Although companies are increasingly reporting on their corporate sustainability responsibility (CSR) performance, there has been scant evidence that such disclosure does anything to improve how workers are treated or betters the environment.
But new research from Harvard Business School and London Business School demonstrates the first real evidence that mandatory CSR reporting works, and could give policymakers and companies themselves added impetus to increase transparency around environmental, social, and governance (ESG) performance.
The trend of mandatory sustainability reporting picked up steam as consumers, investors, and civil society in general increasingly demonstrated that they value the social responsibility of corporations. Another major boost for the concept came after several countries began requiring that companies report their metrics on environmental footprint, worker safety, and similar issues in a systematic, uniform way.
But does this reporting actually lead to more responsible management practices, or is this just an exercise in public relations?
That's the question that professor George Serafeim set out to answer with the working paper The Consequences of Mandatory Corporate Sustainability Reporting. Coauthored with London Business School's Ioannis Ioannou (PhDBE '09), the paper grew out of earlier research by the pair that found a sea change in the social awareness of investors in the past decade.
"The number of investors who care about this kind of performance has increased dramatically in the last 10 years," Serafeim says. "Right now those investors have about $5 trillion in assets under management, so you can say this is a pretty significant amount of money."Difficult to measure
After analyzing government websites, NGO publications, and investor reports, the researchers found 16 countries, ranging from Australia to the United Kingdom, that mandated sustainability reporting. A more difficult task was finding a standardized way to measure the sometimes subjective qualities of what makes a company socially responsible.
For that, the researchers relied on survey measures from the World Competitiveness Yearbook, published by IMD business school in Switzerland, which ranks the competitiveness of countries based on some 300 statistical and survey measures. Those measures include not only hard statistics but also indicators from anonymous surveys of executives, on issues such as the level of corruption in the country, the quality of labor relations, and environmental awareness. Even though the responses are self-reported, they have been found to be remarkably consistent. "You'd think that nobody would say a country is corrupt, but if you look at the data, many say just that," Serafeim says.
With this data, Serafeim and Ioannou were able to compare the 16 countries that required sustainability reporting with a sample of 42 others that didn't. The researchers focused on several measures that capture socially responsible management practices including the social responsibility of business leaders, sustainable development, employee training, efficiency of corporate boards, ethical practices, and avoidance of bribery and corruption. To guard against the possibility that countries that required mandatory reporting were simply more conscientious about social issues, the researchers performed a time-series analysis that compared countries before and after they instituted the reporting.Performance improvements noted
After the data were analyzed, a clear pattern emerged: Countries requiring corporate sustainability reporting experienced a significant improvement in most categories. For social responsibility, for example, those countries improved their ranking by 8 percent relative to countries that lacked mandatory reporting.
Serafeim and Ioannou also measured the incremental effects of two additional variables: effective enforcement of government decisions and assurance of data in the reports by independent organizations. They found that reporting was more effective in countries with stronger enforcement and in countries where the sustainability data were more likely to be verified.
Taken together, says Serafeim, the data provide the first real evidence that mandatory sustainability reporting works.
"If we believe that corporations should behave in a more socially responsible way, then we'd better have transparency around these issues," he says. "If regulators care about these issues, they should ask companies to disclose their performance around them, and if companies want to change the way they conduct business, they can use reporting as a way to change."
The effects would be even greater, he predicts, if countries followed the example of South Africa and France, which recently expanded their mandatory reporting laws to require that companies report their financial and ESG performance in a single integrated annual report.
"This increases the visibility of these disclosures and brings them up to the same level with financial disclosures," says Serafeim. "Moreover, it forces companies to explain the relationship between financial and nonfinancial measures and how managing these nonfinancial issues contributes to the long-term profitability of the company. This is an area where much more work needs to be done.
[This article was provided with permission from Harvard Business School Working Knowledge.]