Water UK

CSR and water

21/06/04

It’s my job to introduce the conference with some of the ideas behind CSR, ideas like vision, definition and measurement. That sounds a bit abstract, but what I’m really going to talk about is success and why CSR is an essential part of it.

I want to focus on behaviour rather than the content of CSR programmes. My fellow speakers will cover the content far better than I can. But I do have the privilege of helping launch our first full sustainability report.

First, I’ll say that the main social responsibility for companies is to be successful and make a profit. Second, the water industry aims at long-term success, which we call sustainability. Third, genuine CSR is essential for sustainability. Fourth, success is different in different markets and it’s necessary and responsible to explain what it means. Our sustainability report is a good example. Fifth, company reporting of CSR is changing with the Operating and Financial Review. The OFR will influence what we do from now on and show more clearly the links between CSR and business success.

1 Corporate success

So, first, what is success?

Whether we’re customers, investors or employees, we want to know if a firm is profitable.

Even after Enron and WorldCom, if we’re lucky enough to live in an open society, we still tend to see the profit number as shorthand for a ‘good’ company. Our faith has been shaken, but we know that you only get consistent profit growth from getting the important things right.

Things like success in delivering products and services customers want to buy. Success in giving people secure employment and rewarding them properly. Success in community relationships and investing adequately for the future. And success in making returns to society, to people’s pensions and the income of ordinary shareholders.

So, it may be obvious, but we do need to keep putting CSR into context. The first base is profitability, because unprofitable companies, like failing societies, hurt people who are victims of their poor performance.

The best commentators on the centre-left now accept this. And more and more business people admit that blind pursuit of shareholder value isn’t the best road to success.

The Work Foundation, led by Will Hutton, has proposed five attributes that mark out high performance - maximising shareholder value, innovation, understanding what customers want, recognising community needs, and treating staff well.

The Chairman of the Sustainable Development Commission, Jonathon Porritt, said recently that companies need incentives to move on with sustainability or green issues. It was unrealistic, he said, to expect companies to jeopardise shareholder value or take excessive risks.

2 Sustainability

But water is the ultimate long-term business.

The industry’s vision is to meet its long-term objectives through continuing business success. We call this nirvana ‘sustainability’, because you won’t get there if you neglect the big social, economic and environmental issues.

Of course there’s a problem with the definition of sustainability. Everyone accepts the bit about not cheating on the children or using resources in ways that spoil things for future generations. We also recognise the ‘three legs’ definition.

This is OK. But is it enough for people who are getting interested for the first time, like representatives of the capital markets? They want to satisfy themselves that management is on the case where risk is concerned. They want rigorous audits and assessments and in some areas they find them, as I’ll show in a moment.

The trouble is that the idea of sustainable development is never going to be precise. Perhaps it’s best not to push it too far. If we do and make claims we can’t substantiate, we run the risk of leaving practical people behind. Which is not a good idea.

I still find parallels between sustainability and religion quite persuasive. There’s a sort of mystery about sustainability, isn’t there? There are evangelists who go out into the world to convert the infidel. Some predict doom and destruction on the day of judgement. And they teach us to work for sustainability, which feels like the kingdom of heaven.

On this analysis, sustainability is a vision of a time and place we never actually reach. You don’t have to be a green fundamentalist to accept this. Sustainable development is in truth a journey, but that doesn’t reduce its importance. The direction we take will deeply affect all our futures.

Also, social and moral responsibility is part of both religion and sustainability.

This may sound frivolous, but it could help.

It could keep us practical. And help us avoid the spray-on kind of CSR that’s always waiting to seduce us. After all we’ve learnt, haven’t we, that spin (or ‘bearing false witness’?) is the work of the devil. (Well Alistair Campbell anyway.)

3 Defining CSR and sustainable success

So, the proposition is that responsible business seeks long-term success or sustainability, and that in sustainability there is a moral dimension.

This is where we need to be careful.

It seems uncontroversial to seek a tight business case for CSR. Just like any other business expense. Finance Directors and investors expect it. But the main value of genuinely responsible behaviour depends on trust, not watertight proof. Maybe it’s a bit like believing in God. You either accept that it’s good sense to treat people and the environment responsibly, or you don’t. Isn’t this why the NGOs who argue for mandatory CSR are barking up the wrong tree?

Because then it would become just one more set of regulations. You might say there’s nothing wrong with that. Regulation is essential and beneficial in many areas. True, but it works differently. It’s the opposite of Heineken. It can’t reach the parts that social responsibility reaches. Regulation is always vulnerable to attempts to play the system. Just look at the doubts already surrounding Sarbanes-Oxley in the US.

I believe the water industry is committed to the spirit of CSR, not just the letters.

Last year Water UK published its first CSR report. It shows that Water UK members know the value of sharing good practice. And that they can take criticism from stakeholders. The report is a showcase for successful partnerships. This isn’t surprising. Most of the industry is in private hands, but all of it has public service running through it like Blackpool in rock.

