����Chapter 15:�International Corporate Social Reporting����

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Chapter Topics

• Theories to Explain CSR Practices
• Drivers of CSR Practices by Companies
• Implications of Climate Change for CSR
• Regulating CSR Practices
• Global Reporting Initiative (GRI)
• CSR Practices by MNCs

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Learning Objectives

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• Explain the meaning of corporate social reporting (CSR).
• Identify theories used to explain the CSR practices of companies.
• Describe the current international trend of external reporting.
• Describe the steps taken at the international level to regulate CSR practices of companies.
• Discuss the factors that drive CSR practices of MNCs.
• Identify the organizations that promote CSR at the international level.
• Discuss the role played by Global Reporting Initiative (GRI).
• Explain the diversity in CSR disclosures by companies at the international level, with possible reasons for the current trends in this area

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Corporate Social Reporting (CSR)--Background

• Also known as:
• Ecological footprint reporting
• Economic, social, and governance (ESG) reporting
• Triple bottom line (TBL) reporting
• Goal of sustainable development
• Meet the needs of the present
• Without compromising the ability of future to meet needs

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The Meaning of Corporate Social Reporting (CSR)

• Derived from notion of organizational societal responsibility:
• Which comes from notion of stewardship—the accountability of management for the resources entrusted to an organization
• Accountable to shareholders and other stakeholders (employees, creditors), and society at large
• Accountability is proactive—not reactive
• Example—morally irresponsible for corporations to profit by depleting natural resources or polluting the environment
• Recognize the need to take responsibility for one’s actions

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Theories to Explain CSR Practices

• Stakeholder theory

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• Environmental disclosures made in response to stakeholder demand for environmental and social information
• Major problem-- fails to explain different disclosures by similar industries in same geographic area

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• Legitimacy theory

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• CSR is means to deal with firm’s exposure to political, economic and social pressures
• Behavior motivated by society’s perceived goals to legitimize their performance

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Theories to Explain CSR Practices

• Legitimacy theory (continued)

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• Society’s perceived goals represented by various interest groups such as environmental public interest groups (e.g. motivation for disclosures by other petroleum firms after Exxon Valdez oil spill and expected disclosures from firms other than BP after 2010 Gulf of Mexico oil spill)
• Has sometimes led to increased skepticism, such as in Ireland who has no demand for CSR, so any attempt at CSR is questioned
• Australian managers, on the other hand, consider CSR disclosures useful for maintaining or reestablishing legitimacy

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Current International Trends and Drivers of External Reporting

• Largely voluntary in most countries
• Wide diversity based on different countries’ drivers
• National culture affects CSR practices:
• E.g. Spanish culture differ from Anglo-Saxon countries closer to Latin-European and Latin-American countries
• Remember Hofstede's four societal cultural dimensions:
• Individualism vs. collectivism
• Large vs. small power distance
• Strong vs. weak uncertainty avoidance
• Masculinity vs. femininity
• Also remember Gray’s relationship between accounting values:
• Secrecy vs. transparency (e.g. Spain secretive in CSR disclosures)
• Conservatism vs. optimism
• Uniformity vs. flexibility
• Statutory control vs. professionalism

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Current International Trends of External Reporting

• Influenced by organizational culture:
• Attitude of top management toward its stakeholders
• “Tone at the top” identified in U.S. Treadway Commission Report
• Managers determine relevant audience
• Foreign subsidiaries may disclose information in line with parent—not local culture
• Rate of development of CSR internationally is slow due to cultural factors—economic, political, capitalism, lethargy, inertia and resistance to change by accounting profession

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Regulating CSR Practices

• Significant shortcomings with voluntary CSR practices
• Biased and self-laudatory disclosures—minimal disclosure of negative environmental information
• CSR practices insufficient and low in credibility—lack independent verification of performance and selectivity
• Difference between accountability and forced accountability, where spirit of accountability may not exist in the latter

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Regulating CSR Practices

• Problems of regulation through legislation

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• Lobbying in favor of economic over social/environmental interests may undermine regulatory enforcement
• If corporate legitimizing activities successful—public pressure for governmental disclosure legislation may be low leaving it up to managers to control details of social reporting
• Needs to be stringent enforcement mechanism (e.g. Thailand’s social and environmental legislation hasn’t promoted more management CSR disclosure)
• Regulatory agencies weak due to dependency on expertise and information of those they are trying to regulate

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Regulating CSR Practices

• Regulation of CSR in the United States
• Chicago Climate Exchange is the only cap and trade system for all six greenhouse gases (GHGs) in North America
• Emitting members—voluntary but legally binding commitments to meet annual GHG reduction targets:
• If below target—can sell or bank surplus allowances
• If above target—purchase CCX Carbon Financial Instrument contracts—tradable commodities (each contract = 100 metric tons of CO2 equivalent and comprised of exchange allowances and offsets)
• CCX failed since:
• Governing agencies issue certificates for a fictional commodity of emissions not emitted
• Carbon offsets are nearly impossible to verify as to legitimacy
• California and nine Eastern Seaboard states have formed Regional Greenhouse Gas Initiative to introduce regulations on GHG emissions

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Regulating CSR Practices

• Regulation of CSR in the United States (continued)
• SEC has taken steps to introduce greater regulatory scrutiny
• “Superfund” legislation in the ’80s required corporations to actively remediate past problems (even if not responsible for the contamination)
• “Superfund” reporting also helped more positive environmental informational financial reporting

