We Need MandatoryCorporate Social Responsibility (CSR) Reporting

We Need MandatoryCorporate Social Responsibility (CSR) Reporting

By Ron Robins

I favour mandatory CSR reporting. Let′s face it, companies coming clean on their environmental, social and governance (ESG) practices are now being seen important by nearly everybody. ESG issues are essential in informing us about long-term opportunities and risks for individual companies. Therefore, CSR reporting should be as mandatory as audited financial statements.

As revealed by Watson Wyatt recently, ESG analysis is one of the six big macro trends among institutional investors. And in most developed countries, over 80% of investors are interested in this too.

For small companies, this might be costly, so perhaps a reduced form would be better for them. But for large companies with big societal impacts, CSR reports should be standard practice.

Also, stockholders reading a company′s CSR report need to be assured that what they are reading is factual and reliable. Today, we see a proliferation of differences in CSR reports in their methodology, construction and reporting styles. There are no universally accepted standards, such as Generally Accepted Accounting Principles (for financial statements). And for North American companies, few are externally audited or have what are called an ‘assurance statement.′ The latter means an external reviewer provides an independent audit of the report, and we hope, with some useful commentary as well. Some companies have gone the route of creating an external advisory panel of highly respected individuals who review and comment on the report. Many a Japanese company has just one respected individual placing a comment within the CSR report. That might be alright for some, but for most investors, it would seem inadequate.

As in accounting, to avoid conflicts of interest, the people who create the CSR report should not be the same ones who audit it.

Not only should these reports be required, but they must be audited and opinion given by qualified ‘assurers.′ This suggests some form of standardization in the design of these reports and the qualification of whom may perform such audits and offer opinions. Currently there is an enormous variety of CSR reporting methodologies.

But three key ones are emerging. They are: the ‘AA1000AS,′ created by the Institute of Social and Ethical AccountAbility (usually called, simply AccountAbility) from London, England; the ‘ISAE 3000′ which has been developed by the accountancy profession; and the ‘Global Reporting Initiative (GRI) Guidelines,′ developed collectively by numerous CSR professionals and stakeholders. The first two of these are considered an assurance standard in the CSR reporting industry. However, the ISAE 3000 is the only standard that has developed a global following so far.

So when you review a CSR report, check to see how it was created and who assures its data and statements before taking it seriously. Also, check for statements of independence of the assurance provider to the company as well as any disclaimers! This obviously is important for those who rely on these reports in assessing socially responsible investment rankings.

The idea of separating non-financial reporting from financial reports may well change in the years ahead. From an investors′ standpoint, it is probably preferable to have them integrated into one report rather than as a separate report that the investor has to request.

From the research which I have seen, it is clear that the greatest number of CSR reports that have some type of independent scrutiny are from European companies. In North America, given its particularly litigious climate, it seems that some companies, and especially those who might perform an assurance or auditing function, steer away from doing this work because of the danger of being sued. This is a pity, and ways around this problem need to be found.

Companies should realize that it can be very beneficial for them to engage outside consultants in the CSR reporting process. Such consultants can help them in enhancing their data quality and provide information on how to continuously improve their CSR performance. Thus benefits to their bottom line can accrue. In turn, organizations which provide ratings on ethical and socially responsible investments may give them higher rankings, resulting in higher prices for the company′s stocks and bonds.

Unsurprisingly, countries in Europe and Asia particularly, are increasingly likely to mandate CSR reports for all companies. Norway seems set on this path, according to Responsible Investor. And in the UK directors of public companies must now disclose environmental and social risks that are material to the company′s operations. Eventually I believe we will see countries everywhere mandating CSR reporting for public companies. These reports will be largely uniform in structure, contain generally agreed upon ‘reporting principles,′ be audited by professionally licensed assurance providers, and contain a standard ‘assurance statement.′ Without these safeguards investors are disadvantaged in understanding, comparing, and knowing how to act upon CSR reports.

Special note. Much of the above information came from an extraordinary, first-of-a-kind, study: Assure View. The CSR Assurance Statement Report, recently released by, and available from, http://www.CorporateRegister.com/. I highly recommend anyone interested in CSR or ethical investing to read this report. Please note though, that opinions expressed in this editorial are my own.

October 17, 2008

© Ron Robins 2008

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