CSR Reporting: Prevalent Practices in Businesses
Kulapan Chantarasap
The prevalence and relevance of corporate social responsibility (CSR) reporting for companies in the private sector during the past two decades were limited in scope and mainly voluntary in nature, with minimal adherence to internationally accepted reporting standards that ensure transparency and integrity in reporting. According to Gray et al. (1987) in Corporate Social Reporting—Accounting and Accountability, CSR is the process of communicating social and environmental effects of the organization’s actions to particular interest groups within and among society at large. This, in the past, entailed publicly disclosing information that had significant impact on investment decisions and the market value of trading firms’ securities, and this act of disclosure had also served to keep the company’s shareholders informed (Stock Exchange of Thailand, n.d.).
In addition to these drivers, the increasing awareness of climate change across the globe also led to the passing and enforcing of regulatory policies and legislations toward controlling pollution and greenhouse gas emissions that targeted both public sector and private sector companies. This in effect led to the disclosure of information on their operations and mitigation measures to the public at large as well as the regulatory and enforcement authorities. The focus on industrial safety, occupational health and safety issues, relocation and resettlement issues, employee welfare and development, and gender issues in several developed countries also propelled the popularity of CSR reporting by multinationals in order to maintain their “license to operate.” This, in turn, produced a ripple effect, emphasizing the importance of CSR to government bodies, companies, investors, consumers, stakeholders, and other interest groups. The ripple effect also extended to developing and nondeveloping countries, setting examples of what types of data investors and stakeholders expected in companies’ reporting, how these data are reported, and the transparency and integrity of information disclosed. The arrival of Global Reporting Initiative (GRI) in 2000 became the watershed event, a result of the pioneering efforts of the activists and interest groups of the twenty-first century (GRI, 2020). It is one of the first international nonprofit organizations to develop a comprehensive reporting framework that is globally accepted and used for disclosing information on the CSR-specific activities carried out by organizations (GRI, 2020).
Two decades later, the CSR reporting concept transcended its original meaning of “companies interacting with society and/or parts of society” to a higher level by encompassing short-, medium-, and long-term perspectives of value creation to benefit business organizations, economy, society, and the environment as a whole (Perrini and Tencati, 2006). CSR became synonymous with sustainability and expanded its scope from social responsibility to cover economic, environmental, and social impacts of the operations of business corporations. The reporting served to disclose to the public information on companies’ values, governance model, linkage between business strategies and commitment to global sustainable economy targets, as well as responding to and integrating stakeholder’s perception and expectations. Most Securities and Exchange Commissions that regulate the stock exchange around the world encourage listed companies to provide information beyond financial statements and reports to include info on their performances in the context of sustainability (RobecoSam, 2014).
In the oil and gas industry, where stakes are high in relation to operational disasters, accidents, fatalities, corruption cases, tax evasions, and other hazardous effects to the local community and environment, the transformation of CSR reporting into sustainability reporting and the public disclosure of relevant data have become a significant part of doing business.
It may take years for companies to gain a good reputation, and all it takes is just one day and one disaster or industrial accident to lose that reputation. In other words, public may lose faith in a company for a variety of reasons, including its mismanagement or poor handling of accidents, explosions, oil spills into the environment, heavy criticism from the social media, corruption scandals, lack of transparency of cash flows, human rights violations, and other issues, leading to the revocation of company’s “license to operate” and drastic erosion of its financial securities, including its stocks and share value. These issues could have irreversible negative impacts on the company if remedial steps are not taken in time to mitigate losses all around and in a timely, transparent, and effective manner. The sustainability concept and values must be integrated into the business operations for companies to effectively and efficiently identify sustainability risks and opportunities and manage these issues to sustain long-term value for all stakeholders (RobecoSAM, 2014).
By publicly disclosing data on company’s sustainability performances in compliance with international sustainability indices, standards, and practices (e.g., GRI, CDP, UN Global Compact Principles, Dow Jones Sustainability Index [DJSI], etc.), in addition to what is required by local regulators and governing bodies, companies should communicate to the public that they operate with integrity, transparency, and accountability; have the capacity to prosper in a competitive and changing global business environment; and are focused on continuous improvement in quality, innovation, and productivity to create a competitive advantage and long-term value for all stakeholders.
The transformation of CSR reporting into sustainability reporting occurs in three stages.
