Ethical business

Research recently carried out by Ethical Investment Research Services (EIRIS), a research organisation designed to reflect the investment principles of the group of churches and charities that helped set it up, found that the top listed companies on the London Stock Exchange have made great strides in the past five years to tackle ethical issues head on, spurred on by the demands of “responsible” investors and stakeholders.

According to the research, in the last three years (2005 – 2007) over 80% of company policies and over 70% of management systems with regards to environmental policy are assessed as being “good” or “exceptional”, with a four fold increase in companies assessed as having exceptional environmental policies.

The survey also found that there has been a significant move towards tackling wider corporate responsibilities such as human rights. For example, EIRIS found that 94% of companies operating in countries of concern have some form of human rights policy, and over a third of these (39%) are considered “advanced”.

But some experts query aspects of EIRIS’ research, in particular its focus on the top 100 companies. Mark Chadwick, CEO at environmental management consultancy Carbon Clear, says that there needs to be a much wider review than just to look at the world’s largest 100 companies. “There are thousands of small and medium enterprises out there – just in the UK alone – as well as some other very large companies that aren’t listed on the FTSE that think that ethical and socially responsible behaviour and disclosure do not apply to themselves,” he says.

It is fair to say that the level of investor pressure and regulatory obligation for firms outside of the FTSE100 or listed on other exchanges such as the Alternative Investment Market (AIM) is much lower than for those listed on the main exchange. Consequently, those companies do not feel compelled to constantly improve their ethical behaviour or level of disclosure about corporate governance, meaning that EIRIS’ findings are likely to be more than a little skewed.

According to Chadwick, legislation such as the UK’s Carbon Reduction Commitment is going to force more organisations – and not just the largest in terms of revenue – to take more notice of their environmental and social policies. This is because the legislation, a new mandatory emissions trading scheme which begins in January 2010, will force all organisations whose electricity consumption is over 6000 megawatts per hour to bid for further allowances to cover their emissions. At the end of each year the government will compile performance tables to show which organisations have managed to reduce their carbon emissions the most. The government estimates that the rules will affect over 5,000 UK organisations.

“This kind of legislation, which takes a wider view than just focusing on 100 entities, will ultimately compel the majority of organisations in the UK to take their ethical, environmental and social responsibilities more seriously because it’s enshrined in law. We all know that legal risk is one of the key drivers of changing corporate behaviour,” says Chadwick.

Other business monitoring groups believe that the UK’s largest companies have a responsibility to encourage greater disclosure and compliance with industry best practice in the smaller companies that they deal with, such as suppliers and other contractors. They think that the “clout” that larger companies have to dictate terms will be a key driver in enforcing compliance with ethical codes.

Philippa Foster Back, director of the Institute of Business Ethics (IBE), an organisation that promotes ethical business practices, says that “from our research, around 60%-65% of companies in the FTSE350 have codes of ethics, compared to over 90% in the FTSE100. We believe that the world’s largest companies have the opportunity and responsibility to help smaller companies become more ethical because they now think that smaller companies have the obligation to act more ethically.”

But does such encouragement amount to corporate bullying? Already, some firms – particularly those in the US – are forcing suppliers (especially in developing countries like China and India) to sign contracts which stipulate that any ethical breach stays at a local level – meaning that if the US firm is found at fault for unethical behaviour on the part of a foreign supplier (for example, the supplier uses child labour), then the supplier agrees to take the rap.

On paper it may sound fair enough – why should a company in the US take the blame for practices in its supply chain that it does not carry out in its own workplace – but the reality can be quite different. Regulators and enforcement agencies have already picked up on the idea that these companies may be using their suppliers from the developing world as scapegoats, and so are now more inclined to look more deeply at the ethical guidelines that they are asking such companies to abide by.


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