The Triple Bottom Line Blog

Supercapitalism, the new book by Bill Clinton's secretary of labor Robert Reich, is an interesting analysis of how the rules of business have changed in recent decades, and the implications for public policy.

The nutshell version of Reich's thesis is that today's hypercompetitive global marketplace has stretched the traditional boundaries between business and government almost to the breaking point. Reich wants citizens to demand that those boundaries be redrawn, so that democratic institutions can reassert their control over vital quality-of-life issues (such as economic equality, health care, and the environment) rather than ceding them to the free market.

Reich's book is worth a look--it's well written and a quick, easy read. For the purposes of this blog, I want to focus on chapter 5, "Politics Diverted," in which Reich casts a skeptical eye at the corporate social responsibility (CSR) movement. Because this is a position one might not expect a political liberal to take, it is one of the "counterintuitive" elements of the book that is drawing considerable attention.

The arguments Reich deploys against CSR Reich fall into two broad categories. First, he makes the point that CSR may actually damage efforts to improve the behavior of businesses by diverting attention from the need for tough government regulations. For example, after listing some of the famous books written by reformers about industry abuses of the public trust (The Jungle, Unsafe at Any Speed), Reich comments:

The purpose of these and other exposes was not to pressure individual companies to change their ways but to incite political action so all companies would have to. These efforts were not substitutes for political action but preconditions for it.

Reich's point here is well taken, insofar as some kinds of business reform can't be based purely on voluntary efforts but require government action, with teeth, to be effective. (I for one wouldn't be happy about buying medicines that had never been tested by the FDA but only by some voluntary, industry-sponsored, and industry-run agency.)

But Reich's other criticisms of CSR seem less well considered. At times, he writes as if there is really no such thing as CSR. For example, he is loath to credit companies with behaving "responsibly" when their choices are driven, in part, by profit considerations:

Logically, when the extra benefits of some product accrue to consumers individually, they may be willing to pay more for it. This doesn't make the product "socially responsible" . . . Wendy's restaurants have stopped frying their food in trans fats, which have also been banished from Oreo cookies and Frito-Lay snacks. General Mills now makes its Cheerios and Wheaties out of whole grain. These changes were not made because these firms became more socially virtuous but because consumers have become more conscious about their own health.

Similarly, companies that pay good wages and offer good benefits in order to attract and retain high-caliber employees are not being "socially responsible"; they are merely practicing good management.

I think this redefinition of "socially responsible" business as merely "good management" over-simplifies the question. For example, it leaves unexplained why the definition of "good management" in the snack business has changed in recent years to include the notion of meeting basic health standards. Isn't this a positive phenomenon that deserves some explanation rather than being explained away as if it didn't exist?

By the same token, Reich's account fails to explain why some companies choose not to switch to healthier snack recipes, or why others continue to underpay their employees. How and why do competing firms follow such conflicting definitions of "good management"? Don't social or ethical values have something to do with the choices these companies make?

Reich then goes further, asserting that, in fully competitive free markets like those existing under today's "supercapitalism," CSR is, strictly speaking, impossible:

A 2004 report by the World Economic Forum at Davos applauded the efforts of some forward-looking multinational companies to reduce greenhouse gas emissions but concluded that voluntary actions were inadequate to counter effects of climate change.

Of course they're inadequate. Supercapitalism does not permit acts of corporate virtue that erode the bottom line. No company can "voluntarily" take on an extra cost that its competitors don't also take on--which is why, under supercapitalism, regulations are the only means of getting companies to do things that hurt their bottom lines.

Part of Reich's point is certainly valid: Most people agree that the problem of global warming is too big to be dealt with on a purely voluntary basis. But notice the scare quotes Reich uses around the word "voluntarily." He is casting doubt on the very notion that corporations have any choice about the policies they pursue. In Reich's world, CEOs don't even have free will. Driven by the unyielding demands of a personified "Supercapitalism," they have no choice but to obey the dictates of the marketplace, which, in the case of global warming, means emitting greenhouse gases as long as they can get away with it.

The real world is a little more complicated--as suggested by the fact that various companies have, in fact, adapted widely different policies in regard to carbon emissions.

And Reich's dismissal of CSR as inadequate, or even purely mythical,shouldn't be taken too literally. In the real world, where consumer demands, public opinion, pressures from interest groups, market dynamics, and government involvement interact in complex ways, the CSR movement has had a definite impact.

