By Frank Dixon
A Whole System Approach to Corporate Responsibility and Socially Responsible Investing
A large opportunity exists to substantially improve the effectiveness of the corporate responsibility (CR) and socially responsible investing (SRI) movements. Over the past 15 years, these movements have gone mainstream. Nearly every large corporation has some type of sustainability strategy. And trillions of dollars are invested through various environmental, social and ethical screens.
Yet in spite of proactive corporate and financial sector sustainability efforts, environmental and social conditions still are declining rapidly in many regions. This begs the question, if CR and SRI have gone mainstream, why are environmental and social conditions still declining? The answer largely is that these movements are not focused on the main cause of declining environmental and social conditions – flawed systems.
CR and SRI largely are focused on unilateral corporate efforts to reduce negative environmental and social impacts (social includes labor, customers, product safety, supply chain, community relations, government relations and international operations). But very generally speaking, companies only can unilaterally mitigate about 20 percent of their short-term and long-term, tangible and intangible, negative environmental and social impacts in a profit-neutral or profit-enhancing manner. Beyond this point, if companies voluntarily mitigate impacts, when competitors are not, costs often go up. If they continue down this path of voluntary corporate responsibility, they ultimately will put themselves out of business. Our flawed economic and political systems create a situation where all companies, without exception, must degrade the environment and society to survive.
Obviously no one intended that these systems would degrade, and possibly destroy, society. Unintended degradation results from myopia (failure to think from a whole system perspective and consider all relevant factors). Our flawed systems frequently compel business, government and broader society to put economic growth and shareholder returns before all else. But these factors should not be the primary measured and managed focus of society. The first priority should be environmental protection (because everything else is irrelevant without an environment that is clean and stable enough to support human life). The next priority should be maximizing the long-term well-being of society (i.e. providing the greatest possible good for the greatest possible number of current and future citizens).
Our myopic economic and political systems grossly violate the laws of nature. They absolutely will change. If we do not voluntarily change them, they will change through collapse. Businesses that degrade the environment and society (i.e. all businesses) are not the enemy. They simply are doing what they are designed and incentivized to do. The main enemies of humanity are our myopic thinking and the flawed systems that result from it.
The corporate and financial sectors are very powerful. We can harness this power to evolve our flawed systems into sustainable forms. Probably the most effective way to do this is to utilize existing mechanisms. Environmental, social and governance (ESG) ratings are primary drivers of the CR and SRI movements. They are used to develop high-performing SRI funds. This puts pressure on companies to improve environmental and social performance. If you want to learn more about ESG investing, you might want to read this article on esg investing (investing in an ethical way) for more information.
ESG rating largely is focused on assessing how effectively companies mitigate negative impacts, for example, by selling low-impact products, taking better care of employees and reducing pollution. Shifting the focus of corporate sustainability rating from unilateral impact mitigation to system change will strongly drive the systemic changes needed to achieve sustainability.
The Total Corporate Responsibility methodology (TCR®), developed in 2003, provides a practical and profitable way for businesses and investors to engage in system change. The model combines traditional ESG metrics with system change assessment. TCR broadly defines two levels of system change – mid-level and high-level. Mid-level refers to system changes related to specific sectors, stakeholder groups, or environmental and social issues. High-level system change refers to evolving overarching economic, political and social systems into sustainable forms.
Accurately assessing corporate system change performance is far more difficult than traditional CR or ESG analysis. Effective ESG rating requires understanding companies’ negative environmental and social impacts. This enables analysts to assess how effectively impacts are being mitigated. Effective system change analysis requires understanding necessary system changes. This enables analysts to accurately assess the effectiveness of corporate system change efforts. Assessing which high-level and mid-level system changes are relevant and necessary for each company is complex. It only can be successfully and accurately done through a whole system approach.
A companion series of books to TCR provides the whole system overview needed to identify necessary mid-level and high-level system changes. Due out in early 2016, Global System Change: Achieving Sustainability and Real Prosperity describes and links together all major issues and aspects of human society, including economic, political, social, environmental, psychological, spiritual and religious. It provides a detailed description of virtually all major overarching system changes needed in human society. It also discusses necessary system changes in many sectors and areas of society, including education, food production, energy, chemicals and government.
A growing number of companies are getting involved in collaborative sector-level or mid-level system change. But corporate involvement in high-level system change is limited. High-level system change is by far the most important sustainability issue. Overarching economic and political systems constrain sectors and companies and compel unsustainable behavior. Achieving sustainability and real prosperity is not possible without high-level system change. TCR provides a practical roadmap for corporate involvement in mid-level and high-level system change.
TCR delivers large potential benefits to businesses, investors and broader society. As the human economy and society expand in the finite Earth system, negative impacts return more quickly to harm companies, often in the form of market rejection, lawsuits and reputation damage. About 80 percent of corporate impacts cannot be mitigated without system change. As the focus of the CR and SRI movements shifts from unilateral impact mitigation to system change, companies that are proactively involved in collaborative mid-level and high-level system change will be seen as the true sustainability leaders. Like current sustainability leaders, they frequently will attain enhanced reputation, market share and profitability.
In the financial sector, the TCR best-in-class rating methodology can be used to develop SRI funds that produce superior financial returns and drive far greater positive environmental and social impacts than any other type of SRI. This occurs because TCR is focused on the most important aspect of sustainability – system change. At the societal level, TCR and other system change-focused approaches provide the most effective (and perhaps only) way to reverse environmental and social degradation and achieve a truly sustainable and prosperous society.
Global System Change suggests hundreds of mid-level and high-level system changes that are needed to achieve sustainability and real prosperity. One of the most important system change principles discussed in the books is emulating nature. A whole system perspective reveals that nature displays nearly infinitely greater technological sophistication and coordination than human society. But we are part of nature. Therefore, we have the innate potential to display the nearly infinite sophistication, coordination, sustainability and prosperity seen in nature.
From the myopic human perspective, we frequently think that we are advanced and sophisticated. But a whole system perspective reveals that we only have reached the tiniest fraction of our potential. We can be nearly infinitely better and more prosperous than we are now. As we begin to think and act from a whole system perspective, we will fulfill our most important obligation – protecting our children and future generations.
This article was originally on www.CSRwire.com. A longer version is available on EthicalMarkets.com. It provides more information about the TCR methodology, the business case for system change and the Global System Change series of books.
Frank Dixon is an advisor to the Compression Institute, and was the Managing Director of Research at Innovest Strategic Value Advisors, formerly the largest ESG rating firm in the world. Institutional investors used Innovest research to develop high-performing SRI products. Overseeing the sustainability analysis of the world’s 2,000 largest companies for many years made it clear that flawed systems compel all companies to degrade the environment and society. Frank Dixon developed the TCR approach to provide a practical and profitable way for companies and investors to engage in system change.
Copyright © 2016 Frank Dixon