ESG

Business Ethics and Corporate Social Responsibility: How Do They Intersect?

“Doing the right thing” is becoming a priority for businesses worldwide, putting business ethics and corporate social responsibility in the spotlight. The imperative for ethical conduct in treating individuals, communities and the planet has been underlined throughout recent global health and social challenges, generating awareness that businesses can and should do more. Consequently, boards are focusing on business ethics and Corporate Social Responsibility (CSR) programmes in a bid to align strategic decisions with moral imperatives and build an environment of trust with all stakeholders.

However, despite the relative maturity of CSR and business ethics as concepts, confusion persists over how they interact and how they can be operationalised to benefit both business and society.

 

What Is the Difference Between Corporate Social Responsibility and Business Ethics?

Business ethics and CSR are closely related but not interchangeable. It is more accurate to say that the second flow from the application of the first. Business ethics are the moral principles that the organisation and those who work in it use to make daily decisions about interacting with others.

The UK Institute of Business Ethics defines the term as: “The application of ethical values to business behaviour,” adding: “It applies to any and all aspects of business conduct, from boardroom strategies and how companies treat their employees and suppliers to sales techniques and accounting practices.”

Ethics and moral values are cultural and social constructs. An individual’s moral code may be intuitive or based on a particular belief system, but a business has the opportunity to codify its ethical stance. By including its values in a mission statement or corporate philosophy, the organisation can set expectations for ethical conduct for everyone from the board down. In fact, a crucial board responsibility is to set the “tone from the top”, ensuring everyone in the business knows how they are expected to treat others and what ethical principles they should apply to their work. A corporation’s philosophy of social responsibility derives from business ethics and is the proactive implementation of actions and initiatives to benefit people, communities and the planet.

One of the most successful examples of corporate management philosophy was developed by entrepreneur and philanthropist Dr Kazuo Inamori, founder of Kyocera Corporation. Kyocera’s philosophy was loosely based around Inamori’s Buddhist beliefs and his firm understanding that profit will flow naturally from the fair treatment of people and the planet.

All CSR activities undertaken by the business should be the result of an ethical decision-making process. The primary objective of a CSR activity must be its benefit to third parties; there is no room for cynical PR stunts or marketing-led greenwashing activities in a truly ethical CSR programme. In an ideal world, they are activities the business would undertake even if nobody were watching.

Despite this lofty ambition, in reality, the benefits of CSR are wide-ranging. They can generate a significant positive impact for the business in building its reputation, attracting customers and reducing employee churn. This close association between strong social, environmental and commercial performance is sometimes referred to as the ‘triple bottom line’.

While there are some common features – usually in terms of environmental CSR initiatives to reduce waste and resource consumption – CSR programmes are typically bespoke to each organisation. Particularly on the social side, they tend to reflect the industry and community in which the organisation operates and aim to address specific challenges. While this is understandable, the wide range of issues that can be covered makes the value and impact of CSR programmes less measurable and comparable in real terms.

This leads us to another key difference between business ethics and CSR:

 

Business Ethics Can Be Regulated, but CSR Is Not

In an ideal world, businesses would operate ethically simply because it is the right thing to do. Sadly, unscrupulous organisations and individuals within them often do not operate according to the principles we might expect. To mitigate the damage unethical business practices have on communities, individuals and society, there is a raft of regulation that businesses must comply with, including but not limited to:

These areas reflect the wide range of stakeholders that businesses must treat fairly and legally. A core aspect of board governance is ensuring that the business complies with the appropriate regulations.

CSR may be closely related to an organisation’s work to discharge its regulatory obligations, but businesses must be cautious over how they present activities. For example, a CSR report may celebrate the businesses success in reducing waste or eliminating harmful emissions but, if this is actually a regulatory requirement, it should not be presented as a voluntary activity. This was a criticism levelled at oil company Chevron, which launched a major marketing campaign in the 1980s highlighting its environmental programmes, although many were legal requirements.

In terms of many of the ethically related regulations mentioned above, a company can be said to either comply or be in breach. However, CSR programmes and reporting, as a whole, are not regulated in the same way. This is frustrating for stakeholders seeking objective guidance on an organisation’s overall performance.

 

Measuring CSR and Ethical Impact – the Role of ESG

As demand for corporate sustainability, transparency and accountability grows, businesses seek a more standardised and objective way to measure the impact of business ethics and CSR. The concept of environmental, social and governance (ESG) is gaining traction due to its more data-focused approach.

ESG is more closely defined than CSR and allows boards and executive teams to select key performance metrics to base strategic decisions. All decisions must still be made within the organisation’s ethical framework, but ESG allows for a tighter focus on areas where measurement and comparisons can be made. The World Economic Forum’s sustainability metrics align with the UN’s sustainable development goals (SDGs); it is likely to become a global standard for ESG and should be the first port of call for businesses aiming to establish a clearer view of their non-financial impact.

It is important to note that adopting an ESG framework does not preclude the creativity and innovation that are characteristic of many companies’ CSR efforts. It simply means that each activity chosen – from educational programmes for underprivileged children to eliminating harmful substances from the supply chain – should relate to a measurable metric. In this way, business ethics and corporate social responsibility can be operationalised.

While the feel-good factor of acting ethically and responsibly can be hard to quantify, adopting an ESG-led approach is a good start. Diligent’s ESG Solutions help organisations turn their business ethics and CSR activities into a more sophisticated programme where progress can be tracked and achievements evidenced for the benefit of both the company and the world around it.

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