23 May 2011  Research & Ideas

Corporate Sustainability Reporting: It’s Effective

In a growing trend, countries have begun requiring companies to report their environmental, social, and governance performance. George Serafeim of HBS and Ioannis Ioannou of London Business School set out to find whether this reporting actually induces companies to improve their nonfinancial performance and contribute toward a sustainable society. Key concepts include:

  • In the past 10 years, corporate investors have shown an increasing interest in the social responsibility of the companies whose stocks they pick.
  • The researchers compared 16 countries that required sustainability reporting with a sample of 42 countries that didn't. Using several measures, they found that the social responsibility of business leaders and managerial credibility increased in those countries with reporting mandates.
  • The data provide the first concrete evidence that mandating social responsibility reporting actually makes a positive difference.

 

Editor's note: Please see related story, Leading and Lagging Countries in Contributing to a Sustainable Society.

Although companies are increasingly reporting on their corporate sustainability responsibility (CSR) performance, there has been scant evidence that such disclosure does anything to improve how workers are treated or betters the environment.

But new research from Harvard Business School and London Business School demonstrates the first real evidence that mandatory CSR reporting works, and could give policymakers and companies themselves added impetus to increase transparency around environmental, social, and governance (ESG) performance.

The trend of mandatory sustainability reporting picked up steam as consumers, investors, and civil society in general increasingly demonstrated that they value the social responsibility of corporations. Another major boost for the concept came after several countries began requiring that companies report their metrics on environmental footprint, worker safety, and similar issues in a systematic, uniform way.

But does this reporting actually lead to more responsible management practices, or is this just an exercise in public relations?

That's the question that professor George Serafeim set out to answer with the working paper The Consequences of Mandatory Corporate Sustainability Reporting. Coauthored with London Business School's Ioannis Ioannou (PhDBE '09), the paper grew out of earlier research by the pair that found a sea change in the social awareness of investors in the past decade.

"The number of investors who care about this kind of performance has increased dramatically in the last 10 years," Serafeim says. "Right now those investors have about $5 trillion in assets under management, so you can say this is a pretty significant amount of money."

Difficult to measure

After analyzing government websites, NGO publications, and investor reports, the researchers found 16 countries, ranging from Australia to the United Kingdom, that mandated sustainability reporting. A more difficult task was finding a standardized way to measure the sometimes subjective qualities of what makes a company socially responsible.

For that, the researchers relied on survey measures from the World Competitiveness Yearbook, published by IMD business school in Switzerland, which ranks the competitiveness of countries based on some 300 statistical and survey measures. Those measures include not only hard statistics but also indicators from anonymous surveys of executives, on issues such as the level of corruption in the country, the quality of labor relations, and environmental awareness. Even though the responses are self-reported, they have been found to be remarkably consistent. "You'd think that nobody would say a country is corrupt, but if you look at the data, many say just that," Serafeim says.

With this data, Serafeim and Ioannou were able to compare the 16 countries that required sustainability reporting with a sample of 42 others that didn't. The researchers focused on several measures that capture socially responsible management practices including the social responsibility of business leaders, sustainable development, employee training, efficiency of corporate boards, ethical practices, and avoidance of bribery and corruption. To guard against the possibility that countries that required mandatory reporting were simply more conscientious about social issues, the researchers performed a time-series analysis that compared countries before and after they instituted the reporting.

Performance improvements noted

After the data were analyzed, a clear pattern emerged: Countries requiring corporate sustainability reporting experienced a significant improvement in most categories. For social responsibility, for example, those countries improved their ranking by 8 percent relative to countries that lacked mandatory reporting.

Serafeim and Ioannou also measured the incremental effects of two additional variables: effective enforcement of government decisions and assurance of data in the reports by independent organizations. They found that reporting was more effective in countries with stronger enforcement and in countries where the sustainability data were more likely to be verified.

Taken together, says Serafeim, the data provide the first real evidence that mandatory sustainability reporting works.

"If we believe that corporations should behave in a more socially responsible way, then we'd better have transparency around these issues," he says. "If regulators care about these issues, they should ask companies to disclose their performance around them, and if companies want to change the way they conduct business, they can use reporting as a way to change."

The effects would be even greater, he predicts, if countries followed the example of South Africa and France, which recently expanded their mandatory reporting laws to require that companies report their financial and ESG performance in a single integrated annual report.

"This increases the visibility of these disclosures and brings them up to the same level with financial disclosures," says Serafeim. "Moreover, it forces companies to explain the relationship between financial and nonfinancial measures and how managing these nonfinancial issues contributes to the long-term profitability of the company. This is an area where much more work needs to be done."

