Corporate Disclosure of Social and Environmental Data: Mandatory vs. Voluntary

April 21, 2004
Boston College, Chestnut Hill, MA

This day-long conference examined whether corporate disclosure of social and environmental data is best accomplished through voluntary or regulatory schemes. Government regulations, accounting standards, stock exchange listing requirements and voluntary initiatives such as the Global Reporting Initiative all offer opportunities to push much-needed disclosure forward. Attendees were asked to contemplate the most efficient and effective means of reaching this end.

The following report by Sandra Waddock, DBA, Professor of Management at Boston College's Carroll School of Management and a senior research associate at The Center, summarizes the discussion of the April 21 meeting.

Social and Environmental Disclosure: Should There Be a Mandatory Requirement?

What should the company be in the 21st century—and how should it be held responsible and accountable for its practices? How transparent should companies need to be, and about what issues companies do need to be to be considered good corporate citizens? Should social and environmental reporting be mandatory or voluntary? Should such reporting be standardized? These questions framed the second meeting of the Institute for Responsible Investing (IRI) at Boston College Carroll School of Management, April 21, 2004. The IRI of the Center for Corporate Citizenship at Boston College held its second conference to discuss the evolution, current practice, and future of multiple bottom line disclosure both internationally and in the United States. Leading institutional investors, researchers, academics, NGOs, consultants, and practitioners discussed emerging frameworks and developments, and thought through the pros and cons of mandatory v. voluntary disclosure in a setting where multiple points of view could be aired. The following report summarizes the key ideas that emerged from that day of presentation and conversation with specific attribution to individuals.

Pressures for greater transparency and disclosure about environmental and social practices aimed at long-term ecological, social, and business sustainability have been growing in the wake of the growth of power of multinational corporations, the array of scandals that have plagued business institutions since the collapse of Enron and Arthur Anderson, and increasing anti-corporate activism by NGOs, labor unions, and others. Around the world, governments (typically following the lead of practice) have begun to take notice, putting new disclosure regulations on the book. Despite these new regulations, significant questions remain about whether, and, possibly more importantly, how corporate disclosures about their social, environmental, and economic practices should evolve.

Observations from the International Scene

In England, where pension fund managers are already required to disclose their policies on social and environmental issues, the concept of ‘enlightened shareholder value’ is replacing ‘shareholder value’ as the focal purpose of the company. The concept of enlightened shareholder value maintains a clear shareholder orientation (v. a stakeholder orientation) and focuses on business performance. The term ‘enlightened,’ however, opens up considerations of long-term issues and performance, business (e.g., stakeholder) relationships in decision making, as well as impacts on society and nature and maintaining a reputation for high standards of business conduct. Much of the discussion focused on another shift of language in defining what needs to be disclosed and what does not. In new statements called operating and financial reviews to be included in annual reports, companies will now have to disclose matters about employees, the environment, and social and community issues ‘to the extent necessary’ to allow board members to make sound long-term strategic decisions. Ensuring that decisions are well founded means that directors need relevant (e.g., employee, environmental, and community) knowledge and skills.

France became the first country in the world to mandate social and environmental reporting in 2001 with its New Economic Regulations Act. The regulations state that some 40 indicators, drawn from both the Global Reporting Initiatives and Bilan Social, the regulations are general rather than industry specific, which has proved problematic in that not all are relevant in every company’s industry or situation. Implementation is not yet complete, as a study undertaken in 2002 suggested that no companies were in full compliance and that considerable reluctance to disclose remains. Problems include information overload, material issues not being reported, and the recognition that compliance with a law is not the same thing as commitment to corporate responsibility, which is implied by voluntary reporting. At the same time, stated commitment to corporate responsibility has become popular in France since the law took effect in CEO statements, a market for corporate responsibility services (e.g., consulting, rating, auditing, academic programs, conferences) has emerged in France, and the media has become highly interested.

The Global Reporting Initiative (GRI) has made tremendous progress in a relatively few years, however, it is important to remember that these are still early days for social and environmental reporting. Neither the measures nor the current reporting standards are stabilized, nor are they likely to be, since the issues that are relevant to stakeholders change with the times. At the same time, the profusion of activities globally, the changing laws and regulations in France, the UK, Japan, the Nordic nations, and even the US with Sarbanes-Oxley, among others, combined with waves of activism and demands for transparency, and voluntary reporting by numerous large and powerful corporations suggest that broad-based reporting is a wave of change that won’t easily be reversed.

GRI builds its legitimacy on the processes that are used to devise and modify reporting standards—a multi-stakeholder engagement process that builds trust in the product because the process has been fair and participatory. GRI reporting is also a long-term learning process, with steady but not spectacular growth on a global basis. GRI helps companies focus on integrated responses to their strategic business issues as well as the array of stakeholder concerns facing them. The process for developing GRI has deliberately been largely outside of governmental purviews, with governments basically following trends that have already emerged when they begin thinking about mandated reporting requirements.

