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19

November 2009

SUSTAINING CSR IN DIFFICULT TIMES: JAIME AUGUSTO ZOBEL DE AYALA’S SPEECH AT THE ASIAN FORUM ON CORPORATE SOCIAL RESPONSIBILITY

Below is the speech of Ayala Corporation chairman and CEO Jaime Augusto Zobel de Ayala at the Asian Forum on Corporate Social Responsibility on the conference theme, “Sustaining CSR in Difficult Times: How Business Can Benefit and Why It Still Makes Sense.”

I am delighted to be here and honored by the invitation of Mon del Rosario to speak before you today. I congratulate him and AIM for this continuing initiative (the 8th this year) to bring together CSR practitioners, business executives, non-government organizations from the Philippines and across the region, to share best practices and ideas on corporate social responsibility.

WHY CSR

With every passing year, CSR continues to grow in relevance to private sector enterprises. I am sure you have all seen a dramatic change since the first conference was organized. There is a continuing realization that businesses need to take a more active role in addressing many of the social development challenges we face today and this has been accentuated by two key trends.

First, businesses today are increasingly seen as having an implicit social contract with a society that expects them to be more mindful of their impact within the broader contextual framework of their social and environmental setting.

And second, businesses increasingly realize the need to have a social development agenda to ensure their own viability. Ultimately, no business will ever thrive in a society where poverty continues to grow and where the social and economic environment remains unstable.

On the positive side, CSR programs continue to grow among private sector enterprises. Social giving and business philanthropy have seen significant growth in recent years.

Yet, despite this increase, extreme poverty and social inequity persist in many parts of the world, and we are certainly not immune from it here in the Philippines. The sheer enormity, gravity and magnitude of the challenges seem to blunt the impact of this growing engagement by private sector enterprises in helping address social issues.

One just has to look at the statistics. Just a few weeks ago, the UN World Food Program reported that over the past two years alone, 200 million people were counted to have joined the ranks of the hungry.

In the Philippines, the latest numbers of the SWS Survey, for the second quarter of 2009, reveal that 20.3% of Filipino families are suffering from involuntary hunger and 50% are rating themselves as poor. While these are self-rating mechanisms, they are increasingly being accepted worldwide as a valid measurement of well-being.

Income disparities have also widened tremendously. The poorest 40% of the world’s population accounts for only 5% of global income today, while the richest 20% accounts for three-quarters of it.

The poverty problem is only further aggravated by the effects of climate change and the increasing degradation of our natural resources which are, in turn, threatening major ecosystems on which our food sources depend. Ondoy, here in Manila, was just the latest gripping reminded of the devastating impact of climate change.

Finally, it is also ironic that all these social, economic, and environmental strains are also happening amidst the unprecedented global economic growth of the past few decades.

When reflecting on my remarks for today, I came to realize that this paradox suggests that we should re-examine our current economic paradigms and question our models of engagement. The world has, since, the post-world war era, pursued an economic framework that has not always led to the desired outcome of raising the standards of living of all citizens equally and effectively.

There are no finite right or wrong answers, but to my mind, there are three fundamental questions we must ask of the future economic frameworks of our countries.

First, at the very core, is whether our current measurements of economic success are appropriate. I feel there is some validity to the thinking of Prof. Joseph Stiglitz, the recipient of the Nobel Prize in economics, and former Chief Economist at the World Bank, when he states that there has been too much focus on the material aspects of growth. He has been quite vocal about this lately.

The world has traditionally measured itself, and defined growth based on product and output related metrics like GDP. It equates growth mainly with an increase in the quantity of goods and services produced. However, it says practically nothing about the way in which these are produced.

Nor is there sufficient attention to how the resources used affect all other aspects of our quality of life and the state of the environment we rely on for our well being. Given the realities we face today, which include poverty, social inequity, and global warming, a GDP scorecard may not be entirely sufficient.

I am inclined to agree with Prof. Stiglitz when he suggests that what we measure affects what we do. The metrics lay the foundation for executive focus. In the quest to increase GDP, we may end up with a society in which negative externalities end up outweighing the positive ones, even as we grow in general terms.

Initiatives, however, are taking place to improve measurements and indicators of economic progress and human development. These new metrics encompass social capital, happiness, health, and mental well-being as part of the analysis. The United Nations Development Program (UNDP) has, for example, been pushing for a better measure of human development through the human development index (HDI). This index combines factors like life expectancy, literacy, educational attainment, GDP per capita, health care, education, income, and employment.

In the Philippines, Winnie Monsod and Arsi Balisacan at the University of the Philippines are trying to mainstream the sustainable human development concept under the Human Development Network Foundation by monitoring achievements, breakthroughs, deficiencies and gaps regarding human development in the work of both governments and non-government organizations.

For similar reasons, I would suggest that businesses must begin to expand their metrics and definitions of success to take into account the broader impact they have on their communities. The move towards “sustainability” reporting is a step in this direction and gives a more holistic scorecard of the effects of any institution on its community. We have taken this issue of “sustainability” reporting seriously in our group and have just issued our first set of reports for each of our publicly listed companies. I will discuss this in more detail later.

