By now largely adopted by corporate America, sustainability reporting can offer investors valuable insights into an organization’s broader impact on the world. That said, this reporting remains as much an art as a science, which can trip up the unsuspecting.
Tracking the CSR Trend
The Governance and Accountability Institute reported that in 2019, 90% of the companies in the S&P 500 published a corporate social responsibility (CSR) report. In 2012, just one in five companies in the index issued such a report.
The trend reflects the growing attention varied stakeholders are paying to corporate sustainability. In the 2019 edition of insurer Aflac’s annual CSR survey, 77% of consumers said a company’s commitment to improving the world influences their buying decisions. At the same time, 73% of investors surveyed said that a company’s actions to improve society and the environment enhance returns.
These developments have also resonated in boardrooms. With regard to environmental issues, 93% of corporate executives expect consumers to hold businesses accountable for their impact, according to a 2019 survey by the Environmental Defense Fund. The study also reported that managers expect 85% of investors, shareholders, and employees to hold companies to similar standards, along with 84% of regulators.
The emergence of CSR reports, which generally include environmental, social, and governance (ESG) assessments, bolsters the financial industry’s growing acceptance of nonfinancial measures in analyzing a business’s overall health and the risks it faces. Yet with much of the self-reported data coming from internal sources, disciplined reading of such reports is a must.
Corporate Social Responsibility Reports: The Basics
A considerable obstacle in assessing corporate social responsibility reports is that there is no standard approach to what information a company conveys. Unlike in the European Union, where ESG disclosure results from a blend of regulations and corporate initiatives, US-based companies subscribe to no formal or regulatory guidelines.
Nonetheless, a CSR report should typically include:
- A CEO statement that indicates understanding and buy-in from the highest levels.
- Discussion of key sustainability issues—the challenges, stakeholders, and initiatives.
- Metrics-driven results and progress over time.
- Case studies for added context.
Nonprofit crowdfunding resource GlobalGiving adds that corporate sustainability reporting must reflect a commitment to transparency and authenticity in discussing present efforts and future goals. That translates into providing updates and context around setbacks and in-process initiatives in addition to celebrating accomplishments.
The Value of Full and Frank Disclosures
Authenticity goes a long way in CSR efforts, as only 50% of consumers would believe a company if it stated that it wanted to help make the world a better place, according to the Aflac CSR study.
Such findings likely point to a frustration with greenwashing, or the misleading promotion of select accomplishments in tandem with a failure to fulfill broader sustainable aspirations. Earlier this year, numerous professional investors shared their strategies for circumventing greenwashing with the Financial Times, with many stressing that they focus on company processes and practices as much as its goods and services.
“Are financial goals linked back to sustainability ambitions?” asked David Harrison of UK-based Rathbone Investment Management. “How is management compensated—is there a clear link to sustainability? How does a company manage its workforce, its supply chain, and how does it contribute to wider society?”
Such issues are fair game in critiquing a CSR report, as are core elements that nonprofit sustainability advisory firm Ceres recommends corporations disclose to investors. These include:
- The development and maintenance of the sustainability business case and all related accountability.
- Disclosures that consistently feature material and relevant information, both quantitative and qualitative.
- The use of everyday language in proactive updates delivered by company leaders.
To gain the public’s trust, a corporation must trust the public with honest reporting.
The Role of Third-Party CSR Reporting
Another significant challenge for investors assessing how to judge a corporate responsibility report is the self-reported nature of the data and results. While a 50% increase in a specific measure over a year may look good, it is an empty statistic without context.
To provide valuable perspective, many companies turn to third parties for relevant targets and benchmarks. For example, to gauge environmental impacts, the Carbon Disclosure Project provides global benchmarks for measuring, managing, and disclosing greenhouse gas emissions; Forest Stewardship Council standards may be applied for the sourcing of lumber; and Leadership in Energy and Environmental Design (LEED) standards reflect advanced impact measures for buildings.
With regard to social issues, standards from Fair Trade Certified help assess supply chain dynamics; the World Bank’s Environmental and Social Framework assesses risks of potential projects; and the UN Global Compact provides measures including the 2030 Sustainable Development Goals. For an all-encompassing assessment, the Global Reporting Initiative’s GRI Standards and the Sustainability Accounting Standards Board provide frameworks across the ESG spectrum.
Corporate social responsibility reports offer organizations an opportunity to complement traditional financial reporting and expand the discussion around ESG efforts and other impacts. However, for true insights into a company’s impact on the world, CSR reports should focus on outcomes over outputs and self-analysis over self-promotion.