Views from the US

At present, not much disclosure on social and environmental issues is required of US companies in contrast to requirements emerging in Europe and elsewhere around the world (see table). Although past legal research (Williams, 1999) indicates that the SEC clearly has the authority to require such disclosures, little action has been taken to mandate social and environmental disclosures by companies in the US. There are examples of specific data being required within certain domains, e.g., toxic environmental releases, community reinvestment by banks, auto safety and rollover rates, as well as miles per gallon information, and mortgage information is available as a result of the Home Mortgage Disclosure Act (HMDA).

Much of the data that are mandated needs to be integrated and synthesized to be fully useful. Further, important information is not required, and therefore not reported, leaving the landscape ‘cluttered and disconnected,’ with little comparability across companies and industries, and no overall coherence to the picture in the US. Although some of these data are available, they do not immediately come in useful form. The HMDA data, for example, are reported by bank, by area, by subsidiary, and need to be analyzed into a format that tells the ‘story’ of a particular bank or area in tractable ways. When the right analysis is done, the data have great power to help analysts and activists push for desirable changes, however, significant work frequently needs to be done to interpret and analyze the data adequately for policy-making purposes.

US companies are supposed to report on known trends and events (which can be of an environmental or social nature) that might have a future material impact. Research suggests, however, that serious noncompliance with this ruling exists. Sarbanes-Oxley attempts to boost the accuracy of financial reports and ethical standards of companies.

According to research reported by Mary Graham and colleagues, disclosures make sense as regulatory policy under certain conditions, including periodic crises that focus attention on the system, leaders who voluntarily do what is desired, and reasons for others to use information reported. Companies, however, may find it in their interest to have mandated reporting to reduce the clutter, to help them focus on what’s important (i.e., what is being measured is what gets paid attention) to key stakeholders, to boost employee morale (who find out the ‘good’ that their companies are doing), as well as for risk management purposes.

In part, a trend toward more reporting is important because in an era when institutional trust is at an all-time low, company leaders know that they need to do what they can to build and maintain customer (and employee) loyalty and trust. Brands and reputation, in this sense, really do matter. Several business reasons can be offered in favor of reporting: risk management, internal performance value capture, supporting external reputation, affecting consumer actions. Problems arise because of survey fatigue and too many different standards, increasing costs of reporting, fear because of Kasky v. Nike, questions about materiality, and the fact that verification processes are immature.

Issues to Consider

A lively discussion brought out numerous issues that need to be considered going forward, which are summarized below.

Pros and Cons of Mandate: If all companies are required to report social and environmental issues, it will be harder to distinguish corporate leaders from the rest of the pack, public relations from real commitment. On the other hand, required reporting levels the playing field in important ways that are useful for companies as well as activists desiring change. The key is to ensure that the right data are reported, at the right level of analysis, in useful formats. Since it may not be possible in advance to know what those requirements are, it may be better to write more general laws that allow flexibility and adaptation over time as the situation and technology change. It is clear, e.g., from CRA, that reporting has the potential to raise the bar, but it took more than 20 years from the time that the law was initially passed until it began to be effective.

Shifting Norms: Currently, there is a shift in norms and understanding of what a reasonable investor needs to know: what is relevant or material to that investor as s/he (or institutions representing investors) makes decisions. Furthermore, the expectations of the market for performance and the expectations of corporate responsibility are significantly different thrusts that somehow need to be reconciled. It may be important to make issues of reporting on social and environmental criteria, and the risks of not doing so, a public issue, particularly for US companies who may be faced with global competitive disadvantage if they lag in reporting behind international competitors.

Goals: What do SRI advocates really want to see happen over the next ten years in sustainability or triple bottom line reporting? If the idea is to shift norms with the corporation about the way decisions are made, then measurement and reporting externally may be important levers for getting managers to pay attention to relevant stakeholder and ecological issues. Identifying this goal takes reporting and disclosure ‘beyond the business case’ to what BP calls ‘just values.’ It recognizes that sometimes there is no business case for actions that benefit society or nature, but they still need to be done. In part this will happen because reporting itself and the attention paid to gathering data can begin to shift norms within companies about what is important. Reporting can be used as a market signal about what a company values when voluntary, or when mandated, as a tool or lever to manage a shift in norms within all companies.

Language and framing matter: Using the language of risk management, controls, and improvement can provide new language that may help raise the consciousness among less committed companies about the importance of these issues, though some traditional language (e.g., corporate social responsibility) may have to give way. For example, the language of sustainability is well accepted in Europe and other parts of the world, but almost not used (yet) in the US. The concept and practices of fiduciary duty, especially with respect to institutional investors, and the risks associated with not disclosing social and environmental practices, make the case for reporting in the future. Both long and short-term challenges need to be taken into consideration.

Incentives for reporting: Creating positive incentives for reporting. How can a set of positive incentives (e.g., awards, rankings, recognition in the media, benchmarking excellence) be created that will reward companies for leadership in SRI reporting.

Timing: Timing—when to mandate—is critical. Too early and there will be a checklist mentality, irrelevant indicators, and no real change of corporate practices. Too late and practices will be entrenched and difficult to change. Study of the history of financial reporting and how it evolved from its early days might be informative in looking at issues currently facing the SRI reporting field.

