The new rules of the game

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The new rules of the game

Government "rescue"and CSR

In this climate of great uncertainty and economic crisis,many social and political agents are suggesting that thedebate be reopened on the government's role as guarantorof well-being and stability in developed countries.

Measures such as financial rescue plans, state interventionin private enterprises, the hunt for those to blame for thecurrent crisis and the resurgence of protectionism ininternational trade are gaining momentum by the day. Allof this points to a scenario of greater regulatory pressurevis-à-vis the way that companies operate, influence andbehave on the market.

Just how this trend will affect the phenomenon of socialresponsibility could provide subject matter for a wide rangeof publications. We have decided to dedicate this first editionof RSEarch to the creation of a benchmark for regulatorydevelopment in various neighboring countries.

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In 2009, a maelstrom of state actions wereushered in, designed to stabilize the situationcaused by the intense erosion of the financial,real estate and labor markets. The policiesof the OECD states and some emergingcountries (mainly China) are cushioning thereal financial economy by increasing publicspending, reinforcing financial institutionsand even buying stock in some organizations(finance and motor vehicle industries).

Hence, the speed and intensity with whichgovernments have intervened as regulators,supervisors, actors, guarantors and evenwhite knights, coupled with weak resistance– and sometimes open support – from themore liberal sectors of economic policyappear to have extended the scope of stateaction.

This is on top of the resurgence of certainsigns of economic protectionism as severalcountries attempt to give preference to theirdomestic economies. For example, therecently rejected Buy American measure –which would restrict application of the USeconomic stimulus fund (800 billion dollars)to services and products and materials madein the USA – or the relaxation of capitalrequirements to Swiss financial institutionsfor granting loans within the country insteadof sending them abroad.

Against this backdrop, some opinion leadershave stressed that the roots of the crisis liein a lack of ethics and social responsibilityon the part of diverse economic agents. Inaccordance with this, some stakeholdersconsider that if we are to get to the root ofthe problem it will be necessary to regulatea number of aspects, such as executiveremuneration, the toughening of the rulesof the game (ethics, labor, social aspects,environment, among others), increase thetransparency and scrutiny of the private andpublic sector, and to reinforce the state'srole of supervision and control.

As a result of the above, the debate on thevoluntary/compulsory nature of CSR looksset to reopen, coinciding with the start ofoperations of Spain's Council of SocialResponsibility. The current setting recomendsa cautious outlook regarding thesephenomena and warns of the need for greaterstability (clarity, absence of interferences) inthe present economic climate beforedecisions are made that could substantiallyaffect the business panorama. In order tooffer a more wide-ranging perspective, wehave dedicated this issue to a review of thediverse state measures for promoting CSRin our immediate environment.

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Soft Legislation

A “soft legislation” context

In the European context, the regulatoryframework is generally flexible. The commondenominator of all of the regulationsanalyzed can be summarized in threeprinciples:

- Soft legislation: the regulatory content isscarcely demanding and prioritizes voluntaryaction over mandatory.- Comply or explain: social responsibility isalways presumed but the burden of testing

falls on the company. As a result, companiesmust develop CSR policies and tools; if theydo not, they need to explain why.- Supply market: companies must developsocial responsibility. Given that they formpart of the market, government authoritiesmust also integrate principles of socialresponsibility in their management.

Within the framework of action of severalof our neighboring countries, we haveselected the following eight cases for theiradvanced conceptual development.

The EU, from flexibilityto commitment

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“Most countries across Europe have adopted aregulatory framework that emphasizes a voluntaryapproach versus mandatory requirements"

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Some data FOC

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= A specific regulation is in force.= No specific regulation.

Establishes the recommendationof reporting, based on therelevance for the business.There are no reporting obligations.Compulsory social balance sheet.An increase in this requirement isunder study.Big companies; publicundertakings.There are no reporting obligations.Listed companies.Listed companies and publicundertakings.Listed companies.Public undertakings.

CSR Reporting

Germany

Belgium

Denmark

SpainFranceHolland

UKSweden

There is no green governmentprocurement law, but there are supportinitiatives (beschaffung, Blaue Engel).There are no specific plans.Responsible procurementspecifications; CSR Compass (CSRcontrol of suppliers).Public Sector Contracts Act 2007incorporates CSR into governmentprocurement.National Sustainable ProcurementPlan 2007-2010.State program for green governmentprocurement (2006). Aim 100% greengovernment purchases by 2010.UK Government SustainableProcurement Action Plan 2007.National Green GovernmentProcurement Plan 2007-2009.

