CSR – Entering the mainstream

By Dr Yangxin Yu

Dr Yangxin Yu, Associate Professor in the Department of Accountancy, takes a critical look at the rapidly expanding sector of corporate social responsibility, the growth in independent assurance of CSR data, and how it is entering the mainstream of financial reporting. This article makes reference to "Financial analyst coverage and corporate social performance: Evidence from natural experiments," by Cuili Qian, Louise Y Lu, Yangxin Yu, published in the Strategic Management Journal, December 2019.

When, campaign group ClientEarth launched a complaint against BP for creating a "potentially misleading impression" in promoting its environmental credentials in December 2019, it was the latest in a long line of criticisms of "greenwashing." Back in the 2000s, BP once known as "British Petroleum," rebranded itself as "Beyond Petroleum." As events would turn out, their marketing campaign was overly ambitious. In 2010 the company suffered the largest marine oil spill in the history of the petroleum industry. The US Federal Government estimated that the Deepwater Horizon disaster discharged 4.9 million barrels of oil into the Gulf of Mexico. BP currently claims that it is moving away from fossil fuels and towards renewables but ClientEarth maintains that the vast majority of its planned investment – 96% – is in oil and gas.

"Greenwashing" is not unique to the petroleum industry, and is just one facet of "corporate social responsibility," a self-regulating business model which is designed to help companies be more socially accountable. With the growing recognition that the earth is in climate crisis, the meaning and scope of social responsibility is being drawn ever wider. And the role of the corporate sector is under increasingly scrutiny. Contemporary environmental, social and governance problems cannot be tackled by governments alone. Investors, stakeholders and the general public are demanding that corporates play a key role in combating these issues. So how has the accounting profession responded to the global demand for CSR? How much influence are stakeholders bringing to bear on multinationals? And what are the key areas in which accountants can apply their skills?

CSR is getting integrated into financial reports

CSR reports are now typically included in the mainstream financial reporting system. Annual reports increasingly feature disclosure alongside financial information, and there is a mounting expectation that larger firms disclose CSR information. In the 10th annual survey of corporate responsibility reporting in 2017, KPMG reviewed corporate social responsibility and sustainability reporting from 4,900 companies in 49 countries and regions. Around 75% of the companies issued stand-alone CSR reports, and 60% included CSR information in their annual report along with financial performance data. But the vast majority – 78% – of the world's biggest companies now integrate CSR in their annual financial reports, a massive shift from the 44% in 2011. Why the change?

Leading CEOs are actively exploring alternative metrics for measuring the long-term health of their companies and the communities they serve. A myopic focus on earnings or stock price is no longer sufficient. Boards are now asking more qualitative questions. Deloitte's 3rd annual Readiness Report (2019) surveyed more than 2,000 C-suite executives across 19 countries and showed that nearly 60% of executives said that "increasing their companies' positive impact on society" was among their top-five desired outcomes for Industry 4.0.1

PwC found 69% of CEOs agreed that "the purpose of business is to balance the needs of all stakeholders2." Over 9,000 companies now work with the United Nations Global Compact to advance broader social objectives such as the UN Sustainable Development Goals. Overall, there are four major emerging trends in CSR reporting: Firstly, to account for climate-related financial risk, secondly, to include the UN Sustainable Development Goals (SDGs), thirdly to embrace human rights, and lastly to take account of carbon reduction targets.

78% of large companies worldwide integrate CSR in their annual financial reports

The rollout of the CSR disclosure agenda, however, differs greatly around the world. Broadly speaking, stakeholder concerns are considered vital in developed countries. The views of regulators, shareholders, creditors, environmentalists and the media all play a role in how CSR information is disclosed by companies. By contrast, in countries with emerging economies, CSR reporting is more heavily determined by external influences such as international buyers, foreign investors, international media and international regulatory bodies such as the World Bank. Here, companies are under relatively little pressure from domestic forces.

The United Nations takes the lead

The United Nations Global Reporting Initiative is the most widely adopted framework for CSR reporting. According to KPMG3, around two-thirds of companies apply the Global Reporting Initiative (GRI) G4 Guidelines. Also, there is a clear trend that companies are aligning their own CSR strategies and targets with global goals, such as the UN 2030 Agenda for SDGs launched in 2015. These are a set of 17 goals designed to end poverty, protect the planet, and ensure prosperity for all as part of a new global sustainable development agenda. Each goal has specific targets to be achieved over the next 15 years. According to a 2018 PwC survey, 72% of companies surveyed mention the SDGs in their annual corporate or sustainability report.