For example, when a few major corporations respond to public demands by adopting pro-environmental or pro-labor policies, it ratchets up the pressure on Congress and the administration to implement regulations requiring such policies, so as to "level the playing field" among competitors. If government fails to act, voluntary organizations may be formed to set and enforce industry-wide standards, with similar effect.

These kinds of phenomena don't appear in the overly simplistic landscape Reich paints, but in the real world, they do happen. And they wouldn't happen without pressure from the CSR movement.

Bob Reich is smart, he writes well, and his central thesis is dead-on--that the new economy demands a re-examination of the relationship between democracy and capitalism. But when it comes to CSR, I think he's off the mark.

Labels: Management and Organization, Robert Reich, Role of Government, Supercapitalism

This report from TerraChoice Environmental Marketing, Inc., has been drawing a lot of attention in environmental and business circles. Titled "The Six Sins of Greenwashing," it's based on a study of over 1,000 products sold at big-box retailers, each of which made some sort of environmental claim. The startling findings: Out of 1,753 environmental claims, only one was found to meet the researchers' standards of accuracy and verifiability.

Based on this analysis, the report's authors conclude that "greenwashing is pervasive," posing a serious danger that consumers will be confused, misled, and ultimately driven to cynically disregard all environmental claims as meaningless or dishonest.

I have no doubt that greenwashing is, in fact, pervasive, and that many companies are guilty of exaggeration, obfuscation, and distortion when making environmental claims. (After all, the same is true in almost every other area of marketing and advertising.) But I also think the conclusions of the "Six Sins" report are just a trifle overblown, and that the authors have themselves succumbed to the temptation of stacking the deck in order to make a serious problem appear even more alarming--a bit of the kind of hype they accuse corporate marketers of practicing.

My doubts are based on what I see as the shaky basis of one of the "Six Sins of Greenwashing" outlined in the report. As summarized on Joel Makower's blog, the six sins are:

Sin of the Hidden Trade-Off--claims that suggest a product is "green" based on a single environmental attribute (the recycled content of paper, for example) or an unreasonably narrow set of attributes without attention to other important, or perhaps more important, environmental issues (such as the energy, climate, water, or forestry impacts of paper). Such claims aren't usually false, but paint a misleading picture of the product than a more complete environmental analysis would support. This was the most frequently committed "sin," made by 57 percent of all environmental claims examined.

Sin of No Proof (26 percent of all claims examined)--any claim that couldn't be substantiated by easily accessible supporting information, or by a reliable third-party certification. TerraChoice determined there to be "no proof" if supporting evidence was not accessible at either the point of purchase or at the product website.

Sin of Vagueness (11 percent of all claims examined)--any claim that is so poorly defined or broad that its real meaning is likely to be misunderstood by the intended consumer, such as "chemical free" or "all natural."

Sin of Irrelevance (4 percent of all claims examined)--claims that may be truthful but are unimportant and unhelpful for consumers, such as CFC-free products, since ozone-depleting chlorofluorocarbons have been outlawed since the late 1980s.

Sin of Lesser of Two Evils (1 percent of all claims examined)--environmental claims that may be true, but that risk distracting the consumer from the greater environmental impacts of the category as a whole, such as organic tobacco or green insecticides.

Sin of Fibbing (less than 1 percent of all claims examined)--claims that are simply false, typically by misusing or misrepresenting certification by an independent authority, when no such certification had been made.

Now, some of the "sins" listed here are genuine misdemeanors. Obviously lying about a product's environmental qualities (the Sin of Fibbing) is an absolute no-no. And making product claims that are true but fundamentally meaningless (the Sin of Irrelevance) is almost equally dishonest. TerraChoice is dead-on in criticizing companies that are guilty of these sins. And they are also right to suggest that companies making environmental claims ought to provide clear definitions and proof of their claims. So far, so good.

My problem is with the first of TerraChoice's sins--the Sin of the Hidden Trade-Off. Here we get into murkier territory, where the "greenwashing" label seems much more dubious.

It's undoubtedly true that judging the "greenness" of a product or company is a complex, many-layered process. It's also true that, in the final analysis, the environmental impact of an organization can only be measured by examining a whole host of issues, including the ones TerraChoice mentions--energy use, effect on global warming, and so on.

But does that make it fair to describe any less-comprehensive environmental claim as "greenwashing"--in effect, accusing the company that makes it of dishonesty? I don't see it.

To use one of TerraChoice's own examples: If a paper company truthfully describes a product (copy paper, for example) as being made from recycled materials, but doesn't also report its policies and practices in regard to (say) water consumption, does that make the "recycled materials" claim greenwashing? I don't see how.

