Companies often fail to see the links between their corporate policy gaps and social risks. Social risks are identified as potential threats to individuals and communities from social changes. A social risk can negatively affect both society and businesses. Firstly, it threatens the most vulnerable low-income groups who live on the margins of society. Secondly, it creates economic and political obstacles, which prevent growth of businesses.
It’s equally important to remember that irresponsible corporate policies also create social risk. A company that lacks policies for social risk management is not only jeopardising its own future but also causing social instability and insecurity.
Inequality is not good for the private sector too
Wealth across the world is concentrated in the hands of a few and the 2016 Global Wealth Report by Credit Suisse confirms this. The report states that the richest top 10 percent people own 89 percent of all global assets. Such drastic inequality causes corruption, crime and conflict.
The private sector fails to see that growing inequality can threaten its own existence. Developing nations like India are bearing the brunt of inequality the most. Despite this, a majority of Indian businesses have been conveniently turning a blind eye to socio-economic disparities without considering their long-term consequences. There is an urgent need for companies to understand that gaps in corporate policies and social risks are tied together.
The Indian Responsible Business Index (IRBI), which was launched in 2015 analysed the policies of top 100 companies listed on Bombay Stock Exchange (BSE) in the area of responsible business. Though many of these companies have established CSR units and instituted welfare policies, the research by IRBF revealed that these policies were inadequate in certain areas. The index highlights critical links between corporate policy gaps and social risks.
Land conflicts with communities stall growth
Land is a major asset for industries and societies. Large companies require land to set up their operations, factories and fuel their supply chain. For decades, companies have been clashing with local communities living around the land where they want to set up their plants. Locals who are relocated during land acquisition complain of unfair or no timely compensation, health issues caused the factory’s pollutants, and unemployment, among many problems.
Indian has many examples of land acquisition conflicts. A major multinational steel company had to withdraw its operations from Orissa after years of negotiations with locals failed completely. This proves that overrunning the rights of tribal communities can turn a company’s plans upside down and lead to major losses.
There is evidence that companies in India don’t have land acquisition policies to avoid risks. Analysis from IRBF 2015 shows that merely one company out of the top 100 listed companies in India incorporated a policy on Free, Prior and Informed Consent (FPIC). Mint estimated the value of stalled projects to be Rs.11.36 trillion in March 2016. The failure to acquire land proves how faulty corporate policy gaps and social risks created by them cannot be ignored.
Low or no transparency is supply chain
Lack of transparency in a supply chain attracts both financial and social risk. A company needs to have well-rounded internal policies on workers’ safety, manufacturing processes, enforcement of labour rights, banning child labour, provisions such as maternity leave, paid leave, and creation of an ethical work environment.
Today’s consumers are more informed and conscious than ever before. They don’t trust companies that have hazardous supply chains and they simply stop buying from them. After the Rana Plaza incident in Bangladesh, fashion retailers involved in the incident faced a public backlash and saw their sales dropping. So much so, that they had to relocate their operations to other countries which met international safety standards.
Despite the fact that India is a prominent player in the global supply chain, the findings of IRBI 2015 show that Indian firms are performing poorly in this area. The supply chain linkage between corporate policy gaps and social risks is often overlooked by profit-oriented industries. In a country where 92% of the workforce is informal and a vast gender gap exists in terms of employment and payment, the private sector needs to clean up its supply chain and make it risk-free.
Investors are choosing responsible businesses
Gone are the days when investors looked solely at highest profit grossing firms and ignored their practices. Nowadays the top investors want to minimise social risks by adopting Environmental, Social and Governance (ESG) norms. And they’re doing so in emerging markets like Asia.
Emerging economies like Brazil and South Africa are also beginning to take ESG norms seriously. Even pension funds are including ethical business principles and human rights in their investment criteria. This was clearly seen when a Norwegian pension fund sold its shares in a mining company because of its failure to protect environmental and human rights in its operations in India.
Investors are cautious about identifying corporate policy gaps and social risks that they may cause. Soon enough, finding investment will become a challenge for firms not conducting their business responsibly.
Businesses in India are slowly waking up to the reality of social risk but they need to act faster. There is an urgent need for companies to fight inequity and see the connection among corporate policy gaps and social risks. Responsible risk management calls for paying taxes fairly, embracing responsible business structures, making supply chains crystal clear and going beyond CSR.