Social Credit in the West: Non-State Rating Systems for CSR Compliance

(Pix © Larry Catá Backer 2017)

I have started thinking through the issues around social credit generally, and the Chinese Social Credit project. I will be working through the issues and practices that are presented by the emergence of Social Credit theory--both in China (as an indigenous and quite complex set of policies, advances on political theory, and operational challenges), and in the rest of the world. To understand the shaping of law today (and soft law as well) one must understand social credit. To understand social credit, one must understand the evolving structures of the relationships, in law and politics, of the relationships between states, its masses, and the institutions through which it operates.

Index of Posts. 

In China's Social Credit Initiative in a Global Context: Foundations--"Monitoring, Assessment and Reward: Are there Social Credit Systems in the West?" I suggested that Western hand wringing about China's efforts to institutionalize social credit systems within its public and private domains were to some extent surprising in light of the long utilization of rating and incentive systems by public and private institutions--from informal and formal rating systems of universities (e.g., here), to the credit rating of public and private institutions and individuals (here, here, and here).  

This post introduces and very briefly illustrates the ways in which Western versions of social credit--of providing ratings grounded in targeted data harvesting, proprietary algorithms, and coordinated incentives and punishments--has become an important regulatory element in the societal field.



Rating systems as a mechanism for disciplining behavior have become an important instrument of regulatory governance in the non state sector in the West. It has become especially useful in the context of managing the management of a framework for enterprise corporate social responsibility (CSR). In this context, non-state actors have begun to develop and implement private systems of rating the CSR performance of large enterprises.  The effect is meant to be the same as in other social credit systems--to induce the objects of rating to change their operation and their governance structures to ensure a higher rating.  In other systems that inducement to comportment  includes avoidance of criminal charges, or access to financial markets (see, here).

The specific context is the offer, by EcoVadis’ First Annual CSR Performance Index. It suggests as well that regulation continues to move from formal law making to the structures of incentives and markets for regulatory devices based on data, algorithms and reward. It also suggests that, in the contest for the elaboration of the CSR and human rights responsibilities of enterprises (in the West and along global production lines at least, the driving force for elaborating norms and structures will occur beyond the legal-regulatory duty systems of states appears to be driven by the informal mechanisms of societal responsibility rather than the more formal and rigid legal structures of state duty.

The CSR Performance Index is related to the CSR framework approach of ISO 26000 (see here). The CSR assessment applies an algorithm to a very specific set of data to produce comparable results which can be placed on a scale of the crafting of the evaluating institution.  In this case EcoVadis notes:

A CSR assessment is an evaluation of how well a company has integrated the principles of CSR into their business. An assessment program is a first step into an ongoing monitoring process. The objective of the assessment is to get a clear picture of your Corporate Social Responsibility practices (i.e. environment, social, ethics, supply chain). The assessment results will enable you to understand how your company is positioned, but you can also use the assessment results to communicate your CSR commitment to your stakeholders. (Here).

 (EcoVadis Global CSR Risk and Performance Index 2017, p. 9)

It is here that the  ISO 26000 framework is especially useful.  EcoVadis builds its data harvesting framework on four principal categories: environment, social, ethics and sustainability.  It subdivides data categories for environment (operations and product related), and social (human resources and human rights). These categories and subcategories can then be subdivided in a way that permits efficient data gathering. 

 (Here).

The evaluative algorithms are them molded around the data to specific ends: "The CSR Assessment should show the main risks and opportunities and give a thorough analysis of the following: How well is the company’s strategy in responding to emerging opportunities and issues? Where is the company strong and weak in regards to CSR? These are important information which can be used as a selling point to stakeholders." (Here).

And the ultimate object, of course, is tied to the product of the algorithm--the production of standards against which compliance can be measured, and the evaluation of mitigation methodologies of managing CSR risk.  That management, of course, is tied quite tightly to the data set itself.  It is the data universe that defines the universe of risk; and it is the algorithm that defines its effect.  The product of that combination--the structuring and assessment of risk--produces its operational implications.  The most important of these is the direction that risk measures give toward the focus of compliance and understanding of the character of its reduction. Environment, social, ethics and sustainability factors are important because these are the things that are measured.  The way they are measured (what data is harvested versus what data is ignored) determines the character of the mitigation attempted to reduce risk and elevate performance as measured against the CSR Index. Algorithm, then, points to the modalities of operational changes responsive to net positive changes in measurement.   To induce an enterprise to become more responsive to CSR issues in the way it orders its operations and the way it considers factors in making decision, one has to measure those CSR issues in a way that produces incentives toward particular behaviors.

It is precisely that which EcoVadis, along with others in the West, now attempt.  This is not a criticism--just a suggestion of what this project manifests.  It is a manifestation of the move away form law-regulatory structures, and from the state as the driving force in commanding behavior norms, to a system in which the state is an actor but the driving force may well be the private sector itself and the method may be the provision of credit and assessment systems that may be used to assess behavior, and change it.  In place of the state and law, behavior (including CSR based corporate governance) is also now driven by the creation of markets for assessment. But the market does not produce the norms underlying the choice of data and algorithm.  Rather, private enterprises (and some states) build these data and algorithmic approaches by drawing on national  and international normative standards.  EcoVadis drew in part on ISO 26,000.  One can as well draw on the International Bill of Human Rights (as embedded in the corporate responsibility pillar of the  U.N. Guiding Principles for Business and Human Rights).  The point is that the societal regulation that arises builds on an effective coordination between private actors as facilitators and system builders with states and international organizations as generators of legitimate expressions of norms. The difference between these efforts and those of China, as it seeks to institutionalize a large number of social credit systems, is that in lieu of the private actor, the private standard and the market for determining the value and legitimacy of ranking based assessment (and its power to influence behavior in response to its market power) (interesting study here on the nature and effectiveness of that "signalling"), China would interpose a set of state-private cooperative arrangements overseen by the state and crafted to advance state policy.   