What’s unique is the ethos of service.

It’s what makes staff work all night to fix a problem for customers. It’s why companies have been able to turn anonymous water rate payers into individuals. It has led them to reach out into the communities they serve. It has strengthened their reputation with regulators, policy makers and investors.

The ethos shows itself in a hundred different ways. But what’s common to them all is that the motive is internal or second nature. And in the long term that’s what you need to build up trust and licence to operate.

Niall Fitzgerald, who’s just stepped down as Joint Chairman of Unilever, was asked about playing fair with customers. He said that on just a few occasions he had been persuaded to allow a production corner to be cut, or a cost saved, because no one would notice. And guess what. On every occasion people did notice and trust was reduced as a result.

When we were planning the CSR report, we had a debate about the ‘S’ for ‘Social’. Some people wanted to drop it, because we weren’t just talking about social matters. Plain CR, Corporate Responsibility, would have been more accurate. Also, the focus on ‘S’ plays down the environment, which is particularly important to us.

In the end though we stayed with CSR.

The heart of the matter is the interface of a business and the SSociety that creates it. CSR shines a light on this relationship. That’s why it’s timely and why it became a management issue in the first place.

All companies, regardless of ownership, are part of the public realm in society. This makes the point again that CSR should be an ethos or culture, rather than part of the business plan. It influences business outcomes. It’s necessary for long-term profits. But it isn’t a business strategy.

The strategy could be to report on CSR, or appoint a head of CSR. But reporting social responsibility isn’t the same as being responsible. Companies make choices about acting responsibly everyday and at every level. But these choices aren’t the same as deciding to move into a new market, or setting up a training programme, or replacing an IT supplier.

4 Measuring CSR – industry sustainability indicators

You have to report properly though, because expectations have changed so much. There is less trust. You can’t just be honest, you must be seen to be honest.

Also, we live in a complex world. Corporate success means a lot of different things. Companies need to explain how they judge themselves and how they’re responding to challenges. Profits are understandable in any language, but sophisticated and nervous stakeholders now want much more.

For the first time today the industry is reporting progress against thirty-seven indicators of sustainability. Sustainability, broadening the perspective is a huge commitment to transparency and cooperation. We developed it with the generous help of our stakeholders. UKWIR carried out the consultation and research. Water UK’s sustainability network turned the research into a practical outcome – this report.

The report uses the five kinds of capital defined by Forum for the Future. They are natural (or environmental) capital; social and human capital; financial, and manufactured capital. And colleagues wisely added a category for governance, planning and management.

We hope stakeholders like the result. It shows at a glance the breadth of the industry’s work. Why it matters so much to the quality of life. And how we’re doing in managing the infrastructure that’s vital to our national success.

Unfortunately, as many of you know, too much of that infrastructure is suffering from decades of under-investment. But things are getting better and the indicators show what you can do if you manage investment efficiently.

This is true for example in the improvements in our rivers, and drinking water quality and supply. But energy consumption and CO2 emissions are rising. The report reveals the tensions between improving quality and minimising inputs.

The industry will benefit from this project by being able to measure itself against expectations. It will be a solid basis for dialogue with stakeholders for a long time into the future.

5 The OFR and the future

I’ll finish by looking to the future.

Reporting will continue to be a key interest. The Operating and Financial Review will probably be the main driver. Quoted companies have to publish one from January. Some may decide that it they can dispense with existing CSR or sustainability reports.

If it works, the OFR will increase transparency, raise the profile of risk planning, and show that long-term success goes with a culture of decent behaviour. It should also help cut the cynicism many people feel about business.

The importance of the OFR lies in its scope. It combines development and performance with factors likely to affect the company’s future. It covers objectives, resources, risks and capital structure. Then, famously, it suggests there should be stuff about employees, the environment, social and community issues, business relationships and investment.

Some people feel that the OFR is just another drag on enterprise. There are questions about its legal status. But many companies are already doing something like it and some stakeholders, (though not all) have even been quite nice about it.

A moment ago I talked about confusion between CSR reporting and CSR behaviour. The OFR could bring culture and reporting closer together. The regulations require a report to be published and specify the categories of information. But they leave it to directors to decide what to put in their report to meet the objectives.

It’s hard to predict how this will work out. Some NGOs have already criticised the government for taking the voluntary, not mandatory, approach and withdrawn support for its international CSR framework.

But there is good reason to think that putting the onus on the honesty of directors is the best way. In fact, if we want to promote genuine commitment rather than a culture of compliance, then voluntary action is the only way.

To summarise. To be of most value, corporate social responsibility means:

 •  successful profitable business
 •  sustainable development
 •  an ethos of service
 •  open reporting
 •  voluntary not mandatory commitments.

Ends