CSR & Public Procurement

BelgiumDenmark

Spain

France

Holland

Germany

UK

Sweden

Interministerial climate change group.CSR seal introduced by the government(ordonnance de la Région Bruxelles-Capitale, 4 September 2008).CSR Compass, Energy efficiency sealsfor public and private buildings (>1000m2), creation of a Climate Consortiumwith employers.Creation of a State Council for SocialResponsibility.Creation of an equal opportunities seal.Creation of several environmentagencies and international cooperationprograms to promote CSR.Swedish Council for EnvironmentalManagement (State, regions andemployer associations), CEO WaterMandate (public-private alliance).Local sustainability plans, Sustainabledevelopment indicators.

Other PromotionalInitiatives

Belgium

Denmark

Spain

FranceHolland

Germany

UK

Sweden

None.Fonds de l’Economie sociale etdurable. Loans & Capital inprojects with social andenvironmental impact.Vækstfonden (venture capital). PRI+ social and environmental filtersin the fund portfolio.There is a proposal in the SocialSecurity Reserve Fund bill.Retirement reserve fund (FRR).Exercise of vote & social andenvironmental filters in the fundportfolio.None.AP funds (government pensionfund system) PRI.None.

SRI Investment ofPublic Capital

Belgium

Denmark

Spain

France

Holland

Germany

Sweden

UK

Belgium

Denmark

SpainFrance

Holland

Germany

UK

Sweden

Investment policy by pension planmanagers (employment).Investment policy by pension planmanagers.Investment policy by pension planmanagers.There are no reporting obligations.Investment policy by pension planmanagers.There is no specific plan.Investment policy by pension planmanagers.There are no reporting obligations.

SRI Reporting

German Strategy for Adaptationto Climate Change (2008).There is no specific plan.Aim of reducing energyconsumption: 2% by 2011 and 4%by 2020 (Base year 2006).Spanish National Climate ChangeAdaptation Plan (2008).Presented in 2005 and enforceablefrom 2010. Target for 2050: reduceemissions by 4 (Base year 2000).Program for adaptation to climatechange with an investment of €15billion in 20 years.Commitment to an investment ofSEK 5 billion to combat climatechange.Target of reducing emissions by20% by 2050 (Base year 1990).

Climate Change

BelgiumDenmark

Spain

France

Holland

Sweden

UK

Germany

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1 Companies Act 2006. This law regulates aspects concerning companies. It is the equivalent of Spain's LimitedCompanies Act.

The United Kingdom has been pioneeringin its incorporation of CSR in the publicdomain. The content of regulations isbased on the following points, listed inaccordance with their target public:

1. CSR management:

1.1 Listed companies

- Responsibility of companymanagement. The Companies Act 20061(article 171) establishes that responsibilityfor the environment and social impactof business operations falls on themanagement team.- Reporting: Under the Companies Act2006 (article 417), listed companies mustinclude information in their annualreports on the existence and efficacy ofcorporate policies on the environment,employees and impacts on society andstakeholders.

2. 2. SRI (socially responsible investing).

Fund managers (private sector)

- CSR in investment policies: since1999, pension plan managers in theUnited Kingdom have been required tostate in their investment policies theimportance of ethical, social andenvironmental aspects in theirinvestment decisions.- Policies on the exercise of votingrights: pension plan and fund managersare required to detail their policy on theexercise of rights regarding theirinvestments (voting in shareholders'meetings, delegations, transfer of theserights, etc).

3. Environmental context: Climatechange:

3.1 Government and private sector:

Kingdom has committed to reducing itsgreenhouse gas emissions by 2050 to

less than 80% of its emissions in 1990.To achieve this, it has established a seriesof requirements, which include:

I. Five-year emissions budgets.II. Creation of an Emissions Registry andits corresponding governing body.III. Creation of an Advisory Committeeon Climate Change.IV. Publication of regular reports onpotential risks and adaptation to climatechange in the United Kingdom.V. Guidelines for reporting emissions forApril 2012, expanding on the contentsof the Companies Act 2006.

4.Responsible regions:Local governments:

The Sustainable Communities Act 2007sets up a CSR deployment plan throughits system for drafting proposals for localsustainability plans.

With the support and coordination of theSecretary of State, regional governmentsmust put forward their respective plansafter successive phases of localconsultation.