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EcoVadis’ First Annual CSR Performance Index
12.09.2017
Announcements

Supply Chain CSR Investments Lower Global Risk Exposure

Analysis of more than 20,000 companies reveals improvement and opportunity across environmental, labor, ethical and sustainable procurement risk


PARIS/NEW YORK – Sept. 12, 2017: EcoVadis, the leading platform for environmental, social and ethical performance ratings for global supply chains, has published the first annual edition of its Global CSR Risk and Performance Index. The report illustrates the CSR performance of more than 20,400 companies evaluated by EcoVadis, based on Scorecard Ratings that analyzed nearly 800,000 data points across the calendar years 2015 and 2016.

The Index was built using EcoVadis’ CSR Ratings, which evaluate companies on 21 CSR criteria across four themes: environment, labor practices and human rights, fair business ethics and sustainable procurement. Each company received a cumulative score, based on a scale of zero to 100, where 25 represents basic CSR coverage, 50 represents standard, 75 comprehensive and 100 exceptional. Each industry of companies was broken down into two categories – small and medium sized businesses (companies with 999 or less employees) and large organizations (1,000 or more employees). Select highlights from EcoVadis research include:

Regional performance and risk:

Europe had the highest percentage (61%) of low risk (scores above 45) companies, compared to the Americas (42%) and AMEA (35%)

Large Europe based companies scored the highest average (49), compared to the Americas (40.5) and AMEA (38.2)

Small and Medium Europe based companies scored the highest average (47.2), compared to the Americas (42.2) and AMEA (39.1)

Top performing industry:

Small and Medium Food & Beverage companies, and Small and Medium Construction companies, tied for the highest percentage (61%) of low risk (scores above 45) companies, The large segment is led by Manufacturing Light industry (56%), followed by Finance, Legal, Consulting and Advertising industry (51%).

The highest overall CSR score in 2016 went to Small and Medium Construction companies, which earned an average score of 47. In the Large category, the Financial, Legal, Consulting and Advertising market finished with the highest average score (46.2).

CSR improvements: Large companies in the Manufacturing Light industry improved performance the most (19.2%) from 2015 to 2016. Construction showed the most improvement in the Small and Medium sized business segment (18.7%).

Environmental performance: The Large Manufacturing Advanced segment led all groups in environmental performance with a score of 51.6. The Food and Beverage industry topped the Small and Medium sized segment with a 50.2 Environment score.

Labor practices and human rights: Small and Medium sized companies in the Construction industry had the best score (50.3). In the large segment, the Finance, Legal, Consulting and Advertising industry scored the highest at 47.3.

Fair business ethics:

The Finance, Legal, Consulting and Advertising industry led all groups and sizes in the Fair Business Ethics segment with scores of 47.5 points for Large companies and 46.0 for Small and Medium companies.

Sustainable procurement: Small and Medium Food and Beverage companies earned the top sustainable procurement score (41.9). Manufacturing Light took the top spot in the Large category (41.4).

“The overall results are promising. We’re observing many companies, across all markets, making crucial year-over-year improvements to CSR performance, and many industries edging toward lower CSR risk,” said Pierre-Francois Thaler, co-founder and co-CEO of EcoVadis. “While the progress has been terrific, the criticality of supply chain CSR remains extremely high, and there’s a lot of room for all businesses to grow and improve. Our grading scale and evaluations represent this reality – we’ve seen strong progress in 2016, but there’s still a major gap between today’s scores and peak CSR performance.”

While the overall average score of both size groups (large and small/medium) was about 44, small and medium sized businesses are improving CSR scores at a faster rate than their large counterparts. Given that value chains are made up mostly of small and medium sized companies, the improvement rates represent a promising trend that will have a lasting supply chain impact.

“The research shows that recent initiatives focused on improving crucial CSR and sustainability issues – like modern slavery, conflict minerals, environmental pollution and more – are paying off,” said Thaler. “We can expect greater dividends and less risk globally if our world leaders and businesses continue to invest in these efforts.”

Geographically, EcoVadis’ research found a stark performance contrast between Europe, the Americas and AMEA. In 2016, the average score of Large companies across all segments in Europe was 49, compared to a 40.5 for Americas and 38.3 for AMEA. AMEA also had the highest percentage of companies that scored under 25 (13 percent in 2016), compared to the world average of 4 percent.

This year’s inaugural index also uncovered trends across major global industries related to, among others, the circular economy in supply chain, science-based targets to fight climate change, the relevance of cybersecurity for CSR and the nexus of corruption, human trafficking and modern slavery.

To read the full EcoVadis CSR Risk and Performance Index, download the full 2017 report.

About EcoVadis

EcoVadis is the first collaborative platform providing sustainability ratings and performance improvement tools for global supply chains. Combining powerful technology and a global team of CSR experts, EcoVadis’ easy-to-use CSR ratings and scorecards are used by procurement teams to monitor environmental, social and ethical risks across 150 purchasing categories and 110 countries. Over 175 industry leaders such as Nestlé, GSK, Heineken, Michelin, Johnson & Johnson, Schneider Electric, Salesforce, L’Oréal, BASF, JLL, and Subway use EcoVadis to reduce risk, drive innovation and foster transparency and trust among over 35,000 trading partners. Learn more at ecovadis.com, Twitter or LinkedIn.