If there’s one method for encouraging companies into a “sustainability” frame of mind it is the plea that they adopt a form of disclosure scheme that reveals their corporate social responsibility (CSR) progress.
And yet, the benefits may be difficult to pin down, say academics reviewing the potential of mandatory CSR reporting.
Written by academics Hans Christensen, Luzi Hail and Christian Leuz, Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review examines the potential benefits of sustainability reporting by assuming the hypothetical imposition of mandatory disclosure standards on US companies.
According to the paper, published by the European Corporate Governance Institute, defining what is “material” in CSR reporting is a difficult task—and made more trying by a troubling obstacle.
“At the core of the problem is the observation that the empirical line between CSR activities and financial performance is tenuous, yet central to the definition of materiality,” the paper says.
CSR or sustainability reporting has become a much discussed issue in business as boards grapple with new expectations from regulators, politicians and the public that they will play their part in reorientate their strategies to help confront the climate crisis.
A slew of different reporting frameworks have emerged for companies to use. These include guidelines from bodies such as the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), and the Global Reporting Initiative (GRI), to name just a few.
These schemes are voluntary and much effort goes into promoting them to board members around the world and investors.
But the academics in this latest paper were looking at the possible outcomes from introducing a set of mandatory reporting rules.
Defining “materiality” would be a key problem for any mandatory reporting system, the authors conclude, because what may be material for investors may be quite different for other stakeholders who “care about CSR issues”.
According to the paper, more evidence is required to show what is “material for investors”.
The researchers also warn that mandatory reporting can have “unintended” as well as “intended” consequences for a business, “which are not always beneficial from an investors’ or societal perspective”.
But they also conclude that “more and better” CSR information could help capital markets, and that mandatory disclosures are more likely to have “real” effects on a company’s operations and activities.
Two potential costs are highlighted in the paper: proprietary and litigation.
Proprietary costs are those that come in the form of external groups such as competitors, unions, regulators and tax authorities using the newly disclosed information for their own purposes with the firm.
Litigation costs spring up as disclosures, or failure to disclose, and raise the prospect of courtroom battles, an ever-present concern for US companies.
The net effects from the introduction of a mandatory system of reporting are therefore difficult to spot.
“If compliance is rather low, as some evidence suggests, and a reporting mandate is able to force out new or better CSR information, then capital markets should respond as theory predicts, for example, in the form of improved liquidity, lower costs of capital, and higher asset prices,” write the authors.
“At the same time, more transparency can increase proprietary costs and evoke heightened scrutiny by investors, analysts, or the general public. Thus, the net effects of a CSR reporting mandate are not a priori obvious or necessarily beneficial for investors.”
European companies must report using the Non-Financial Reporting Directive, which requires much greater levels of sustainability disclosure. The requirements are under review with the possibility in the near future that the EU might issue guidance on the specific subjects and measures companies must disclose.
Last year a YouGov poll found that 70% of C-suite executives believed the new reporting requirements had made their companies more transparent.
To read the paper click here.