The second question has to do with our approach towards poverty alleviation. While many countries have managed to climb out of poverty, many others, including the Philippines, have found it challenging to develop a virtuous cycle of economic improvements for each citizen.

One could argue that traditional approaches to poverty alleviation rely heavily on multilateral aid and on “under resourced” governments to provide the needed services and infrastructure to cover income inequalities.

The success of this framework has been increasingly debated by economists like Jeffrey Sachs of Harvard University who claim that the value of multilateral aid, after costs, is marginal. His points of view are often controversial and I do not fully subscribe to all his points.

However, it does seem apparent that this system relies on under-resourced governments and their bureaucracies to translate the aid into a holistic set of interventions delivered to thousands of low income communities. But more often than not, the developmental aid that does make it to communities is less effective due to incomplete or poorly executed programs. Delivery of the critical infrastructure needed at the community level, such as food, water, energy, healthcare, education, and access infrastructure then falls short.

The consequence of this is the fact that the lack of basic infrastructure then discourages the private sector from providing goods and services to these marginalized communities in favor or more developed segments of the market. Private investment capital, which is far more abundant and self-sustaining than aid or donations, is then unable to trickle down and reach the segment of the market with the greatest need for modern goods and services.

The third and last issue, when reflecting on our current economic framework and its emphasis on GDP growth, is that it fails to assign any cost to goods and services that produce negative externalities.

As our economies continue to grow, and as wealth is created, there is an increasing tension between the demand for resources and their availability. This tension is most visible in countries with an aggressive growth agenda or with strong consumer demand. Technology is used to counter cost-related issues and encourage productivity, but sustainable solutions are not always the end result. Environmental degradation is one obvious manifestation of this tension to gain access to natural resources while just minimizing economic cost. The denudation of forests, the poisoning of land, and the problems of overfishing are just some of the end results.

These three challenges, taken together, are helping create an unsustainable and increasingly self-destructive path that threatens the health and life of our communities.

The way I see it, businesses cannot operate, thrive, and succeed if the society within which it operates is not progressing. It also cannot expand and grow productively if the resources it needs, and the environment it works in, continue to deteriorate. The long term goals must be made to outweigh the short term ones.

We must improve on our current CSR responses and help create a new level of engagement that helps address these negative externalities.

This is where I believe that private enterprise has an important role to play in this new framework for action. Businesses have the tools, the discipline, the creative adeptness, the appropriate resources and investment capital to be a productive force in helping address these environmental and social problems. We must understand that by 2050, the world population is projected to approach 9.5 billion, approximately 40% more people than today. Our own Philippine population is expected to reach 145 million by 2050. Our capacity to sustain this growth and provide an increase in the quality of life of each citizen in a fair, progressive and equitable way is increasingly being challenged.

There are three positive trends worth mentioning that should help create a sustainable cycle of growth and which we should increasingly align ourselves to.

First, businesses are increasingly realizing that market-oriented solutions are effective in providing solutions to lower income and marginalized groups.

Enterprises are now looking at the base of the economic pyramid as a legitimate market that needs to be served and which can be engaged profitably. It is spurring innovation in products and services, through creative business models, that penetrate lower income segments of the market in financially viable ways. Although much has been achieved, there is room for greater awareness of the potential opportunities for the many disenfranchised consumers at the bottom of the economic pyramid.

There is a growing list of companies that have been successful at significantly increasing their social and environmental impact, while simultaneously growing profitability. They demonstrate that it is possible to integrate CSR objectives into their strategic business models as a self-sustaining way of empowering lower income groups to lift themselves out of the economic challenges of their community setting.

For instance, in South Africa, companies like Vodaphone are making telecommunications services available in imaginative ways for many people who cannot afford a mobile phone or where a phone line is inaccessible. Vodafone has a joint venture that provides community phone shops to provide telecommunications to the poor, rural, and under-serviced areas particularly where there are few or no fixed line phones.

The company provides training and support for local people to run phone shops as franchise businesses and calls are connected to the Vodafone network. This allows them to expand their reach while providing livelihood opportunities to poor communities.

Another example is ITC Ltd., one of India’s largest exporters of agricultural products. It developed what they call the “e-Choupal” initiative, which is enabling Indian farmers to significantly enhance their competitiveness through the power of the Internet. In essence, ITC created a network of “e-Choupals” (choupal means village square) in rural communities and, through these, farmers are able to check the market trading price of their produce and sell directly to ITC. This system has helped eliminate the inefficiencies in the supply chain caused by middle men at local rural markets.

Here in the Philippines our own Ayala group has developed some exciting new initiatives around increasing the accessibility and reach of microfinance.

Microcredit is a highly empowering tool for self-employment but many of the lower income segments of the market do not have access to credit from the legitimate banking sector. Using new technology platforms today, it is becoming economically viable to lend small amounts of money to customers who remain unbanked. In a new initiative, three of our companies, BPI, Globe, and Ayala, for example, are working together to extend microfinance facilities to poor communities and microfinance institutions using Globe’s cost effective over-the-air value transfer technology platform and BPI’s expertise in financial services. This, we believe, does not only help unbanked communities, but allows BPI and Globe to expand their market reach and create value for their businesses.

