British American Tobacco 2008 Sustainability Report

6 Using Assurance Programs to Build Credibility

The BAT Sustainability Report 2008 has been accredited with two awards and accepted into a business community for its sustainability activities. The report has been acknowledged by Dow Jones Sustainability Indexes (DJSI), by Sustainable Asset Management’s Sustainability Yearbook 2009 (SAM) and in the UK Business in the Community’s 2007 Corporate Responsibility Index. These awards are particularly special to BAT as the DJSI presents BAT as the only tobacco company in its index. Moreover, the SAM identifies BAT as both a sector leader and sector mover. Whereas, the Business in the Community places BAT’s report in the gold sector (App. 2, p.5).

The idea of certifying a sustainability report stems from the assurance of financial accounting reports which are ratified by third parties, usually large accounting firms. Blanco and Souto state, “The active scheme for financial accounting and its corresponding financial audit can be repeated for CSR contexts.” (Blanco & Souto, 2009, p.156). However, the assurance and auditing of CSR and sustainability are incomplete under the above-mentioned notion that there is a lack of a definition for CSR and sustainability. Such a definition is necessary in order to be able to define a standard in which to work from, otherwise as Blanco & Souto note, “The current situation, without a generally accepted standard, has negative consequences… for the trustworthiness of the information.” (Blanco & Souto, 2009, p.161). Thus, we must view these assurance programs and audits as mere proposals and not given standards. Still, there is some evidence as to why BAT should use these assurance programs. In a larger research conducted on firms that belong to the DJSI and firms that do not, it was found that sustainability practices favour stakeholders’ legitimation offering a positive image and improves its reputation. This may create a differentiating effect between firms that follow sustainability practices and those that do not. (Lopez et al., 2007). Moreover, what they found was that “These practices sustainability practices help to develop opportunities and manage economic, environmental and social risks. Many investors consider this a crucial value for success.” (Lopez et al., 2007, p.289). These, findings support the idea of assurance.

When BAT is accredited by the DJSI, it is a marking of the company and its activities that point in the right direction. Thus, the incentive for BAT to announce these acknowledgements and assurance programs is legitimised by the effect it has towards some of the stakeholders of the company. Particularly, shareholders are interested in such accreditations, as it assures them that their money invested in BAT are brought to good use which is supported by Lopez et al. who found that, “…stakeholders believe accredited practices in CSR lead to good economic-financial performance for a specific firm.” (Lopez et al., 2007, p.286).

However, there is good reason to question the use of these assurance programs. The extent, to which these programs are used, relies on the receiver, in this case how BAT, wants to be assessed. Blanco and Souto found, “The most selected option is limited level of assurance…” (Blanco & Souto, 2009, p.166) which is also the one BAT uses, “Provide a ‘limited level’ assurance opinion on the Report’s content with respect to the AA1000AS (2008) assurance principles of inclusivity, Materiality and Responsiveness” (App. 2, p.48) and “Provide a ‘limited level’ assurance opinion on the completeness and accuracy of the performance claims and data presented in the Report” (Ibid.). If a company chooses a limited level of assurance, how can stakeholders view this as a credible and transparent assurance level? The obvious answer to this question is that the global business community acknowledges the AccountAbility Standards (AA1000AS) as an assurance standard. Interestingly enough, BAT is a Global Launch Sponsor of AA1000AS, (see App. 3). Thus, it is reasonable to q

Appendix 3 : http://www.accountability.org/default.aspx?id=2974
uestion the validity and objectivity of such a review, especially when the corporation being reviewed sponsors the assurance standards. More importantly, it substantiates the lack of ethics within CSR. However, the AA1000AS is used as an assurance standard for multiple sustainability reports in many different corporations.
Therefore, it is still recognised as an assurance standard, but it is reasonable to question the ethics and validity of these standards in the example of BAT. However, the idea of standards without a clear definition poses ethical questions of legitimacy and lack of transparency. Thus, a solution to the assurance program lies in a clear definition. But, recognising that it takes time to define the concepts and agree on standards can be learnt from the financial auditing world. Blanco & Souto conclude, “For decades, financial accounting and financial auditing have carried out a long development process to achieve a generally accepted conceptual framework. Promoters of CSR should learn from this process.” (Blanco & Souto, 2009, p.167). Thus, recognising the current embryonic stage, in which CSR and sustainability reporting and assurance programs finds itself, helps explain its lack of clarification.
7 A Discussion on the Effects CSR and Sustainability Reports have on Business Performance¹

Previous evidence shows that corporations that show social and ethic responsibility can actually benefit from it. According to Tench and Yeomans, “…companies with a reputation for ethics and social responsibility grew at a rate of 11.3% annually from 1959-1990 while the growth rate of similar companies without the same ethical approach was 6.2%).” (Labich 1992 in Tench & Yeomans, 2006, p .101). Moreover, the companies recognise their competitive value and CEOs among others claim that engaging in CSR is a necessity for corporations if they wish to stay profitable. Moreover, they claim that their engagement in CSR will remain high even though the economic conditions are going to change (Tench & Yeomans, 2006). BAT commits to this in their sustainability report as the CEO claims, “Our sustainability agenda is integrated into our business strategy and we believe our business strategy works in good times and in bad, so it won’t change if the going gets tough...” (App. 2, p.3). Thus, we see that BAT as a company is quite frank about their understanding of the importance of CSR and particularly sustainability.

