Investor Oriented Corporate Social Responsibility Reporting

Jane Thostrup Jagd

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781317743538
• Topic: Business
• Subtopic: Accounting
• Index: Business

Reporting organizations' corporate social responsibility activities is difficult - a lack of regulation means that the communication of these activities varies significantly and there is a multitude of ways in which mistakes can be made.

The author provides the tools and insights required to produce investor-friendly CSR reports and includes a chapter showing how the investors can integrate CSR in their quantified analysis of investment-opportunities. Features include formulas, conversion standards and CSR note tables which enable the book to be used as a practical handbook as well as in the classroom.

Written by an experienced compliance officer with years of experience in reporting CSR, this book is an easy-to-follow guide for practitioners and students and will be required reading for students of accounting, financial reporting and auditing as well as those in industry who want to improve their organization's reporting standards.

1 WHY IS THERE A NEED FOR THIS BOOK?

DOI: 10.4324/9781315794112-1

Today in many countries such as South Africa, Denmark, and France the vast majority of the largest companies produce some form of corporate social responsibility (CSR) reporting – not least because it is mandated by their countries’ financial statements acts. However, when asked about the importance of this reporting, many companies, auditors, and investors contend that it is of limited value. Alan Teixeira, Senior Director, International Accounting Standards Board (IASB), puts it this way: “Some businesses take it very seriously, some use it more opportunistically (i.e. as a PR/marketing exercise) and some ignore it. My sense is that where elements of CSR are in regulation businesses treat it mainly as a compliance exercise.”¹ Some indicate it primarily affects companies internally. “The CSR reporting, established today, is usually mostly important for the company itself. It is a kind of status whereby the company’s own employees and management can see an overall picture of the CSR activities undertaken during the year and what goals are met or the evolution herein.”²

Financially and non-financially, if CSR reporting is to be useful to others, it should be possible to compare content across companies and over time. The data must be validated and must be easily accessible; this will provide the foundations for investors to be able to use the reporting in their analysis of corporate risks and performance. Whereas there are many specific international and national rules on financial reporting, unfortunately the regulations on CSR reporting are not very specific. “Consistency is very important to investors, so the use of international standards for sustainability reporting is a key factor when looking to get investors to incorporate the topic into their analysis.”³ Thus, one of the cornerstones of useful CSR reporting is not yet in place.

The lack of precision in the regulations means that we have thousands of annual reports of very variable quality. Thus, we are also in the position that thousands of companies use resources to develop CSR reporting, which from an overall perspective can effectively be used for very little. Companies report on different aspects, they measure them differently, and it is often the case that a company cannot even compare its own CO₂ data with, for example, its production data as the boundaries and consolidation of CSR data are different from financial consolidation. Thus, one cannot really comment on whether the company is performing well or poorly, environmentally, either in itself as a company or in relation to other companies.

However, recent research⁴ shows that valid CSR reporting places the professional investor in a far better position to value the company properly and it creates fewer fluctuations in stock prices when negative events occur. Similarly, it also appears that valid CSR reporting can actually reduce capital costs. Therefore, “…it is clear that increased transparency creates trust, and provides a more holistic picture and there are more confident long-term investors.”⁵

The above arguments mean that if investors are to acquire the described benefits, it is at least necessary that the CSR reports can be used by investors when they evaluate companies; it also requires that CSR reports are available, comparable, and validated. According to a recent survey undertaken by the Association of Chartered Certified Accountants (ACCA) and the European Sustainable Investment Forum (Eurosif), a number of issues are explicitly mentioned by investors when asked about the usability of the current CSR reporting:⁶

• Current non-financial reporting by companies is inadequate for investors.
• Reporting must be linked to business risk and integrated with financial information.
• Quantitative key performance indicators (KPIs) are essential.
• Accountability and assurance mechanisms are needed.

Addressing the above points requires data discipline. For companies who want a stable share price or capital, a valid CSR report in a familiar format suitable for investors is an important tool both for the company and the investor.

The book is structured such that it begins with a chapter presenting arguments on whether CSR is worthwhile and the uses to which investors can actually put CSR reporting. The rules and guidelines that currently exist internationally are presented, followed by a section on the rules that ought to exist if investors are to maximize the benefits of CSR reporting. Through an analysis of the 50 largest listed companies’ CSR reports, in conjunction with an analysis of what equity research agencies seek from CSR information, a set of minimum data that all companies can use is then proposed; these minimum data will be defined quite specifically including demands for evidence. It is also demonstrated that companies must ensure that the data are valid and complete through a structured control environment, whereby reviewers can assure accountability.

The book concludes with a chapter that shows how to combine these available, comparable, and validated CSR data with financial data, so that CSR data are immediately usable by the investor.

Appendix A contains definitions of abbreviations, and Appendix B lists those interviewed for this book. In addition, for reference purposes, other appendices contain formulas, conversion tables, and reporting forms.