These local plans must cover aspectssuch as the promotion of local purchases,organic food production, localemployment and social integration,among others.

United KingdomHeading down the learning curve

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DenmarkThe orthodox model

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Denmark is among the best-positionedcountries as developers of integral CSRpolicies.

The recently published white paper anda series of development regulations laythe foundations for a balanced andorthodox model of social responsibility.This model is based on four pillars: 1.Social responsibility led by companies.2. Promotion of CSR through publicactivity. 3. Responsible actions with theenvironment. 4. The brand: Denmark forresponsible growth. The Danish initiativecan be classified according to targetpublic as follows:

1. CSR management

1.1 Private companies.

The Danish government is backing abusiness-led CSR model. Nonetheless, ithas introduced a series of supportinginitiatives, which include:

- Reporting: it establishes therequirement of CSR reporting forDenmark's largest 1,000 companies.Nonetheless, the regulation does notestablish a minimum set of reportingindicators. Moreover, compliance withthis requirement is met by publicationof the United Nations Global CompactProgress Report.

- Responsible procurement (B2B): withthe creation of CSR Compass, the Danishgovernment has set up a free platformto register companies that work withethical, social and environmentalstandards.

- Diversity: “Jobs for New Danes”program, the aim of which is to facilitateaccess to best practices in themanagement of diversity in Danishcompanies.

- Other programs:I. Risk prevention certification for SMEs.II. Support of the Danish Chamber ofCommerce for companies operating incountries with high corruption risks.III. “People and Profit” training programand guide published in 2007 especiallyfor CSR integration in SMEs.

1.2 Government undertakings:

Danish public undertakings haveincorporated CSR criteria into certainareas of their business, such asresponsible procurement, the draftingof codes of conduct and other bestpractices.

The new regulatory framework extendsthe obligation of CSR reporting andmembership of the United Nations GlobalCompact to these companies.

1.3 General government:

The Danish government has focusedmainly on reinforcing CSR criteria ingovernment procurement.

- Responsible government procurement(G2B): The Danish government isincorporating environmental and eco-efficiency criteria in public procurementspecifications. The most notableinitiatives include:I. Promotion of eco-efficient official cars.II. Incorporation of ILO treaties and theUniversal Declaration of Human Rightsin procurement specifications.III. Creation of a mixed (public/private)panel to evaluate ‘green’ procurement.

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DenmarkThe orthodox model

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2. SRI (socially responsible investing):

2.1 Public capital and funds:

- Active management of governmentfunds in SRIi. Vækstfonden (state-owned venturecapital company) has established a seriesof ethical, social and environmental filtersfor its investments and plans to becomea signatory of the PRI2.ii. Export credit Fonden (export creditinstitute) has introduced environmental,social and anti-corruption criteria and iscommitted to the Equator Principles.

2.2 Private capital. Fund managers

- CSR in investment policies:Danish pension plan managers arerequired to state in their investmentpolicies the importance of ethical, socialand environmental aspects in theirinvestment decisions.

3. Environmental context:

The most relevant environmentalprograms are:

- Establishment of targets for thereduction of energy consumption: 2% by2011 and 4% by 2020 (base year 2006).- Target of 20% of energy generationfrom renewables.

- Compulsory inclusion of informationon climate change in business reports.- Creation of sector alliances (retail,construction and maritime) on climateresponsibility and investors.- Compulsory requirement for buildingsover 1,000 square meters to pass theenergy-labeled test every five years.

4. Responsible regions:

The last pillar in the Danish strategy isto build a “Denmark for responsiblegrowth” brand. This line of actionincorporates a variety of tools designedto position the country as a sociallyresponsible region. These activitiesinclude:

- Setting up a support fund for activitieslinked to CSR with an internationalprojection.- Open commitment to the United NationsGlobal Pact and OECD guidelines.- Hosting of international conferencesand activities in Denmark on specific CSRtopics.

2 UN PRI: Principles for Responsible Investment. United Nations.

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FranceA focus on equality

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1. CSR management. Focus on financialmarkets

1.1 Listed companies.

The French government establishesgreater transparency for companiesfloated on the French stock exchangethan unlisted companies.