Mandatory CSR reporting is also a trend in most markets around the world. New reporting requirements are being introduced through company acts, and accounting regulations, as well as instruments that address reporting on specific themes such as corporate governance or environmental pollutants. China illustrates the close interrelation between voluntary and mandatory reporting. Here the CSR regulations of the central government are followed by industry regulatory bodies and local government. Also, state-owned enterprises act as pilots to set an example to private companies which comply with these supposedly voluntary initiatives.

Governments and regulators increasingly encourage companies to disclose CSR information in annual financial reports. The number of reporting jurisdictions that require this integrated reporting nearly doubled worldwide between 2013 and 20164, while jurisdictions that require disclosure in stand-alone reports have also increased but by a lower proportion. This trend indicates pressure from investors for improved information about the material relevance of sustainability risks.

CSR can be reduced to impression management

Despite its prevalence, the credibility of CSR reporting has been called into question. Although the GRI is widely followed as the de facto standard, the framework allows considerable flexibility with respect to compliance. Companies may focus on positive CSR performance metrics, using descriptive information such as graphs or narratives that do not accurately reflect their overall CSR strategy. And in more relaxed jurisdictions, companies may simply disregard mandatory reporting regulations. In such cases, CSR reporting is reduced to impression management, symbolic in nature. The PwC survey in 2018 reported that the average score for reporting quality for those companies that had prioritised SDGs was just 2.71 out of 5. Clearly there is room for improvement.

Growth industry in the independent assurance of CSR data

CSR audit assurance is becoming a necessity as the awareness and engagement of investors, audit committees and management fuels demand for reliable data. In Japan, there has been serious investor pressure where the Government Pension Investment Fund demands reliable CSR information from its investee companies. International frameworks are also an important stimulus in Japan. Assurance of CSR information is required for listing on sustainable stock indexes such as the Dow Jones Sustainability Index, and this has driven up assurance rates in Japan.

Stakeholders are also interested in how external assurance can help improve CSR disclosure. The main assurance providers are accountancy firms, engineering firms and other professional services firms. The International Standard on Assurance Engagements (ISAE) 3000 was developed by the International Auditing and Assurance Standards Board (IAASB), and came into force in December 2003 and is used by accounting firms to guide their assurance engagements on CSR reports. According to KPMG, independent assurance of CSR data has more than doubled from 2005 to 2017 (now 67% of reports), indicating that the largest companies see value in promoting the reliability of CSR information.

Internal audit CSR assurance is also considered a growth industry. Trotman and Trotman5 interviewed 29 senior audit committee members, senior accountants, in-house internal auditors, and external auditors from outsourcing partners. The report showed that the value of internal audit as part of CSR reporting is widely accepted.

Sustainable and Responsible Investments gain traction
  • Two-thirds of millennial investors believe that environmental or social factors are important considerations in making investment decisions6.
  • The United Nation's "Principles of Responsible Investment" aims to encourage sustainable and responsible investment by institutional investors considering environmental and social factors in portfolio selection and management. Over 1,500 institutions holding assets worth more than $80 trillion signed up to the PRI initiative by 2018.
  • SRI is going mainstream with $30.7 trillion assets in the United States, Europe, Canada, Japan, Australia and New Zealand, a 34% increase in two years7.
  • The global mutual fund leader BlackRock launched the "BlackRock Impact US Equity Fund" in 2015, which aims to cater towards the growing demand for sustainable and impact investment solutions.
  • The pioneering MSCI KLD 400 Social Index remains one of the most influential socially responsible investment indices in the US. The two iShares ETFs issued by BlackRock (the MSCI KLD 400 Social ETF and MSCI USA ESG Select ETF) are largely based on the KLD index, which have $1 billion and $679 million in assets, respectively.
  • Corporate green bonds have become increasingly popular. For example, Apple issued a $1B green bond to finance "renewable energy and energy efficiency at its facilities and in its supply chain" in June 2017.

