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A seal of approval for companies' social progress

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"The average consumer could care very little about whether a report has verification," says Maria Sillanpaa, managing director for AccountAbility. "However, an investor looking at a CSR sustainability report without verification would not place much value in the report."

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Who's bias-free?

What constitutes an independent auditor remains a matter of debate. NGOs routinely decline a fee, Mr. Erikson says, while accounting firms sometimes regard social auditing as a growth area for their businesses and see no conflict of interest. Meanwhile, social audits are increasingly targeting not just CSR reports, but also far less visible supply-chain facilities overseas.

Since the late 1990s, when sweatshop conditions in Asian factories dragged down such lofty names as Nike and Kathy Lee Gifford's clothing line, monitoring supply chains has become a cottage industry. For investors, that's good news because they now have places to go for answers about ethical standards, especially in some industries. For a tobacco or oil company that's trying to establish credibility, for example, external monitoring can be especially important, Erikson says.

In textiles, the first stop for a concerned investor might be the Fair Labor Association (www.fairlabor.org). Its licensees and member companies identify those that have agreed to let accredited monitors bring International Labor Organization standards to bear on factories in their supply chain. Monitors note issues such as sanitation, child labor, and compensation rates.

In coming years, the association aims to draft standards for use in monitoring other industries, particularly agriculture, according to monitoring program coordinator Roopa Nair. In the meantime, investors concerned with crop-growing and processing conditions can look for a label increasingly familiar to upscale coffee drinkers: Fair Trade.

Investors who see the Fair Trade label on a company's products have assurance from social audits that, for instance, coffee was grown in shady conditions that bode well for the land. What's more, everyone in the supply chain actually got paid as promised, according to an audit that reviews the transactions. Those who are audited ultimately foot the bill, and they need to keep showing progress to retain the label.

"It's not good enough to just meet minimum requirements year after year, especially if you're deriving tremendous fair-trade benefits from the system," says Christopher Himes, of TransFair USA, which audits transactions for the Fair Trade label. "You then have to become more of a model producer, do more for your workers ... do more for the environment, etc."

Another auditing group, Social Accountability International, accredits monitors who then "certify" outsourced factories in toys, apparel, and other industries. Firms that work with SAI-accredited monitors get to use its seal of approval.

Shrouded details

Investors aren't likely to see exactly what auditors said since few companies post their reports. Some experts say that's fine as long as investors know the independent audits are being done.

"Ninety-nine percent of the people who see these audits won't understand what it means," says former McDonald's attorney Phillip Rudolph, now a partner in the CSR group at Foley Hoag in Washington, D.C. "It really creates an impediment to effective relationships between the customer - the Nikes of the world or the Reeboks of the world - and their suppliers to have the entire world suddenly become involved."

But others believe the world needs to know what independent auditors are saying. "Even if we ask what's going on, they'll just say, 'Well, we're taking care of it, but no, we're not going to give you the details,' " MacKerron says.

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