even when it was considered the most progressive international oil company on social issues, nor did it invest in Volkswagen when some environmentalists were praising it. In-depth analysis turned out to be predictive.

"For BP, the writing was on the wall for a long time - their safety record was just miserable," he explained. "VW had a history of serious governance issues, the overall fleet efficiency wasn't so great ... and there was also military weapons contracting."

Pick and choose standards

Kanzer said the biggest problem for investors is the lack of a single international standard for comparing companies with their peers. There is an alphabet soup of nonprofits that offers ratings, but each has limitations.

Corporations pick and choose which standards they want to comply with, and they always choose the one that makes them look best.

One effort to overcome this problem is the Sustainability Accounting Standards Board, a non-profit backed by former New York Mayor Michael Bloomberg, which has two former SEC chairs serving on the board. The group is drafting methods for measuring how well companies manage sustainability in 80 industries.

The guiding principle is that sustainability is important to investors trying to make informed decisions. Once the board finalises the standards, the hope is the corporate and market regulator will require companies to include them in annual reports.

This would be a huge help to all investors who want to compare corporations and decide which management teams are thinking about the long term, not just next quarter's profits. Corporations should also welcome a level playing field that compares apples to apples.

More information is always better than less, so this can't happen fast enough.

-New York Times