CSR’s evolution: Dodd-Frank and the UK’s Bribery Act

Corporate social responsibility (CSR) is still a largely voluntary, loosely defined initiative in the resource-extraction industries, but pressures from a number of sources make it harder and harder to ignore.

Financing requirements, public outcry, shareholder initiatives, international conventions and simply a need for internal social risk management are all increasing the need to address issues related to CSR.

At a recent seminar in Vancouver on CSR and risk mitigation, hosted by the Canada-Southern Africa Chamber of Business, several speakers emphasized the growing requirement of a proper CSR approach in order to secure project financing.

“The genesis of this [requirement] is the mitigation of risk,” said Kevin O’Callaghan, a partner at law firm Fasken Martineau, underlining that lenders want to ensure there is a social license to operate.

O’Callaghan explained that, while international laws and treaties dealing with CSR largely contain objectives that are non-enforceable by home-country governments, financial institutions are enforcing them.

Public and private lenders are measuring how well companies comply with guidelines such as the International Finance Corporation’s “Performance Standards on Social and Environmental Sustainability,” which O’Callaghan said is the current standard.

Janne Duncan, a partner at law firm Macleod Dixon, warned that companies need to address CSR issues because, if they don’t, there is a “real risk that companies are not going to be able to raise money.”

Duncan talked about corruption and bribery as key social risks. She said that Canada’s Foreign Corrupt Practices Act currently requires a real and substantial link to Canada for it to take effect, but that is changing.

She pointed to the Dodd-Frank Act in the U.S. as an example of what to expect in the future north of the border. The act, passed last year, gives broad powers to U.S. regulators to enforce American anti-corruption legislation on companies with only a tenuous hold in the country. Dodd-Frank also requires more disclosure in general, such as filing all payments to foreign governments, broken down by country and project.

“This is coming to Canada,” Duncan said.

Meanwhile on July 1, the U.K.’s Bribery Act comes into effect, which will also considerably expand regulators’ extra-territorial reach. Duncan explained that the legislation creates a strict liability offense for not preventing bribes, and it applies not only to companies, but also anyone who provides services or is associated with the company.

“People are serious about enforcing this,” Duncan said.

While anti-corruption laws are developing the sharpest teeth, O’Callaghan pointed to increasing peer and public pressure as a powerful motivator for companies to adopt stronger CSR policies.

“Corporate reputation plays a large role in creating mandatory guidelines,” O’Callaghan said.

He explained that, while non-binding, principles like free prior informed consent when dealing with indigenous peoples are becoming at least more expected.

Many conventions, like the United Nations’ Global Compact, the International Council on Mining and Metals’ Sustainable Development Framework, and the Equator Principles are establishing more stringent reporting requirements, though not enforcement.

Pressure is starting to build from shareholders as well, with a recent report by accounting giant Ernst and Young showing that roughly half of shareholder initiatives in 2011 will centre on social and environmental issues. The report, which was not limited to the mining industry, also showed that while overall support for such initiatives is still a fairly low 18%, the number of social and environmental initiatives passing the 30% support threshold has gone from 3% in 2005 to 27% in 2010.

The Ernst and Young report noted that “shareholder proposals currently pending reflect a growing belief on the part of institutional investors that a company’s social and environmental policies correlate strongly with its risk management – and ultimately its financial performance.”

And while social risk management is growing in profile there is still a lack of consensus on how to approach it, as was evident at the recent Vancouver seminar.

On one side, Martin Jones, chairman of Banro‘s (baa-t, baa-x) charitable wing The Banro Foundation, spoke of the many schools, clinics and water systems it had built near its project in the eastern Democratic Republic of the Congo.

On the other end, Michael Auerbach, of consultancy Control Risks, stood up and boldly declared that he did not like CSR, and didn’t think corporations should be involved with it.

Auerbach’s argued that initiatives like those of Banro, while commendable on their own, do little to address actual risks. 

Auerbach said companies should “get out of CSR and into risk management.” He pointed to the Ruggie Framework, soon to be adopted by the UN Human Rights Council, as a key document that contains clear, practical strategies and principles for business to meet more effective human rights obligations.

The varying perspectives at the seminar reflected different interpretations of CSR as much as anything, and underlie the continued lack of clarity surrounding it.

But caught as they are between financial institutions, international organizations and the public, there is undeniably a growing pressure on companies to properly address CSR issues.