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March 24, 2009

IT Companies Improve CSR Performance but Still Face Challenges
    by Robert Kropp

Oekom report credits improved reporting by companies for better scores in the IT sector, but warns that compliance in supply chains and environment could be undermined by economic crisis. -- Competitive challenges to companies in the information technology (IT) industry are many. Overnight, technological advances can make a product yesterday's news, and formerly high-priced technology must now be made affordable. Companies must deliver new products to the market quickly, and must do so as economically as possible. To meet these demanding goals—especially to meet the goal of significantly reducing costs—companies resort to outsourcing manufacturing to developing nations where labor is comparatively inexpensive. Very few manufacturing plants for the high tech industry remain in high-wage countries.

Visit the
Prospectus Ordering CenterBut according to a report published by oekom research, a rating agency with over ten years of experience in the field of sustainable investment and sustainability rating, the reliance on outsourcing by IT companies often expose those companies to implication by association in many often egregious labor and human rights violations. The report finds that "abysmal working conditions and inadequate environmental standards in some suppliers in South-East Asia and Mexico are tarnishing the perceived clean image of the industry." spoke with Philipp Ruehle, the oekom analyst responsible for the IT sector.

"Almost all the companies we examined are making improvements, in part because of the high reputational risks associated with such supply chain issues as child labor," Ruehle said. "Most companies now have supply chain codes that they require their contactors to sign."

Ruehle continued, "We didn't see such codes as much in our analysis in 2005. We would like to see further improvements along the lines of measurements to monitor the standards of working conditions."

Ruehle credited the Electronic Industry Citizenship Coalition (EICC), an alliance of IT companies, with developing a code of best practices whose goal is to improve conditions in the electronics supply chain.

Ruehle emphasized that the next step for IT companies to take in relation to their supply chains should include such supporting measures as training and sharing best practices to help their suppliers achieve the standards that have become common in high-income countries.

"Only a few companies show good performance in this area at this point," said Ruehle. He mentioned Nokia and HP as two companies that have begun to show improvement in this important area.

Of the 43 IT companies covered by oekom in its report, 26 were accorded Corporate Responsibility Prime Status. Oekom recommends companies that earn Prime Status to its clients for sustainability investment purposes. The top performers were ST Microelectronics, Xerox, and Ricoh, each of which scored a B in oekom's ranking. spoke with members of the Investor Relations team at Xerox.

"Xerox is a chartered member of EICC, and we work to make sure that suppliers are in compliance with EICC standards," said Gil Addo, an analyst. "We have an external auditor, and if suppliers are not up to standards we work with them to meet EICC standards by a deadline." The report encourages the long-term cooperation strategy practiced by Xerox as preferable to simply terminating a relationship if a supplier fails to meet social and employment standards in its workplace.

Addo mentioned environmental standards and labor standards such as health and safety as issues that Xerox works with its suppliers to enforce.

Xerox also publishes an annual annual Report on Global Citizenship that relies on sustainability guidelines provided by the Global Reporting Initiative (GRI), which provides a framework for sustainability reports that benchmark organizational performance and commitment.

The oekom report notes with concern that the social impact of large-scale layoffs among IT companies can be considerable, not only in the companies themselves, but in their supply chains in developing nations, as well. Jennifer Horsley, manager of Investor Relations at Xerox, referred to a 2008 restructuring at the company that led to the elimination of 3,000 jobs.

While layoffs at the supply chains of companies were not included in oekom's ratings, Ruehle of oekom observed that given the global nature of the economic crisis the issue is of critical importance. He referred to the work of Students and Scholars Against Corporate Misbehavior (SACOM), a Hong Kong-based non-governmental organization (NGO), as contributing to awareness of the urgent nature of mass layoffs at third-world contract suppliers.

The report recommends that IT companies demand contractually assured minimum standards in supplier companies, but this is an area in which there remains considerable room for improvement. While Horsley of Xerox was unable to provide data regarding the company's activities in this area, she did say, "We have rigid standards for companies in our supply chains, and employment security is one aspect of it."

Another critically important consideration for IT companies is the effect of its products on the environment. Directives restricting the use of hazardous substances include the Restriction of Hazardous Substances Directive (RoHS) adopted by the European Union (EU), which restricts the use of six hazardous materials in the manufacture of electronic equipment. Additionally, the Waste Electrical and Electronic Equipment Directive (WEEE) sets collection, recycling and recovery targets for electronic products sold in the EU.

While Ruehle of oekom maintained that geographical differences could not be discerned in the area of environmental stewardship by IT companies, he did say, "The European directives referring to waste management by IT companies are state-of-the-art, and companies selling products in Europe are required to abide by them. European companies often maintain the standards in their products worldwide, while American companies may be less inclined to do so."

At Xerox, Horsley said, "We have spent a lot of money in the last few years to make our products compliant with RohS and WEEE. With our new products, we are pretty much on track to meet those standards."

While Ruehle noted improvements in environmental performance, he did observe that much of the improvement could be attributed to regulation and not to competition among IT companies to be best in class. He did see cause for optimism in the increasing demands of consumers in area of environmental responsibility.

The report concludes that "the companies studied are facing up to the social and environmental challenges of the 21st century." In most cases, initial steps have been taken to address the most relevant issues, and IT companies have begun to compete for best-in-class status on the issues.

But Ruehle sounds a note of warning in conclusion.

"I'm afraid that the current crisis could stop the improvements that have been started, and important issues such as poor working conditions in the IT supply chain and large-scale layoffs could become of lesser importance as a result," he said.

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