Stage 1
The organizational sustainability journey normally begins with tactical actions related to specific functions, issues, and/or concerns to respond to short-term business requirements and stakeholder’s expectations. For example, in the past, specific function groups came together to respond to stakeholder’s perceptions and expectations on certain topics, such as occupational health and safety statistics; CSR strategies, projects, and activities; and environmentally friendly/operational eco-efficiency projects. These stakeholders’ expectations (which mainly include local regulators, government bodies, nongovernment organizations, and investors) included confirmation that the company complies with local regulations and legislations and is conducting business ethically, lawfully, and responsibly toward both the environment and society. The activities in the first stage mainly focus on recordable injury rates, lost time injury rates, oil spills, donations to schools and communities, as well as mitigation of environmental impacts from operations. As the company progresses along the disclosure of these elements by using international standards such as OHSAS 18001, SA 9000, ISO 14001, or ISO 26000 to benchmark and assure the company’s quality of occupational health, safety, environmental and social performance, they, in fact, become obliged to adhere to these standards to continuously improve management functions and performance. Baselines statistics are collected, and both short-term and long-term targets are set within the ambit of a check-and-balance system to ensure the company is managed efficiently and its performance is improving steadily. Normally, data are collected on a monthly basis and benchmarked with past performances annually. These performances are benchmarked against other companies in the same industry for further improvement. This is still, however, a stand-alone system, where none of the specific functions are linked to or included in the business strategy development and implementation. The data at this stage have no link with the company’s business strategy. Eventually, sustainability reporting guidelines and indicators help shape and evolve the separated sustainability performance targets and data by integrating them with business strategy and incorporating stakeholder’s views and expectations at the early stage of operations itself.
Stage 2
Compliance is not enough to maintain a company’s “license to operate” in the context of regulatory and political uncertainty, agile cultures, shift in global paradigms, and the influence of powerful social media that can drastically change public and investor’s perception of the company from positive to negative or vice versa. At this stage, finding commonalities between functions, issues, and concerns is one of the major priorities for external sustainability reporting. Sustainability in this context is sometimes referred as the ESG criteria (environment, social, and governance). At this stage, sustainability risks and opportunities, measures to mitigate and minimize risks, as well as measures to capitalize on sustainability opportunities should be identified and integrated into business strategies and decision-making processes. Companies need to ensure that sustainability-related risks and opportunities are addressed and accounted for in the earliest stages of project lifecycle. This is essential for companies in the global arena to quickly respond to immediate changes such as ESG shocks (e.g., explosion, spills, or corruption scandals) or large-scale events that can lead to significant shifts in company’s management, culture, and financial well-being.
Postevent management plays a pivotal role in mitigating the severity of an ESG shock, and the duration of the shock often leads to long-term measures that a company must implement to minimize the risk of future ESG events. Companies that are prepared for ESG shocks can better mitigate both short-term and long-term risks. Disclosure of measures in place for identification, assessment in terms of materiality to business value, and management of ESG risks help maintain investor confidence. Historical information on ESG outputs (e.g., reporting of emissions) is relevant because it can be used to predict future consequences (RobecoSAM, 2014).
Stage 3
The integration of sustainability strategy framework and reporting with company’s business strategies and everyday decision-making occurs at this stage, and stakeholder’s perceptions, expectations, and views are accounted for in business strategies to provide the right balance in creating benefits for both business and society. This is the ideal state for sustainability practices in business as it has become part of the business itself and creates value to all stakeholders (Perrini and Tencati, 2006) wherein it reinforces the following:
• Company’s capacity to prosper in a competitive and changing global business environment
• Anticipating and managing current and future economic, environmental, and social opportunities and risks
• Focusing on quality, innovation, and productivity to create competitive advantage and long-term value
In addition, understanding key sustainability concerns and issues that are relevant to both the company and its stakeholders is vital for creating a complete, relevant, accurate, and transparent form of reporting. These relevant issues (material issues) are identified through the process of materiality assessment.
The most common materiality assessment process used by companies in identifying material issues to include a structured review of current and future business risks and opportunities is based on the framework developed by the GRI. The material issues include aspects that reflect significant economic, environmental, and social impacts for the company. In some companies, materiality analysis is conducted on a yearly basis as part of the reporting cycle, and in others, it is conducted only when necessary (once every 2 years), depending on the demand arising from the external dynamics of each industry.
According to the GRI framework, the materiality assessment process involves the following:
1. Identifying and prioritizing material issues to define reporting content. This identifies the material issues from the perspective of both business and stakeholders. The process is based on consideration of the company’s business strategy and activities, risks and challenges, expectations from the society, applicable laws and regulations, future trends, and stakeholder feedback. Normally, the GRI framework addresses the full scope of sustainability issues that are specific to ESG aspects.
2. Defining reporting boundaries. For each material aspect, companies should consider whether the impact of that issue lies inside or outside the organization and assess and describe where the impacts end by considering the relevance to different stakeholder groups, that is, external groups such as suppliers, contractors, and communities.
3. Prioritizing issues. Companies should assess the level of significance of the ranks and prioritize identified issues using agreed-upon criteria (magnitude of impact and its importance to investors, society, and business). Each issue is prioritized as low, moderate, or high for current or potential impact on the company within the specified timeframe and the degree of concern to stakeholders. Companies can use focus group meetings with relevant departments and stakeholders to identify key materiality issues. The issues and their ratings are then plotted on a “materiality matrix” with
• X (horizontal axis) as “significance to company”
• Y (vertical axis) as “significance to stakeholders”
In most cases, issues in the upper-right quadrant are considered as most material and significant to include in the sustainability report. However, companies must understand and take note that all of the issues identified in the other quadrants are essential in the materiality assessment; the position of each issue in the matrix simply represents the understanding of its relative importance to the company and its stakeholders.