- Reporting: In 2001, article 116 of theNRE (New Economic Regulation Act)established the mandatory inclusion ofsocial and environmental information inannual reports. A decree from 2002establishes minimum mandatorycontents, the main points of whichinclude:i. Workforce statistics: number, gender,contract type, dismissals, extra hours,etc.ii. Information on responsiblerestructuring plans and dismissalmeasures.iii. Information on environmentalmanagement, including consumption,energy efficiency programs, etc.

1.2 Companies and organizations (all).

- Equal opportunities: One of theinitiatives adopted by the French Ministryof Equality was to introduce a seal ofequal opportunities. This seal, currentlyawarded to nineteen certified companies,was created through the Ministry'scoordination with social agents and dealswith the following issues:i. Measures adopted by the organizationto promote equal opportunities.ii. HR policies guaranteeing fair access,promotion and training, and workingconditions.iii. Practices and requirements forbalancing work with domestic andpersonal life.

2. SRI

2.1 Public capital and funds:

- Active management of governmentfunds in SRI. Pension Reserve Fund:Since 2001, the French Social SecurityReserve Fund (FRR) has been required tostate in its investment policy theimportance of ethical, social andenvironmental aspects in its investmentdecisions. This fund is a signatory ofthe PRI (Principles of ResponsibleInvestment), a UN initiative.

2.2 Private capital. Fund managers

- CSR in investment policies: Since 2001,pension plan managers in France havebeen required to state in their investmentpolicies the importance of ethical, socialand environmental aspects in theirinvestment decisions and to include thisinformation in their annual report.

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Germany

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1. CSR management

1.1 Large limited liability companies.

- Reporting: The German governmentestablishes the compulsory requirementof reporting non-financial indicators inthe annual reports of large companies.The BilReG (2004) leaves a widediscretional margin for companies asthese indicators are only mandatorywhere relevant to the business. Moreover,it does not detail the type of CSRinformation expected from companies.

1.2 General government

- Equal opportunities: Well within itsconstitutional mandate on equal rightsfor men and women, Germany hasreinforced its equality programs ingeneral government. In 2001, itintroduced a federal law on sexualequality in the German government andjudicial system.

2. SRI

2.1 Fund managers:

- CSR in investment policies:Since 2001, pension plan managers inGermany have been required to state intheir investment policies the importanceof ethical, social and environmentalaspects in their investment decisions.

3. Responsible regions:

In 2002, the German governmentlaunched its sustainable developmentstrategy. The purpose of this documentis to steer the action of the governmentand private agents towards compliancewith certain aims:

- Energy efficiency.- Sustainable transport and mobility.

- Public health, healthy nutrition andsensible consumption.- Adaptation to demographic change.- Renewal of institutions: basic educationand universities.- Business innovation.- Rationalizing of land occupation anduse.

Belgium

The Belgian model attempts to reflectthe territorial complexity ofadministrating three regions. TheCoordinating Sustainable DevelopmentPolicy Act was passed in 1997. Toimplement the latter, plans are developedevery four years and reports publishedevery two. In 2006, Belgium developedits Social Responsibility Plan. This planestablishes a framework of softlegislation, prioritizing recommendationover obligation.

The most significant areas include:- Promoting CSR integration in business,particularly SMEs.- Promoting socially responsibleinvestments.- Increasing transparency.- Providing financial backing to socialeconomy companies.

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Conclusions

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The current scenario appears to beinviting a tightening of regulations ontransparency, risk control systems andthe social and environmental impact ofbusiness operations. This wouldundoubtedly intensify the developmentof social responsibility policies inbusiness. We will now take a look at theguidelines for action in this area overthe coming years:

1. Sustainability reports. MandatoryCSR reporting?As we have observed in most of thecountries covered here, it would appearthat it is only a matter of time beforelisted companies in Spain are requiredto publish sustainability reports.

This will not have a dramatic effect onthe current panorama, however, asvirtually all IBEX 35 companies haveanticipated this and now draw up annualsustainability reports. A soft legislationapproach would close the gap betweenSpanish legislation and the Europeanframework. Nonetheless, investors maypush for stricter regulations in Europeas a whole.

Recently, EUROSIF (European SustainableInvestment Forum) made an appeal toEuropean institutions to increase thetransparency requirements of all listedcompanies.

2. Impetus of SRI. Nothing isimpossible.Although the climate of the stock exchangeis not optimistic, socially responsibleinvesting should gain momentum in theyears to come. In 2008, we saw how Spain'sleading private financial institutions investedvast sums of money in the application ofCSR filters. The debate on the 10% injectionfrom the SRI equity social security reservefund3 could, in our opinion, be reopenedwhen confidence returns to the markets.The risk, however, is that this measurecould come too late and we could miss out

on the strong potential for long-term marketrecovery.