About the author

Michael Blanding is a freelance writer who lives in Boston.

Comments

    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) private Limited

    Good Corporate Governance is the key to ongoing success of any enterprise. Market value of a company depends on two tangibles - financial capital and physical assets. Additionally, not directly(financially) measurable intangibles such a reputation, brand, trust, credibility, integrity, intellectual capital, customer loyalty, risk management and social & environmental responsibility are equally important. Corporate Sustainability is integral to value-creation through the enhancement of human, natural and social capital complementing their financial growth in order to give the enterprise an enduring future and also help create and serve a longer purpose at all times. It facilitates accountability to the stakeholders as a systemic practice. Such reports impart more transparency to the public at large to properly assess the level of overall competence of the enterprise which naturally improves their vision. This is bound to help the enterprise provided the words in the reports reflect the deeds truthfully. These reports also help to action on needed correctives, if any.

    Customer Sustainability Reporting has been adopted by some companies in India as a voluntary practice. They have greatly benefited and others also can if this receives positive serious initiative. Some information covered in these reports relates to the efforts made/being made to miaintain high rate of employee retention,ensure skills development and availability, ensure ethical business practices,sustain high customer satisfaction, minimise energy conservation waste, work in harmony with community,etc.

     
     
     
    • Andrew McFarland
    • VP, CA

    All initiatives benefit from the type of transparency you discuss. Transparency forces service improvements. Without sharing results, management can hide in blissful ignorance. By sharing results, by opening a forum so that customers can comment, critique, and yes, complain about service, companies take a visible step in acknowledging what customers want and hold themselves accountable to improvements.

    http://bit.ly/mKQsi7

     
     
     
    • Robert Ross
    • Professor, Clark University

    Passing laws on reporting in jurisdictions with weak law enforcement or high motivation (by firms) to evade the content of the criteria seems to add to a problem rather than fix the underlying one: law enforcement. Most manfacturing exporter countries' labor laws are far better than their enforcement, for example. and beneath that is a budgetary matter: you can't do labor law enforcement on the cheap. So here's a counter proposal: tax the firms; hire investigators, enforce good laws.

     
     
     
    • Alan Bressler
    • President, CPR Companies

    "Effective" according to whose measure, according to what standards?

    To the extent that these efforts result in transparency that has the effect of reducing corruption and bribery, and improves the efficiency of corporate boards, no argument.

    To the extent that these efforts result in resource efficiency - fewer inputs per unit of production, or less waste generated per unit of production - no argument there, either.

    But to the extent they force corporations to conform to a subjective version of "ethical behavior" - particularly as it relates to the environmental subjectivities of pressure groups - they are not necessarily a good thing. A dollar spent measuring or reducing "carbon footprint" (one example) which returns fractions of that dollar, at the expense of another activity which provides a greater tangible return to shareholders, (and to "the environment") is merely a dollar economically wasted.

    Here's a case in point.

    While BP was winning accolades from various "sustainability" organizations for their CSR reports/efforts from the start of their "Beyond Petroleum" campaign right up to the Macondo well blowout, rusting pipelines in Alaska, exploding refineries in TX, enormous air emissions at Whiting, and hundreds of millions of legacy soil/groundwater contamination sites remained on the balance sheet, etc., all of which were essentially greenwashed by their CSR reports/awards. Yet these instances were causing material risk/harm to human health and the environment, while BP was getting pats on the head for having reduced their carbon footprint, and for having more women and minorities in sr. mgmt. positions, for example.

    I don't particularly care how much you've reduced your "carbon footprint" or how many women and minorities you have in sr. mgmt. positions when pipelines are leaking, refineries are exploding, refineries are having major air emission problems, and hundreds of millions of soil/groundwater remediation liabilities remain on the balance sheet and a risk to human health and the environment at sites where corporations have cleanup responsibilities.

    Make it material to human health and the environment or get rid of it. As to the "social" and "governance" issues unrelated to the environment, I remind you that the purpose and first responsibility of a corporation - by law in the US - is to generate earnings for shareholders, not sacrifice those earnings for the preferences of pressure groups using the threat of shareholder resolutions to make social/political statements.

     
     
     
    • Peter T. Knight
    • President, Context America

    Mandatory reporting of environment, social and governance issues is very much a minority sport and where it is mandated, the data points are severely limited. Let's hope the next step for the professors is to look at voluntary reporting which is now practiced by most of the large companies in the U.S., Europe and parts of Asia. Since its inception in the late 1980s, such reporting has grown to a point where it is now unusual to find significant companies without report that conforms to a greater or lesser degree to the de facto standard of the Global Reporting Initiative.