Notes

1. Interview with Alan Teixeira, Senior Director, IASB.
2. Interview with State Authorized Auditor Birgitte Mogensen, former PWC Partner, CSR – now owner of Board Management.
3. Interview with Gordon Hewitt, Sustainability Advisor, Association of Chartered Certified Accountants (ACCA).
4. Dhaliwal et al. (2011); Flammer (2012).
5. Interview with Dr Nancy Kamp-Roelands, former Executive Director, Ernst & Young, Corporate Responsibility, the Netherlands and Belgium – now Deputy Director of the International Auditing and Assurance Standards Board (IAASB).
6. ACCA & Eurosif (2013).

2 IS CSR PROFITABLE?

DOI: 10.4324/9781315794112-2

Since CSR was launched as an idea in the 1970s, countless attempts have been made to answer the question of its profitability. Why should the company as a profit-generating unit deal with CSR at all – is it not pure philanthropy? Very different answers to this question exist.

One of the most-cited meta-analyses¹ is from 2003 and covers the period 1972–1997; through a review of 52 academic studies it concludes that there is a positive correlation between CSR and financial performance. Conversely, a British analysis² of 451 FTSE All Share Index companies as of 1 July 2002 finds that the least socially responsible companies achieved by far the best profitability. This analysis also shows that the otherwise prevailing explanation for this phenomenon, the so-called sector beta – i.e. the volatility associated with various sectors, of which some are more likely, or have a longer history, than others to carry out CSR reporting – can only partly explain this underperformance.

A recent meta-analysis³ of 251 pieces of research, covering the period 1972–2007, shows the opposite – that there is a very small, but only a very small, positive correlation between CSR and financial performance.

Thus, we cannot give an unambiguous scientific answer to the fundamental question “Is CSR profitable?” But why should it be particularly profitable to be a CSR-oriented company?

There are at least five arguments for this:⁴

• Customers will prefer products/services from CSR-oriented companies.
• Investors will prefer responsible companies, whereby the company capital costs will decrease.
• Talented employees will increasingly be attracted to employment in a responsible company.
• Responsible companies will be more innovative.
• Companies that enjoy a high level of public trust will be less exposed to risks from safety, boycotts, or other loss of reputation.

Many of these arguments are not especially easy to verify or reject scientifically, although various attempts have been made.⁵ In particular, the argument concerning capital costs has been examined many times, with different conclusions. An extensive analysis⁶ of the first-time CSR reports of American companies and their potential impact on the cost of capital shows that the cost of capital decreases during the year in which the company publishes its first CSR report compared with the cost of capital in the preceding year. Furthermore, it can be shown that companies that have a better CSR rating (KLD⁷) than their competitors continue to have lower capital costs than their competitors in the years after the publication of their first CSR report.

Finally, analysis shows that these highly CSR-rated companies attract more institutional investors than their competitors, and that these investors make fewer forecast errors than they do for the investments they have made in companies without this high CSR rating; moreover, these institutional investors are willing to invest significantly higher amounts than otherwise in those companies that undertake CSR reporting. This conclusion, drawn about institutional investors’ much stronger interest in, and response to, CSR reporting compared with individual investors, is also demonstrated in a Chinese analysis,⁸ which was undertaken following the 2008 Chinese milk scandal.⁹

However, another large British analysis¹⁰ of 20,715 observations for the period 1993–2008 shows, for example, that these capital-cost analyses also depend on the time from which the data stem. Equity analysts’ buy/hold/sell recommendations are compared with companies’ CSR rating in KLD over time, and it is shown that strong CSR ratings up until 1997 actually have a negative effect on equity analysts’ recommendations. After 1999, the opposite is apparent – one can see a positive correlation between high CSR ratings and equity analysts’ recommendations. One cannot, however, show the opposite – that weak CSR ratings generally result in negative investment recommendations.

In the same study it is also shown that those companies with high visibility (measured by their market value) receive both strongly positive and negative responses from the market, from a strong or weak CSR rating, respectively. Finally, the analysis also indicates that the so-called advanced analysts (e.g. JP Morgan and Deutsche Bank), which the researchers have noted as more CSR-oriented, have a tendency to provide a higher buying recommendation for firms with a high CSR rating, while they do not “punish” those companies that have a weaker CSR rating. It is therefore concluded that not only is it to the advantage of all companies to have a CSR rating, whether good or bad, as it can create lower capital costs for the company, but also larger companies with significant media attention must be very conscious of ensuring a good CSR rating, as this is reflected directly in their share prices.

A modification to the aforementioned result can be seen in a large American event analysis,¹¹ which demonstrates that the negative impact of detrimental environmental events on share prices has increased in recent years, while the impact of positive environmental business initiatives on share prices has decreased. The analysis also shows that if a company generally has a good CSR rating in the KLD, then this has an insuring effect, as the negative impact on share prices from environmental events is diminished. Additionally, the analysis shows that a good CSR rating actually has a further dampening effect on share prices when the company undertakes additional environmental initiatives. This means that at any given time wh...

Table of contents

• Cover Page
• Half-Title Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Foreword
• 1 Why is there a Need for this Book?
• 2 Is CSR profitable?
• 3 Rules and guidelines that exist
• 4 Rules that ought to exist
• 5 Proposed minimum data
• 6 Evidence requirements for valid and complete data
• 7 How to create a good control environment
• 8 How can investors use CSR in their analysis of stocks?
• 9 Conclusion
• Appendices
• References
• Index