3. CSR in government procurement.Heading down the learning curve.The commitment to applying ethical,social and environmental aspects togovernment procurement is set down inthe Public Sector Contracts Act, in forcesince 2007.

The Dutch government recently statedits commitment to including social andenvironmental aspects in 100% of itspurchases by 2015. This type ofcommitment can stimulate furtherdevelopment and mandatory compliancewith European regulations.

4. European context. Less businessfriendly.One of the conclusions of the last meetingof the European Multistakeholder Forumwas the prediction of a less favorableEuropean business context.

The elections for the European Parliamentand the new European Commission maymark a turning point in Communitybusiness policies. For the time being,one of the initiatives announced recentlyby the DG-Enterprise involves greatermonitoring of the environmental andhuman rights activity of Europeancompanies outside Europe. This type ofaction, in a context of increased economicprotectionism, could be a tentative steptowards the creation of trade barriersbased on social responsibility.

3 Bill Regulating the Social Security Reserve Fund.

Slowly but surely

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As this article has shown, the politicaland economic climate of the coming yearsappears to be shrouded in uncertainty.Hence, policy-makers will have to makebold decisions but must remain cautiousin establishing the intensity of themechanisms for regulating and promotingresponsible policies. It will therefore beimportant to keep two empiricalstatements in mind.

The first is from the lessons learned afterthe corporate scandals at the start of themillennium, where we saw that tightercontrol does not necessarily reduce fraudif the mechanisms used are unsuitableor they are not assigned sufficient

resources. The second concerns worldeconomic trend. To overcome this crisis,companies must have greater freedomof movement and compatible frameworksof action both in Spain and other partsof the world.

In short, markets and society in generalwill require greater transparency andtighter controls over business activity.New CSR promotion policies will appear,but they will be more effective if they aregradual. Obtaining market feedback andcontinuing to search for formulas forsocial consensus will allow us to combinecredibility with effectiveness.

Excerpt from the description ofthe grounds for Act 30/2007

Incorporating in its own terms and without reservation the guidelines of Directive2004/18/EC, the Public Sector Contracts Act includes substantial innovations inthe preparation and awarding of business subject to the latter.

To summarize, the chief innovations affecting the establishment of mechanismsfor the introduction of social and environmental considerations in public contracting,framing them as special conditions for contract performance or as criteria fortender assessments, foreshadowing a structure that will allow the adoption ofguidelines for adapting contracts to new ethical and social requirements.

Following the collapse of Enron and a spate of major financial scandals (TYCO, Worldcom,Adelphia, among others), the US government enacted the Sarbanes-Oxley Act in 2002. Aspunishment to an ambitious business management class and with the aim of preventingsimilar cases in the future, this Act introduced mechanisms to encourage tighter controlsand a reduction in the risk of shareholder fraud.

From an operating point of view, the excessive bureaucracy led to enormous transactioncosts for listed US companies. As a result, several multinationals left the New York stockexchange to be listed on those of other international cities. The Act has not been successfulfrom the point of view of effectiveness either.

In November 2006, over 130 companies were involved in a new scandal of gargantuanproportions – though with less of a media echo – in the Options Backdating Scandal. Thistime, more than fifty top executives snuck out through the back door to the indignationof millions of shareholders.

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ENRON CASEThe backlash of a shipwreck

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CREATED WITH THE SUPPORT OF:

Plaza Canalejas, 6 – 4º izquierda I 28014 MadridTel. +34 91 245 90 13 I FAX. +34 91 245 90 26

foretica@foretica.es I www.foretica.es

Project Director:

Jaime Silos

Editors:

Acknowledgements:

Design: 21 Gramos, Marketing de peso.

English translation: CELER Soluciones

Andrew Dakers. BITCMaría José Subiela. BITCThomas Sercovich. BITC IrelandInge Aarhus. Green Business Network NorwayRuggero Bodo. SodalitasDelphine Poligne. ORSE

Véronique Graham. Business & Society BelgiumIda Petrik. KövetCarolin Bossmeyer. EconsenseBernedine Bos. MVO NederlandMarion de Marcillac. Eurosif

Germán GrandaAna HerreroLaura Maure

Natalia MonteroJaime SilosRicardo Trujillo