However, recent studies on this issue have shed new light on the general perception of CSR as profitable engagement. And particularly for the tobacco industry there are some suggestions towards a divestment for both financial and, perhaps what is even more important, for ethical reasons (Yach et al., 2001). With respect to the critique of CSR and, whether or not it is good business practice, and thus influences the business performance of companies, it is important to mention Friedman’s critique. Friedman argues that the business of business is simply to make profits and satisfy the shareholders’ expectations. Hence, it is his argument that it is not the responsibility of the business community to engage with society; rather it is a political and societal matter, which they must resolve (Tench & Yeomans 2006). The critique stands, however, it is nonetheless a fact that any corporation with respect for it self publishes a CSR or sustainability report. Thus, we must accept that businesses are trying to influence the society in which they operate. For BAT this means a global influence, and hence there is good reason to question whether or not their CSR and sustainability practices have an impact on their business performance.
López et. al. performed an empirical study on two groups of fifty five firms, in which one group consisted of firms belonging to the DJSI, noting that BAT belongs to this index, and the other group of firms belonged to Dow Jones Global Index(DJGI). The study was conducted in the period of 1998-2004 and the researches found that a difference in performance exists. This distinction is related to the CSR practices, which the DJSI group executed. They conclude, “…that a short-term negative impact on performance is produced.”(Lopez et. al., 2007, p.285; Lopez et al., 2007)
It is important to point out that López et al. were looking for, “… significant differences in performance...” (Lopez et al., 2007, p.285). Thus, they question the existing perception that engagement in CSR and ethical practices lead to a direct improvement of performance. Moreover, Yach et al. have made studies for the specific case of the tobacco industry, and whether their adoption of ethical practices towards becoming accepted as good corporate citizens is likely to influence the economic performance of the tobacco companies, or if it is likely to have the opposite effect. They discuss social responsible investing (SRI) in relation to the tobacco industry. The trend for the tobacco industry is unquestionably moving in the wrong direction, as they have found that the tobacco industry is suffering from a divestment. The divestment in the tobacco industry is taking place in its established markets, meaning the western world and countries who are considered as developed and enlightened on the health issues that follow from smoking tobacco (Yach et al., 2001).
The divestment is also a reaction to this and Yach et al. pin point this as they found “Many managers removed their money from tobacco stocks, mainly because of the increasing financial risks and because they no longer considered tobacco a reliable investment.” (Yach et al., 2001, p.192) and “The social, financial and legal pressure on the tobacco industry is increasing through heightened public awareness, released internal documents showing questionable ethical behaviour… and prospects of new globalized litigation. These events are all leading to increased concern.” (Ibid, p.193). This may also explain the tobacco industry’s increased focus on developing countries, as they are still not aware, to the same degree as develop countries, of the health risks connected to smoking. The focus on the developing countries is seen through the sustainability operations of BAT, who to a larger degree focuses their attention and CSR investments towards the developing world. Through the BAT Sustainability Report 2008, we see examples of initiatives in countries such as; Malawi and Nigeria in Africa and WHO mentions in their reports (App. 1) and (App. 4) that BAT has operations in Brazil and Bangladesh, Zimbabwe, Papua New Guinea and Malaysia. This enhanced focus on developing countries indicates that BAT is aware of the need for more marketing activities in these countries in order to increase BAT’s profits in the future. In addition to this, developing countries’ governments are more susceptible to lobbying by the tobacco industry. Moreover, an important note to keep in mind is that the majority of the tobacco production takes place in the developing world.
However, as mentioned above, it was found that the costs of engaging in CSR in the short-term had a negative effect on the business performance. This may be explained by the start up costs and a reallocation of resources that such an investment requires. The change, which BAT as a company must go through in order to meet their proposed business standards and achieve their sustainability goals, calls for a change within the organisation, and thus leads to a direct cost for the company. Hence, the goal and profit of engaging in sustainability must then be of a long-term nature. The recognition of CSR as providing a competitive advantage is recognised by the companies, and thus makes it logical to incorporate the concept into the business strategy which is also what BAT has done. Moreover, “… sustainability practices favour stakeholders’ legitimation offering a positive image and improves its reputation. This may create a differentiating effect between firms that follow sustainability and those that do not.” as noted by Lopez et al. (Lopez et al., 2007, p.293). But there is a conflict of interest. When companies experience increased costs, in this case the costs of implementing a sustainability strategy or program, the natural reaction is to try and turn this negativity around. Thus, it is fair to assume that what is in fact happening as a result, is that there is an optimisation in procedures, in management and the use of resources which leads to lower costs. Moreover, we know that competitors easily imitate CSR strategies and there is nothing to suggest that Philip Morris; a large competitor to BAT, should not initiate a CSR and sustainability strategy as well. In fact Philip Morris has already done so which supports this argument. Thus, in the long run there is nothing that indicates that a CSR strategy will improve business performance as compared to its competitors who may just as well incorporate a CSR strategy. CSR reports are not secret confidential reports as they are available to all stakeholders, including competitors, which supports the notion that they are easily imitated.
With such notions, the idea that CSR should result in a positive business performance in the long-term for a company, such as BAT, may be hard to conclude because there are multiple aspects that influence business performance. Thus, it becomes hard to distinguish between the effects of CSR initiatives and basic strategic changes and optimisation of resources within the company. Conclusively, this may help explain why it has become the general perception within companies and the business environment that including a sustainability strategy will improve business performance. It may well be, that the CSR initiative kick-starts the process but in fact it is not the actual development and incorporation of sustainable practices that enhance business performance. It is rather the optimisation that stems from the negative costs which the start-up phase of sustainability practices incurs. Moreover, it also helps explain why it is so hard to measure the direct financial gains that follow from engaging in sustainability. Lopez et al. found, “Since there are no significant differences in the variation of revenues, we conclude that differences in performance are due to changes in cost.” (Lopez et al., 2007, p.295).