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Regulating CSR Practices

• Regulation of CSR in other countries and regions
• Environmental laws increased dramatically in Australia, New Zealand, U.K., and the European Union
• Environmental Protection Agency establishes behavioral standards/enforces compliance through punitive measures
• The Asia-Pacific Partnership on Clean Development and Climate signed in mid-2005 to deploy clean energy technology

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Regulating CSR Practices

• International Arrangements to Regulate CSR
• Bodies such as World Bank and IFAC and organizations such as Kyoto protocol and GRI promote CSR practices
• World Bank set up PCF to stimulate development of the emissions trading market and assist investment in carbon credits
• IFAC developed Sustainability Framework to influence the way organizations integrate sustainability
• SO 26000: 2010 provides guidance on social responsibility
• Kyoto Protocol (2005), created under UNFCCC is a combination of country-specific GHG emission reduction targets and emissions trading mechanisms

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Drivers of CSR Practices of MNCs

• Climate change
• International Panel on Climate Change (IPCC) has found concentration of carbon dioxide in the atmosphere has increased by 35% in the past 250 years
• 1995-2006: rank among warmest years for global surface temperature
• 2007 Stern Report in the United Kingdom on the Economics of Climate Change: our actions resulting in climate change risk major disruption in economic activity (e.g. could cost .5% to 1% of world GDP per annum by mid-century and could approach to economic depression of first half of twentieth century)

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Drivers of CSR Practices of MNCs

• Climate change—key concepts
• Emissions Trading—tradable carbon credits must be purchased or pay a fine if certain emission limits exceeded
• Carbon Footprints—represents a range of concerns about environmental impacts and degradation
• Carbon Funds and Emissions Brokerages—funds set up to purchase carbon credits and brokerages mediate between buyers and sellers of the credits
• Clean Development Mechanism (CDM)—promotes reductions in emissions of developing countries
• Carbon Neutral—emissions offset by removal of an equal amount of gas from the atmosphere
• Carbon Tax—tax on use of fuels causing carbon dioxide and greenhouse gas emissions—based on type and quantity—promotes fuel efficiency

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Organizations that Promote CSR

• Kyoto Protocol
• Effective from early 2005
• Created under UNFCCC
• Combination of country-specific GHG emission reduction targets and emission trading mechanisms
• Companies ratifying it provide greater pollution disclosures
• Global Reporting Initiative
• Formed by U.S.-based nonprofits Ceres and Tellus Institute with support of UNEP
• Developed world’s most widely used sustainability reporting framework
• Assists reporting organizations in understanding biodiversity issues
• Launched international certified training program in 2007

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Global Reporting Initiative (GRI)

• Formed by the U.S.-based nonprofits Ceres and Tellus Institute
• Independent, yet remains a collaborating centre of UNEP and works in cooperation with the United Nations Global Compact
• Developed the world’s most widely used sustainability reporting framework
• GRI Sustainability Guidelines have two parts:
• Part I—provides reporting principles and guidance on content, ensuring quality, and setting boundary
• Part II—provides standards for disclosure, specifies base content, and identifies types of disclosure: namely, strategy and profile, management approach, and performance indicators
• G3, third generation of GRI, outlines core content for reporting

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Global Reporting Initiative (GRI)

• Biodiversity—A GRI Reporting Resource (2007) assists in understanding biodiversity issues, relationship with organizations, and offers insight to biodiversity reporting
• Other initiatives:
• GRI-Certified Training Program- to create worldwide common understanding of the sustainability reporting process
• Sponsored Global Conference on Sustainability and Transparency to discuss issues on reporting and assurance
• G4—standardized approach to reporting, encouraging the degree of transparency and consistency
• Formation of the International Integrated Reporting Committee (IIRC)—to develop globally acceptable framework that brings together financial, environmental, social, and governance information in a clear, concise, consistent, comparable, and integrated manner

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Exhibit 15.1— GRI Reporting Framework

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Diversity in CSR Disclosures by Companies

• UPS 2009 annual report states that it follows GRI guidelines:
• Shows plans to cut airline carbon emissions
• Shows how it responds to each of G3 indicators
• GRI research indicates worldwide trend towards sustain-ability:
• Helps build and maintain brand
• Strong correlation between high profitability and sustainability in top international businesses (e.g. Coca-Cola, Microsoft, IBM, GE and Nokia)
• Senior management clearly express commitment to CSR
• Hard to find examples of companies quantifying financial cost or benefit of reducing greenhouse emissions

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Diversity in CSR Disclosures by Companies

• Items disclosed and methods of CSR disclosure vary in different countries
• Items Disclosed:
• U.S., U.K. and Australia mostly disclose human resources and community involvement
• Thailand mostly discloses employee and environmental information
• Methods of Disclosure:
• U.S. and U.K. use both monetary and nonmonetary disclosure
• Australia usually discloses nonmonetary and more favorable to company even around time of negative events:
• Also haven’t adopted compliance-with-standard style of stakeholder reporting as in Europe
• Little reference to reporting standards or necessity of disclosure

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Diversity in CSR Disclosures by Companies

• Extent of Environmental Disclosure varies:
• Canada more extensive than U.S.
• Firms from countries that ratified Kyoto Protocol seem to have higher disclosure indices related to pollution and greenhouse gas emissions
• Japan stands out as a country with high rate of reporting on climate change
• Extent of Environmental Disclosure Varies
• Few companies report on risk of legal action or business disruptions caused by climate issues

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End of Chapter 15

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