Here's an analogy. A wealthy businessperson donates a million dollars to a local art museum. Accordingly, his name is carved in the museum lobby on a list of "Generous Benefactors." Now, suppose that businessperson also happens to be a stingy employer--pays lousy, provides no health benefits. Does that falsify the claim that he gave generously to support the museum? Clearly not. He's not a very nice guy--but he did support the museum, and there's nothing dishonest or misleading about carving his name on the lobby wall.

In its Sin of the Hidden Trade-Off, TerraChoice is saying, in effect, that any product claim regarding the environment is illegitimate unless the company making the claim has also performed a complete analysis of all its environmental policies and practices, and can demonstrate that those policies and practices meet or exceed current "green" standards. That strikes me as unreasonable.

And since this "sin" is by far the most prevalent one in the TerraChoice study, representing fully 57 percent of the sins they uncovered, it seems to me that this bit of shaky logic seriously undermines the very sweeping conclusions trumpeted by the study's authors.

The soundbite version of the report seems to say, "We investigated 1,753 environmental claims, and found that 1,752 of them were lies." But in fact the report merely says, "We investigated 1,753 environmental claims, and found only one of the companies making these claims had provided the details of a complete self-analysis which demonstrated that their environmental practices were of a high quality."

That statement is a lot less dramatic-sounding--but it's more accurate.

Am I nit-picking? Maybe so. But I think there are real dangers in the slightly inaccurate soundbite version of the report. By implying that virtually every company making environmental claims is lying (or at least blatantly distorting the truth), TerraChoice is encouraging cynicism among consumers and the media. It is also (unintentionally, I'm sure) lending support to the extreme right-wing view of environmentalism as phony, self-serving hype whose real purpose is to mislead and exploit innocent citizens and consumers.

Don't get me wrong, I'm all in favor of having companies perform complete and credible environmental audits, and I agree that activists and engaged consumers should examine the results of such audits when seeking eco-friendly companies to do business with. But it seems counter-productive to brand any company that doesn't yet meet this standard as a "greenwasher" deserving nothing but public contempt.

Rather than advancing the cause, pinning a "99 percent dishonest" label on companies' environmental efforts will encourage most consumers to throw up their hands in despair and simply disregard eco-claims in the future.

Labels: Greenwashing, Joel Makower, TerraChoice

Perhaps you saw this week's story in The Wall Street Journal about how protesters are gearing up for the Olympic Games and what sponsoring companies are doing about it. Short version: Most companies are focusing on "going green":

Coke is playing up its water-conservation efforts on the Yangtze River and putting natural-refrigerant coolers and vending machines at all Olympic sites. Since March, Volkswagen has been planting thousands of trees in Inner Mongolia. GE is touting its role selling ecofriendly products such as solar-power and water-filtration systems for the Olympic venues.

By concentrating on the environment, companies can show they are acting responsibly and score points with the Chinese government while avoiding politically charged issues such as Taiwan or Darfur, PR executives say. Mr. [Richard] Edelman [of Edleman Public Relations] calls it a "win-win" situation.

A close reading of the article indicates that the most vehement and well-organized protests may actually be focused on human rights and other non-environmental issues. Which does mean that companies need to have that part of the sustainability agenda under control in terms of having appropriate policies, procedures, and programs in place.

But companies are right to focus on the environment for several reasons.

1. Dirty air will have an impact on the games themselves and on the athletes, whereas hman rights and other issues will be at one step removed. The human rights activists will be trying to draw connections to the games, but the athletes and spectators are most likely to be talking about the environment and will have every good reason to do so. They will not seem like agitators serving some other, unrelated interest.

2. The media will thus be talking about the environmental problems as part of the daily coverage of the overall "Olympic Story." Bad air is likely to affect the performances (think marathon), and it will be easy for the media to follow that angle and go deeper. Unlike human rights and even contaminated toys (the regime will make certain that there are no child laborers or contaminated toys within 1,000 miles of the Games!) there are easy, accessible visuals--smog, belching factories, traffic congestion--that will tell the story. It's the easiest story by far with no investigation and little explanation required. Also, bad air and possibly water (the foreign athletes may not be drinking from the taps) may well make this Olympics different from any other, and the media loves that.