Content: Content—what to report—needs careful consideration and probably, as the experience of GRI suggests, needs to be geared to sectors and even industries, rather than being more generic. The indicators that are actually important and relevant within a specific industry or sector need to be given careful consideration. Cross-industry checklists are not particularly useful. The question of materiality, what is material and what not, is arising in numerous arenas, particularly around questions of future risks related to environment as well as other social trends.

Process: How the reporting should be done—is fundamental. Early signs suggest that some amount of stakeholder engagement is important, and that the indicators to have an effect on corporate practice need to be carefully linked to companies’ strategic objectives.

Format: Where triple bottom line reports are issued and in what format, on the web, on paper, to whom are critical questions that still need answers. The question of ‘who reads these reports’ frames their usefulness. NGOs may raise questions and demand accountability and reporting on certain issues, but they may not be ready to challenge on-going corporate practices on a consistent basis, when there is no immediate crisis.
They can help motivate employees and retain loyal customers, and are obviously useful to socially-concerned investors. One key is to figure out how to get the mainstream financial community and board members interested in and using this information, especially as part of risk management within the scope of their fiduciary responsibilities. The consensus seemed to be that triple bottom line reports are very valuable as management tools, focusing management attention on important issues that need consideration for risk avoidance and management, avoiding reputational problems and controversies, and stakeholder relationships management. They are also valuable to the social investment and activist communities, who pay attention to the issues raised within them, and are useful to companies internally as employee morale boosters. Companies increasingly are putting their reports on the web, rather than printing large numbers of them.

Evolution: Issues are likely to evolve and change over time, and thus what needs to be reported on will also shift accordingly. Any standards that are set or content areas developed will need to remain flexible enough so that new concerns and issues can be included over time. Rigid standards and inflexibility in reporting requirements is not useful and leads to a checklist mentality. It may be far better to mandate in relatively general terms that can then be reinterpreted flexibly as situations, companies, technology, industries, and nations change.

Survey fatigue: Company representatives increasingly report being overwhelmed by requests for information from numerous social analysts, activists, investors, and diverse governmental agencies with specific needs. Some standardization and systematization will need to happen to avoid increasing this problem. Making the system of reporting more automatic, transparent, and computerized is probably a necessary next step.

Open Questions

There is a clear need to bring this message about including social and environmental considerations into investment decisions to the mainstream financial community, both analysts and investors. Environmental and human rights, issues, for example, are material business considerations in an era of intensifying activism and open availability of information.

Should stakeholder engagement processes be somehow formalized into reporting and accountability requirements if and when they are devised?

What will it take to get the mainstream finance community interested in issues of social and ecological performance, as well as financial performance, not in an either/or logic, but in recognizing as some GRI reporters do, that performance is an integrated whole. Financial performance cannot in reality be separated from environmental and social performance especially as it relates to specific stakeholder groups on whom the company depends.

Table 1. Social Disclosure Regulations Currently in Existence (2004)

Europe

United Kingdom: Socially Responsible Investment Regulation (2000) requires pension fund managers to disclose their policies on socially responsible investment, including shareholder activism.

Belgium: Social Label Law (2003) requires annual reporting indicating how CSR is assessed in pension funds.

France: Annual reports require social and environmental impact assessment of company activities (2001) if listed on the French stock exchange. Retirement funds should rely on financial and social criteria in investment selection.

Germany: Companies need to indicate how social and environmental policies are being integrated (2001), and companies must declare whether codes are being followed or not.

The Netherlands: Mandatory compliance with OECD guidelines for multinationals to obtain export credits (2002).

Norway: All enterprises need to include environmental reports in yearly balances (1999).

Sweden: All enterprises need to include environmental reports in yearly balances (1999).

European Commission: In a communication to the Parliament required that CSR criteria be introduced in legislation of member states.

Other Nations

Japan: As of 2003, audits of listed companies are required to disclose material information on risk related to corporate viability, including financial and business risks, but extending to reputation and ‘conspicuous deterioration of brand image.

Australia: As of 2003, a law passed in 2002 requires all investment firms to disclose how they take socially responsible investment into account.

United States

Voluntary Pressure Tactics in the US CalPERS recently stated: "CalPERS has embarked on a large-scale project to develop and deploy a comprehensive framework for measuring, monitoring, and managing risk… ." Over the next several years, risk management will be come a driving force in the decision-making process used for our portfolio management (3/25/04), posted at http://www.calpers.com/index.jsp?bc=/investments/riskmanagesystem.xml (4/21/04) Thirteen public pension funds in the US called on the SEC to disclose financial risks of global warming (2004). A coalition of SRI firms, including Calvert, Citizens Funds, Domini Social Investments, Green Century, Capital Management, Parnassus, Trillium, and Walden Asset Management submitted a letter to the SEC in 2002 seeking disclosure of financially significant environmental risk.

References
Williams, Cynthia A. 1999. The Securities and Exchange Commission and Corporate Social Transparency. Harvard Law Review, 1197, 1998-1999, 112: 1197-1298.