CSR is entering the mainstream

Financial stakeholders understand the business logic behind treating environmental and social issues as core. In emerging countries, CSR is seen as a proxy for good governance, which is critical for attracting foreign investment. Elsewhere, investors are increasingly concerned with how companies are building and protecting long-term value, recognising the role of CSR or non-financial performance information in a company's current financial performance long-term value creation. Increasingly CSR performance is seen as an investment guide for investors, asset managers and ratings agencies. These business groups now factor environmental, social and governance information into their assessments of a firm's performance and risk. "Sustainable and responsible investments" have become part of mainstream investing strategies in leading financial markets.

Institutional shareholders are making their voices heard. After purchasing the "hunger bond" of Venezuela in May 2017, Goldman Sachs was criticised for "funding a systematic human rights violator." Large institutions, such as BlackRock, New York State Pension Fund, and the Commissioners of the Church of England, backed a shareholders' vote in ExxonMobil for an annual assessment to address climate change, despite board opposition in June 2017.

Denial is no longer an option

Demand for CSR reporting also comes from company business strategies. The payoffs include greater customer loyalty, positive publicity, and enhanced corporate reputation. Denial is no longer an option: In 2012, Ikea dropped 70 of its suppliers for failure to comply with the company's supplier code of conduct in areas such as working conditions, waste, and safety. In 2014, the Walt Disney Company cancelled its contracts with several textile suppliers in Pakistan who failed to maintain health and safety standards; the canceled contracts were worth US$150 million.

CSR is becoming an integral part of business practice. Recent CSR studies find that firms use CSR as a reputation repair strategy targeting customers, employees, and geographic communities in the period after an accounting restatement or a litigation event. However, while some researchers find support for what is commonly referred to as "doing well by doing good," others suggest that CSR activities are an irresponsible use of corporate resources. A recent study finds that CSR expenditure is not a form of corporate charity nor do they improve future financial performance8. Rather, firms undertake CSR as a disclosure strategy when they anticipate stronger future financial performance, i.e., signaling information about the firm's future prospects. These findings support the insight that strategic CSR is simply a profit-maximising strategy motivated by self-interest.

Sustainability issues - Key areas in which accountants can apply their skills10
  • Reporting – with their long experience of reporting, accountants know how important it is to understand the regulatory, voluntary, and legal reporting environment in which business and government operates, and automatically keep abreast of any changes which may impact on reporting scope or legal requirements.
  • Risk – accountants can give advice on risk management, and on the implications for an organisation if it opts to start reporting on sustainability issues voluntarily.
  • Establishing frameworks – accountants have a deep understanding of how to collect, measure, and analyse relevant information. This means they are able to develop frameworks which embrace new sustainability information and which suit the circumstances of their own organisation. This skill is vital, as at present there is little specific guidance from government, and the capture and collation of social and environmental data will not be as easy for some organisations as it is for others.
  • Policy – it often falls to the accountant to determine organisational policy on "necessary to report" decisions; they are therefore well placed to advise on the reporting of sustainability issues, identifying what should be covered by a report.
  • Information provision – accountants are trained to provide clear and reliable information and, where required, assurance of this information; they are also able to gather the evidence required to support a business case, and establish the necessary supporting processes and procedures. In addition, many senior accountants report directly to senior management or the board – to do this effectively, an accountant has to know the business inside out and, as a result, can link sustainability issues to organisational performance.

Source: ACCA

On the other hand, as a long-term investment, CSR is also influenced by short horizon imperatives of the stock market which in turn drive short-term thinking. Financial analysts are important players in this dynamic. My recent study published in the Strategic Management Journal9 shows that, ironically, CSR improves when analyst coverage decreases. When analysts set quarterly earning goals for firms, managers may feel that socially responsible investment with a longterm horizon will not contribute to hitting short-term performance targets. It is our belief that despite analyst pressure, managers should still try to pursue both short- and long-term goals. We believe financial analysts themselves are seeing CSR more and more positively and there are value creation elements in firms' engagement in CSR in the long-run.

Overall, the corporate community is increasingly sensitive to the environment. Whilst writing this article, Australia has been battling scores of fires across the country for a period of months. A new survey by Deloitte released in January 2020 showed 81% of Australian executives believe climate change will harm their company. The concern from Australian executives is significantly higher than the global average of 48%.

The rising trend in CSR disclosure indicates surging market demand for CSR information that also feedbacks into firms' practices. Over the next few years, countries without CSR reporting regulations will introduce them, and existing regulations will be strengthened. New requirements will also likely be adopted on intensifying issues such as climate change, human rights and globalisation.


Dr Yangxin Yu
Associate Professor
Department of Accountancy