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Monday, May 17, 2010

Torrance Top Five CSR Legal Trends

In no particular order, here are my predictions for the top five CSR trends from a legal perspective:

1.  Metaregulation:  Metaregulation is a process of "regulating the regulators".  CSR is, in essence, a process of self-regulation.  Metaregulation in the context of CSR therefore entails the oversight, administration, or review of CSR self-regulation and governance processes amongst business, by States. 

Whereas before CSR may have been purely "voluntary", in a circumstance of metaregulation it will not be.  Companies would be expected to be "responsible" in various areas, i.e. human rights, health and safety, labour and employment practices, environment etc.  The "how" of "responsibility" would not be specified however, and instead companies and industries would be expected to develop, implement, and monitor their own standards and practices.  The metaregulator would oversee the process by providing incentives for good practices, or coercive sanctions for "failures". 

Such systems are already and increasingly used in health and safety (for example the "due diligence" concept) and human rights.  Since the businesses themselves are the "experts" when it comes to their own operations, it can be more economical and practically effective for the company to determine exactly what it takes to reach the overarching objective of the state, and other stakeholders. 

In a metaregulatory environment, the role of the State authority is not to prescibe rules, but to enforce outcomes.  Metaregulation epitomizes the definition of CSR as "self-regulation in the shadow of the law". 

I think we'll begin to see the State's role as regulator shift from purely prescriptive to more of a metaregulator.  It will also be a way to make the "soft" obligations of CSR more "hard", and therefore build upon systems for managing risk and social responsibility that already exist at the firm and industry level.

2.  Adjudication Mechanisms:  There is a growing demand for "accountability" and also an increasing interest amongst businesses to have fora to defend their reputations in relation to CSR.  Traditional adjudicative mechanisms like courts do not often have the jurisdiction to apply non-state rules that compose CSR. 

This gap in dispute resolution in some cases has in some cases been filled by internal or external dispute resolution mechanisms, such as grievance mechanisms within companies, or the Compliance Advisor Ombudsman of the International Finance Corporation.  In Canada, Bill C-300 proposed the creation of a state based adjudication mechanism for CSR practices of Canadian mining companies.  While the legislation may not pass, it has generated a lot of discussion and put the topic of CSR accountability front and centre in the Canadian mining sector. 

I believe that adjudication mechanisms will be viewed as increasingly important, to allow for consistency in how CSR practices are assessed and understood, and to provide determinative evaluations of CSR practices.  Leaving it to the market to determine whether the business practices of companies are "CSR compliant" is risky for both stakeholders and the companies themselves.  Consistency will be needed if CSR assessments, auditing or compliance reviews (even those conducted by investors) are to have any credibility and be something other than completely arbitrary.  Once this is realized, we can expect adjudication mechanisms to be developed to formalize and facilitate the review of CSR practices, and evaluation of complaints by stakeholders against companies.  I leave open the question of what such mechanisms will look like.  I suspect they may be unlike anything we've seen to date, and not necessarily linked to the State.

3.  Consolidation of CSR Standards:  There is a growing proliferation of CSR standards created by industries, investors and standard setters out there. They resemble one another and are often redundant.  They are also often rather vague and not highly useful for a detailed understanding of what is required to do business in a socially responsible manner. 

As such, I believe there will be a need to consolidate CSR standards.  This will be necessary if they are to be of any real use as a guide for businesses, and if definitive assessments will be possible (i.e. adjudication).  In the same way that New York no longer has several fire departments, so too will there likely not be several competing standard for CSR best practices. Such a convergence will, in a sense, give rise to an "authoritative" set of rules for CSR compliance. 

That being said, convergence of standardization is well known to be problematic.  It confers large amounts of power on "experts".  The process of establishing an "authoritative" set of rules often marginalizes important stakeholder voices that do not have the time or resources to contribute to standard setting.  It can also create risks that the standards themselves become out of date or illegitimate, thereby defeating their purpose. 

I believe that these risks must be mitigated, and in so doing will result in CSR standards being very procedurally oriented and infused with stakeholder consultation requirements.  As such, their contents will not (and should not) be viewed as ever "settled".  Instead they should be seen as highly context specific, and centred around topics, that can be used in processes of jusitification.  There will also likely be some convergence of standards as certain frameworks begin to take hold over others and experts in certain standards become more influential, thereby increasing the "authority" of such standards.  Stay tuned to see which set of standards wins the day (my money is on the IFC standards so far, but we'll see).

4.  Enhanced Reporting Requirements:  Securities regulators are increasingly interested in full disclosure of social and environmental risks.  Investors and other stakeholders are driving the demand for such information.  There will be an increasing pressure on companies to disclose their practices, policies and procedures, as well as risks, in these areas in financial or non-financial reporting. 

The method of compliance enforcement remains to be seen however.  Again, standards and guidelines are needed.  The Global Reporting Initiative seems far and away the leader in that respect.  Compliance enforcement will also likely be required to "harden" the sense among business and their advisors that such reporting standards are required and not simply optional.

5.  Social and Environmental Investment Standards:  With increased scrutiny of business and financial sectors by governments and the public, increased importance may be placed on ensuring investments (debt and equity) mitigate social and environmental risks to the extent possible.  This will mean CSR compliance reviews for potential investments, and ongoing monitoring in these areas for existing investments. 

To allow for this to occur, there may be a convergence of CSR, compliance (legal/regulatory etc.) and risk management within companies that rely on such investment, meaning increasing overlap between CSR management and other functional areas, including legal, within the corporate environment. 

Watch for these expectations to arise and take hold most firmly in instutional investors (i.e. banks participating in the Equator Principles, pension funds) and State based investors (i.e. sovereign wealth funds).  Also watch for such investors becoming the most important players in the investment world, since the increasing importance of such investors will make compliance with their CSR expectations more significant for companies seeking investment.  Such a new playing field would create financial incentives and cement the competitive advantage that flows from sound CSR practices.

Ultimately these trends feed into one another.  If CSR expectations amongst institutional investors grow, then there may be increasing calls and need for definitive standards, and also adjudicative mechanisms to make proper determinations, as well as more demand for transparency amongst companies.  The role of the State may evolve to be more of a "referee" than an authoritative commander of obedience.  In all, these trends could well change the nature of business regulation for the 21st Century.

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