3. Of course, all of this plays into the two biggest stories of the decade: China and climate change.
4. Then there is the political side of the environmental issue. Never having been to China, I have no real idea how big, strong and deep the environmental movement is there. (Elizabeth Economy's book on the subject, which my writing partner Karl Weber happened to work on, is probably a good place to start in learning about that topic.) But my guess is that the Olympics, and the presence of the international media, will give that movement plenty of cover, not to mention the international environmental activists who will be at the head of the parade. It will be hard for the government to arrest them all, if they do join hands. They would look really bad if they just arrested the locals, and even worse if they put the foreigners in the clink.

And if there are protests and arrests that just gives the media an even bigger story to cover.

5. Finally, I think the human rights activists may understand all of this, and may rally behind the environment as a wedge issue. That's what happened in Hungary--the democracy movement rallied and prevailed around environmental concerns related to the planned construction of a large hydroelectric dam. In so doing, they served their broader political goals--undermining the power and authority of an autocratic central government, and demonstrating to the public that they could affect change if they chose to do so.

For all these reasons, a green focus is a very reasonable strategy for sponsoring companies to use in dealing with the challenges of China 08.

Labels: Air, China, Communications and Marketing, Human Rights and Child Labor, Olympics, Water

Here's a noteworthy item from a source most of our readers probably don't track--the online edition of the Columbia Journalism Review. Seems a couple of sociologists have published a study showing that coverage of protests against specific corporations in The New York Times has an adverse effect on stock prices:

Co-authors Brayden G. King, of Brigham Young University, and Sarah A. Soule, of Cornell University, observed that stories on protests caused a stock price to fall between 0.4 and 1.0 percent, on average. Longer stories resulted in greater declines. Most of the drop happened the day of the protest and the day after it.

The size of the protest appeared not to matter. Neither did the use of boycotts. "What really matters," King said in a telephone interview, "is that you're able to gain media coverage."

On one level, this might seem like a dog-bites-man story: Isn't it obvious that bad publicity hurts stock valuation? But actually that isn't obvious at all:

According to classic stock-market theory, prices change only upon the introduction of new information. Sounds reasonable. But, says King, a question arises: activists tend to mount protests based on already-released information, so why would their actions change a share price?

King and Soule argue that the new information is the news that someone cares about the previously disclosed problem. Investors may already have known that a company was polluting a river (our example), but now they know that someone cares enough to protest it. The study suggests that the market believes that activists' dissatisfaction could be costly in and of itself.

There is, then, a measurable economic cost, levied by the marketplace, on companies that disdain "sustainable" business practices--to the extent that "sustainability" can be correlated with positive, protest-free relationships with stakeholders. Conversely, companies that consciously pursue friendly stakeholder relationships may be able to avoid the "protest penalty" and thereby gain at least a small edge on their competitors.

One last point: The professors' study is based on data compiled from 1962 to 1990. If the effect they discovered existed throughout the period, it suggests that the influence of mass media on financial markets is nothing new and predates the Internet, Bloomberg, MSNBC, and CNN.

It may be that organizations like Greenpeace and PETA are using protests and the threat of protests as anti-corporate weapons more deliberately today than was done in the past, but the weapons themselves have been making an impact for a long time.

Labels: Brayden G. King, Finance and Investment, Measurement, Sarah A. Soule

Ceres has issued a noteworthy report about how the insurance industry is responding to the risk of climate change. Follow the link for plenty of detail, as well as another link that lets you download the entire document, but here is the elevator-talk version of the report from the Ceres website:

Hundreds of new insurance initiatives, including 'green' building credits, drought-protection in developing countries and incentives for investing in renewable energy and carbon emissions trading are being offered to tackle climate change and rising weather-related losses in the U.S. and globally, according to a major new report announced today at the annual conference of the International Association of Insurance Supervisors.

The report, commissioned by the nonprofit group Ceres, outlines more than 400 climate-related activities in the US and abroad--double the number of products and services identified in a similar report done just 14 months ago.

Intriguingly enough, blogger Joel Makower (whose work we've often had occasion to cite) was forecasting just this trend almost two years ago. Noting a couple of early insurance-industry moves that have proven to be a harbinger of more sweeping changes, Makower commented:

If government policies won't lead to aggressive action on climate change, maybe the insurance industry will. . . . The message is implicit, if not explicit: "If you don't care enough about the risks to your company resulting from severe climate change, we just might not insure you."

Insurance companies occupy an interesting place in our free-enterprise system. As middlemen of risk, they consolidate the financial risks to which thousands of companies (as well as millions of individuals) are exposed. By undertaking risks that would otherwise ruin a random sampling of firms and spreading the costs over a much broader base, they make it possible for injured companies to remain in business, supported (in effect) by contributions from thousands of other firms. One might almost call it a kind of "free-market socialism," created not by government but by private companies for their own economic benefit.