    We have been helping companies report for 14 years and the perennial concern among reporters is how to measure effectiveness. We witness first-hand the benefits from the reporting process and from the reputation gains. But it would be good if these could be verified.

    Peter T. Knight President, Context America Inc.

     
     
     
    • Gautham
    • Post-Graduate Research Student, Humber Seafood Institute

    The gravity of using environment, social, governance factors are not considered in the evaluation of financial structures of most companies, this is mainly because of the depth in understanding between the sustainability managers and the process managers with respect to the sustainable factors mentioned. The problem is both the managers have different targets set; this results in no communication among them. Like wise involving the senior management. This non- tri- linearity has to synchronize with effective-communication, to attain a corporate sustainable progress.

     
     
     
    • @CatherineChongC
    • MBA Coursemember, ICCSR

    I do agree with Bressler's call for input vs. output analysis/ argument. Is it correct to say that (your point is) companies should construct their sustainability strategy beyond compliance with sustainability policies but one that is congruent with their business activities. Hence, reporting on industry/ firm specific risk management?

     
     
     
    • Gaurav Goel
    • DGM, RCom

    In my opinion, a good indicator of sustainability of any "way of doing things" is the amount of waste that is generated out of the process. For example if you compare the size of garbage bags coming out of average households in different countries, you can get an idea if a particular life style is sustainable in long term. I think that reducing waste generated by a process improves the sustainability of the process.

    Making it mandatory for a corporate to publish a periodic report on pre defined parameters encourages the corporate to analyze and optimize the parameters covered in report.

     
     
     
    • Amadu Alhassan
    • Master studies, CULS IN Prague Czech Rep

    If CSR is well tackle, it could enhance faster growth and development of a country and firms operating within. An effective CSR would be felt by everyone living within the encatchment area. if firms invest something in to the society where they operate, the boomberang effect brings a multiple positive impact on the society and the country as whole....

     
     
     
    • Noaman Al-Saleh
    • CSR & Media Manager, ENOC

    As it has been witnessed recently by most of the organizations, reporting do add value to the bottom line in various forms and colors. Yet the positive contribution is still within one digit percentage; on the contrary, it add to the financial, brand, reputation and contribute significantly to the competitiveness matrix. They are challenges laying ahead on getting the real essential effect of the report, especially in places around the world where regulation on labor and environment is an obsolete. Challenges are linked to the outcome of the report and the reason of conducting the report, it is embedded by the regulators worldwide. For example, hence there are some countries which does not tax their enterprises nor the individuals, reporting does not add any financial value to any of the stakeholders; thus, it is only an extra work and time draining exercise. However, it is observed on the level of a good public relation act.
    Whereas in other places, some tries to draw their way up on the competitiveness rank, they implement the reporting system for the best practice to allow a collective synergy and co-operation by all the stakeholder; in which it will contribute in excelling up their overall performance and ranking.

     
     
     
    • catherine malecki
    • associate professor, paris 11 france

    Dear Professor Serafeim thank you very much for your highly interesting papers in particular that one. In France things are changing because of the Law Grenelle 2... Wth my best regards catherine

     
     
     
    • T Rajagopal
    • Director, CSR-Supply Chain - Asia

    Nature and the environment must be preserved for future generations. It is time that the corporates assure an inbuilt discilplinary and mandatory form of disciplined reporting with a good start and fine tune it progressively.

    It is a values centred journey and must be ignited and even made mandatory if we are to assure that business must work with Government for the good of the people and importantly the environment.

    Many areas need a solution. For example we highlight the current War on Food Waste. Almost 50% of the food that starts at the beginning of the supply chain (the upstream farm' end) ends up at the end (the downstreamfork' end) even without being consumed. That food waste and the rotting emission of gas is more potent up to more than 10 times or so more deadly than CO2 emissions.

    In Singapore I am surfacing a paper through its final stages for development of a trade marked Supply Chain Card. This strategic weapon addresses consumer discipline and how aggregation of wants from use statistics forms the basis of feeding such vital information to reduce food waste.

    We all share a common planet. Let us do our part to assure that we leave a green planet for the next generation and the next. We have a shared responsibility and that starts from the corporates and consumers coming together and supported by the Government to make it happen and slowly but surely address the problem as a national initiative and for the future.