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This paper outlines DFID’s approach to corporate social responsibility. It highlights the links between corporate social responsibility and poverty reduction and sets out what the UK Government and specifically DFID can do to promote corporate social responsibility to benefit the poor.

The paper demonstrates that socially responsible investment is one of the most powerful ways of embedding corporate social responsibility into businesses and that assets held under socially responsible investment in the UK amounted to some £225 billion in 2001, making it the fastest growing type of investment. There are three broad approaches to socially responsible investment:

• ethical investing
• positive screening
• investors using their rights as shareholders to encourage companies to improve their performance

DFID welcome the recent rise in popularity of the third approach as it allows investors to influence the behaviour of a larger number of industries and companies; proves more attractive to investors with diversified portfolios; and avoids inappropriate screening that could harm the poor. However, none of the existing socially responsible investment funds promote poverty reduction.

Businesses can help to reduce poverty by:

• investing, producing, and paying wages and taxes
• respecting labour standards and encouraging local sourcing
• creating jobs, providing skills and training, and producing products that meet the needs of the poor

But corporate social responsibility can disadvantage the poor:

• socially responsible practices should not replace local laws, let alone prevent businesses complying with them. Ultimately it is effective institutional, regulatory and legal frameworks, including appropriate tax systems, which will deliver the greatest benefit to most poor people
• prescriptive corporate codes of conduct, or sudden action which does not involve suppliers may not be appropriate for local conditions
• in the worst cases, inappropriate codes of conduct become a form of protectionism that prevents goods from the South being sold in the North
• many non-government organisations, consumers and investors have put pressure on multinational enterprises to withdraw from countries with poor human rights records. Instead of withdrawing investments, principled engagement can help poor people and so help to bring about change
• the costs associated with following ethical codes of conduct vary, tempting buyers to favour larger suppliers who are easier to monitor and exclude small-scale producers. Setting up joint monitoring systems, sometimes with suppliers, local non-government organisations and trade unions, can reduce this danger

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