And because of this quasi-social role, insurance companies also play a quasi-regulatory role, developing and enforcing standards of behavior that constrain organizations almost as powerfully as laws might do. In some areas, we take this for granted--for instance, with the product-safety standards established by Underwriters Laboratories, which were founded in 1894 by an insurance company executive. Now this role is being extended into the climate-change arena. A few examples, offered by Ceres, related to auto use:

Pay-as-you-drive (PAYD) insurance products are now being offered by 19 insurers worldwide, who recognize that reduced driving means reduced accident risk, as well as reduced energy use. Tests have shown that PAYD products can reduce overall miles driven by 10-15 percent or more. About 20 percent of new customers of the French insurer AGF have elected the PAYD option, with 250,000 such policies in force. Progressive and GMAC offer PAYD policies in parts of the U.S. Japan's Sompo Insurance has given premium discounts to 3.25 million policyholders that drive low-emitting cars, and Tokio Marine and Nichido have signed up 6.23 million policyholders, 48 percent of its total auto policy customer base, who are receiving discounts for driving low-mileage or low-emitting vehicles.

It's extremely difficult to change human behavior through mere exhortation. And getting laws passed that constrain individual activities without a clear and immediate payoff can be almost as difficult, as stagnating CAFE standards in the US suggest.

But insurance companies may now be stepping into the breach. By pooling and monetizing "externalities" like the environmental risks associated with driving, and then giving insurance customers clear and easy ways of reducing their own share of those risks, they are beginning to reshape human behavior more subtly and painlessly than any government edict.

And making a profit doing it. Ah, the genius of capitalism!

Labels: CERES, Finance and Investment, insurance industry, Joel Makower

Over at Techworld, a U.K.-based business website, blogger Chris Mellor posts an interesting comment about the sustainability initiatives of BT (formerly known as British Telecom). Mellor notes, "BT's urging of sustainable business practices on to business in general is closely aligned to its own self-interest," and asks, "How real is BT's commitment to sustainability?"

He then shows that many of the eco-friendly practices, such as teleconferencing, that BT is promoting in the name of sustainability are also revenue sources for BT. And this leads Mellor to question--albeit gently--the genuineness of the company's commitment to the cause:

Here we have a hugely-prominent British company enthusiastically evangelising the sustainability (read 'green' mostly) agenda, practising what it preaches, which is a solidly good thing, and using the green agenda to sell its kit and services.

This could be interpreted as having an element of jumping on the green bandwagon to pursue its own self-interest. When BT says sustainability makes commercial sense it certainly does for BT because other businesses may well use BT products and services to pursue their own sustainability goals. . . .

For BT it's almost a case, one might suggest, of self-interest driving its sustainability agenda rather than being a byproduct of it. I don't know if this is true and am not pointing an accusatory finger at BT. But the co-incidence of self-interest and the sustainability agenda evangelising at BT is surely worthy of note.

One instinctively believes more in the commitment of priests who take a vow of poverty than in the religious faith of television evangelists living in million-dollar homes.

We all share Mellor's cynicism about televangelists who live high on the hog. But that's because living in luxury contradicts the spiritual message most televangelists promote, which is about humility, self-sacrifice, and service to others. However, there's no contradiction between running a profitable, growing business and the "green gospel" of sustainability, so Mellor's comparison seems off the mark.

If anything, we'd make the opposite point: The more profitable BT's eco-friendly offerings are for the company, the deeper and more sincere BT's commitment to sustainability is likely to be. Anyone who has worked in a corporation will confirm that there is nothing more heartfelt than the desire of executives to report healthy profits every quarter! And this sincere love of profit is shared by board members, shareholders, and all the other key decision-makers at most companies.

So the extent to which BT is able to align its profitability goals with genuinely sustainable practices is not a measure of the company's insincerity, but just the opposite. Such alignment is exactly what believers in sustainable business need to pursue. Without it, green initiatives lose money and therefore become philanthropic efforts rather than profit sources--which makes them inherently less sustainable in the long run.

This is not to say that teleconferencing and the other business practices being promoted by BT are genuinely green--that's a matter for experts to evaluate by objective criteria. But the fact that promoting these practices serves BT's self-interest isn't a bug--it's a feature.

Labels: BT, Chris Mellor, Finance and Investment, Measurement