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Corporate Social Responsibility is a significant reality that businesses have to contend with in today's climate.

Undoubtedly so, consumers have prompted conglomerates to revisit how they conduct their day-to-day activities and made them accountable to higher ethical and moral standards in the production of goods and services.

With this societal trend gaining momentum, Chief Financial Officers are constantly finding financially expedient ways of incorporating green and sustainable policies into their existing company processes.

The question then becomes, what specific costs should they be paying attention to with regards to CSR? The following suggestions help shed some light.

According to this report “The Benefits and Costs of Corporate Social Responsibility”, by Geoffrey B. Sprinkle and Lauren A. Maines of the Kelley School of Business, Indiana University, three costs associated with CSR activities were identified: opportunity costs, sunk costs and recurrent costs.

Opportunity Costs                                                                                               Opportunity costs include any activity that could not have been undertaken due to capital and labour being bound to the CSR activity, which might result in lost revenues.

Sunk Costs                                                                                                                   Sunk costs include all initial investments in new equipment (e.g., environmental health and safety system, waste-water systems, upgrades such as machine guards), buildings and infrastructure.

Recurrent Costs                                                                                                   Examples of recurrent costs are labour costs for increased wages and overtime payments, an increase in management time (i.e. for CSR steering meetings, etc.), all forms of social insurance, trainings, benefits for workers (i.e. free meals, dormitories, medical expenses), monitoring and reporting, and equipment update and maintenance.

So why should a CFO care about these costs?

For starters, opportunity costs give Chief Financial Officers a clear understanding of what the company stands to gain and lose by going with a particular CSR initiative.

Additionally, he/she can make a case for supporting one sustainability program over the other, and most importantly, it instigates complete (or at the very least, a majority of)  stockholder alignment - which isn't always the easiest thing.

Asides from the obvious benefits of comparison (i.e. the process of elimination), sunk and recurrent costs enable the CFO to zoom out their financial lens on each sustainable endeavour - in other words, it gives them economic specificity.

With such granular information, the company can adequately determine if they can take on the CSR imperative, and if not, think of other ways to form strategic partnerships to bring such undertaking to life.

As a CFO, I hope that this quick overview gives you a clear picture of how to adequately assess the financial viability of a CSR effort before making a commitment.

Written by Paul Podbury @ Locomote 

 

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