4. Validating issues. The list of material issues identified should then be validated by the companies’ management and reviewed by companies’ business strategists to ensure it is included in the business strategy and aligns with business objectives. The materiality issues should be reviewed internally with all key stakeholders. All identified material issues are assessed against the reporting principle of “completeness” prior to gathering the information to be reported. The aspects identified in the prioritization step are checked against the dimensions of scope, boundary, and time.
5. Review and continuous development. Companies’ revision process for sustainability reporting should apply the principles of stakeholder inclusiveness (Perrini and Tencati, 2006) (organization communicates info on this process to its stakeholders, including how it has responded to their reasonable expectations and interests) and sustainability context (presentation of the organization’s performance in the wider context of sustainability), to ensure continuous improvement of information disclosure. Companies should be actively engaging both internal and external stakeholders to check whether the report content provides a reasonable and balanced picture of the organization’s sustainability performance and whether the process by which the report content was derived reflects the company’s adherence to the two reporting principles. Comments and suggestions from external stakeholders through the annual stakeholder meeting event, interviews, surveys, and website user statistics are also considered and included in the report. The findings inform and contribute to the identification of issues that need to be considered for inclusion in the next reporting cycle.
Reporting standards advocate the use of materiality analysis within sustainability reporting to guide investors and stakeholders in identifying and prioritizing relevant sustainability aspects to be included in the report.
According to DJSI and RobecoSAM’s definition of materiality of sustainability, materiality is translated in a way that reflects how different forms of capital (intellectual, customer, human, environmental, social, and financial) might have present or future impacts on company’s financial performances, value drivers, competitive position, and long-term shareholder value creation. The DJSI is a tool for investors and companies to benchmark their sustainability performances against one another in the same industry and also across sectors. Investors use the DJSI index as part of their decision-making in long-term sustainability investment.
Looking Ahead
The way to go for sustainability reporting and practices is to look at the “Integrated Approach to Sustainability” by integrating material financial factors, financial key performance indicators (KPIs), and financial performances with industry value drivers and long-term intangible assets and at “Sustainability Investing”—a long-term investment approach that integrates economic, environmental, and social considerations into the selection and retention of investments. In a nutshell, corporate sustainability is driven by the idea that “the competitive position of a company ultimately determines its potential to create value” (RobecoSAM, 2014).
The global trend is heading toward integrating all forms of sustainability criteria, risks, opportunities, and strategies, as well as financial material aspects, into how companies do business in order to create long-term value for all stakeholders and create partnerships between nonprofit organizations, government bodies, and private sectors to help propel sustainability practices into the mainstream. Sustainability indices such as the DJSI, FTSE4Good, EIRIS Sustainability Ranking, CDP Leadership Indices, United Nations Global Compact, and several more will play major roles in identifying which companies are good for long-term investments and which are outstanding in their sustainability performances when benchmarked against their peers in the same industry or across different industries. Most sustainability indices seek to identify companies that demonstrate their ability to manage sustainability issues, include sustainability thinking into strategic decision-making, and also provide attractive investment opportunities. In addition, sustainability reporting trends are changing from voluntary to mandatory around the world as market regulators, government bodies, and international institutions are using sustainability reporting as a tool to screen companies with sustainability risks and identify opportunities for value creation for economy, society, and environment. To quickly conclude, in a nutshell, integrated sustainability reporting is a worldwide initiative today that is on its way to becoming tomorrow’s norm for responsible reporting practices that businesses will be expected to follow.
Summary
CSR reporting for companies in the private sector during the past two decades was limited in scope and mainly voluntary in nature. The GRI is one of the first international not-for-profit organizations to develop a comprehensive reporting framework that is globally accepted and used for publicly disclosing CSR information. Two decades later, the CSR reporting concept transcended its original scope by encompassing short-, medium-, and long-term perspectives of value creation to benefit the organization, economy, society, and the environment as a whole. CSR thus became sustainable, leading to the transformation of CSR reporting into sustainability reporting, which occurs in three stages. The way forward for sustainability reporting and practices is to look at the “Integrated Approach to Sustainability” that integrates material financial factors, financial KPIs, financial performances and other industry value drivers as well as long-term intangible assets in respect to economic, environmental, and social considerations into the reporting process.
Questions
1. Discuss the pros and cons of the different approaches and standards of CSR/sustainability reporting for the private sector. (Instructor may have to look into different reporting guidelines to further this discussion.)
2. What other dimensions do you think are lacking in sustainability reports published by the private sector in a specific industry. (Instructor to select an industry for discussion.)
3. Do you think sustainability reporting should be voluntary, or do you think it should be made a mandatory requirement for the private sector? In both cases, explain why and to what extent.
References
Gray, R., D. Owen, and K. Maunders. 1987. Corporate Social Reporting – Accounting & Accountability. London: Prentice-Hall International.
Perrini, F., and A. Tencati. 2006. “Sustainability and Stakeholder Management: The Need for New Corporate Performance Evaluation and Reporting Systems.” Business Strategy and the Environment 15, no. 5, pp. 296–308.
RobecoSAM Sustainability Investing Report 2014. http://www.sustainability-indices.com.
Stock Exchange of Thailand. n.d. https://www.set.or.th/en/about/annual/sd_report_p1.html.