We are just continuing a trend that has been pioneered by highly respected non-profits like CARD here in the Philippines.

The second positive trend I see is the evolution of corporate philanthropy towards highly strategic and deeply collaborative approaches.

Never has corporate philanthropy been so integrated and cooperative than it is today.

The Bill and Melinda Gates Foundation, for example, is working with a wide range of partners, including the Rockefeller Foundation, to empower millions of small farmers in Africa to grow and build better, healthier lives. It has laid out a vision to provide everyone equal opportunity to uplift and improve their lives but it is using its influence to encourage collaboration. For example, it is investing in better seeds, training, market access, and working for policies that support small farmers in Africa. It is also providing education training and internet access to under resourced schools all over the United States. I have also been delighted to see their continuing support for agriculture and research through their support of IRRI in Los Banos, as one more example.

We have seen the same kind of multi-sector collaboration in the Philippines with our own experience with GILAS, where private corporations, local government units, and the Department of Education, have come together to help connect all the public high schools in the Philippines to the Internet. Ramon del Rosario’s own initiatives in helping promote a progressive agenda in education through Philippine Business for Education (PBEd) is another.

It is the same spirit of collaboration that is alive in the efforts of many public and private companies, local government units, non-government organizations, and citizen volunteers to work together to clean up the Pasig River, under the Kapit Bisig Para Sa Ilog Pasig. This massive and concerted movement harnesses the expertise and competencies of each individual and corporate volunteer to provide an encompassing, end-to-end solution to solve a huge problem like the Pasig River.

What these examples are telling us is that collaboration is key to bringing more permanent and long-lasting solutions. No one enterprise or sector can do it alone. Corporate philanthropy must apply the same strategic thinking and discipline of any business undertaking and work in partnership with a broad array of entities for it to achieve scale and impact.

The third trend I see is that businesses are increasingly open to the idea of managing with a “triple bottom line” approach.

This means companies are incorporating social, economic, and environmental goals to their performance as enterprises and are making sure that their business strategies and models adjust to this new reality.

Today, many institutions are incorporating a deliberate set of goals to reduce carbon emissions in their business operations, produce greener products, harness and tap the wealth of talent and expertise among small and medium enterprises, and develop more sustainable models of engagement with customers.

Businesses realize that there are tangible business benefits to be gained from this approach to responsible investing.

It can lead to real savings, higher profits, stronger brand and employee engagement, and broader community and local government support. Bottom line, I would like to argue that if successful, good execution along responsible lines can reduce overall business risk.

I would like to point out further that harnessing the resources of private initiatives to address social issues can be far more scalable and sustainable over the long term than charitable giving.

Looking at our own experience in the Ayala group, charitable contributions of our CSR initiatives were valued at P330 million in 2008. This is a small amount relative to the estimated p145 billion in distributions made as a group in terms of capital investments spread to suppliers, government (through taxes), employees, shareholder value redistribution, and capital investments.

When directed responsibly, with progressive goals aligned to sustainable practices, these investments can have a more lasting impact in creating progress for the many communities that are engaged with our group.

As a group of corporations, we have taken the first step to adopt the triple bottom line approach. We have laid out our goals in our group-wide sustainability reports which have been published and distributed recently. For the medium term, we find there are three key sustainable strategies that we can pursue as a group.

First is to reduce our environmental footprint. Second is to create high-impact self-funding CSR programs; and third is building businesses that have a focus on creating a significant social and environmental impact.

I do not intend to expand on this here but it is relevant to note that we are setting clear targets for ourselves. We are starting to take steps to calculate our carbon footprint and see how it can be reduced.

We are tracking our engagement as business entities with our environment and making a sincere effort to mitigate negative externalities. From the protection of watersheds to waste management in our commercial centers.

We are also putting a focus on our CSR activities as a group and are aiming to create relevance and impact across the themes of education, the environment, and entrepreneurship. This is being achieved through our Foundation, our company strategies, and our volunteerism.

Finally, we are increasingly looking to expand our engagement within groups and communities that are not always a part of our traditional service network. From overseas Filipinos to micro-entrepreneurs.

Finally through our real estate and banking initiatives, we are putting more weight on setting the bar higher for our environmental goals.

The current project of Ayala Land in Canlubang, Nuvali, is breaking new ground on this front and BPI is increasingly widening its portfolio of “green” financing; to name a few.

I am hopeful that these trends will only continue to grow and become more relevant to the execution of strategy among our business community. However, these efforts must be supported by the right public policy framework that equally recognizes the importance of sustainable development in our plans for the future. Policies that promote sustainable initiatives have long-term social and environmental benefits that would be hard for public services of the national government to match.

Ultimately, businesses cannot succeed in societies that fail. It is vital and urgent that we pursue a framework of growth that is responsible, inclusive, and sustainable. It is a goal that transcends local and global borders and a goal we must all work for to ensure the right quality of life for all our communities.