Chapter 15 - International Corporate Social Reporting

CHAPTER 15
INTERNATIONAL CORPORATE SOCIAL REPORTING
Chapter Outline
1. Traditionally, companies have focused on economic aspects in external
reporting. However, in recent years there has been a growing global interest
in CSR, based on sustainable development.
2. Sustainable development requires new and innovative choices and ways of
thinking.
3. The meaning of CSR is derived from the notion of organizational societal
responsibility, which indicates that organizations should be accountable for
the social impact of their activities.
4. Organizational social responsibility has been explained in terms of theories
such as legitimacy theory and stakeholder theory. Stakeholder theory posits
that CSR is in response to the stakeholder demand for such information, while
according to legitimacy theory CSR is a means to deal with firms exposure
to political and social pressures.
5, CSR practices of companies are driven by many factors, including the level of
media attention to CSR, and cultural factors (for example, the attitude towards
information disclosure at national and organizational levels).
6. Climate change has implications for CSR practices of companies globally.
7. As a result of the attempts at dealing with climate change, some key concepts
have emerged, such as emissions trading, carbon footprints, carbon offsets,
carbon funds, carbon neutral, and carbon tax.
8. CSR disclosures are made on a voluntary basis in many countries.
9. There are mechanisms at the international level (e.g., Global Reporting
Initiative, Kyoto Protocol and European Union Emissions Trading Scheme) as
well as local level (e.g., Chicago Climate Exchange), to regulate CSR
practices by companies.
10. GRIs fourth generation guidelines (G4) issued in 2013, represents a
standardized approach to reporting, encouraging the degree of transparency
and consistency that is required to make information useful and credible to
markets and society.
11. An increasing number of companies around the world are reporting and
assuring their emissions information. The recognition of the importance of
CSR is reflected in the extant Emissions Trading Schemes operating in
Europe (the European Union ETS), North America (the North American
Regional Greenhouse Gas Initiative and Alberta's Climate Change and
Emissions Management Act), New Zealand (the New Zealand ETS) and
Japan (Japan's Voluntary ETS). Also China has announced it will introduce
emissions trading progressively, commencing in a number of key cities and
provinces including Beijing, Shanghai and Guangdong, during the 12th Five
Year Plan period (2011-2015).
12. One of the difficulties in this area is trust. For example, if companies are not
telling the truth about what they have not reported, it will be difficult to trust
them that they are telling the truth about what they have reported.
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Chapter 15 - International Corporate Social Reporting

Answers to Questions:
1. CSR is providing information by companies about both social and environmental
accounting issues. Following financial disasters such as Enron and WorldCom, and the
more recent global financial crisis, ethical issues related to business and accounting
have figured prominently in discussion and debate concerning corporate reporting
and have probably added to the interest in social and environmental disclosures
internationally. CSR encompasses social responsibility, financial performance, ethical,
and sustainability reporting, which are mutually constitutive and mutually reinforcing.
The meaning of CSR is derived from the notion of organizational societal
responsibility, which in turn is based on the notion of stewardship, defined as the
accountability of management for the resources entrusted to an organization.
2. A number of theories have been used to explain CSR practices by firms, such as
stakeholder theory and legitimacy theory. The stakeholder theory posits that
environmental disclosures are made by company management in response to the
stakeholder demand for environmental (and social) information. However, it fails to
explain why firms from similar industries operating in the same geographic area
provide different disclosures. On the other hand, legitimacy theory posits that social
reporting is a means to deal with the firms exposure to political, economic, and social
pressures. According to legitimacy theory, firms behave in a way that is considered to
be congruent with the societys perceived goals to legitimize their performance.
3. The conceptual basis of CSR is the organizational societal responsibility. This in turn is
based on the notion of stewardship, defined as the accountability of management of
an organization for the resources entrusted to it, which In a broad sense, exists to
shareholders, other stakeholders (such as employees or creditors), and to society at
large. For example, it is increasingly considered morally irresponsible for companies
to make profits by unnecessarily depleting natural resources or by polluting the
environment. By definition, accountability is a proactive concept, which recognizes
the responsibility associated with it. If companies simply react to community concerns
or comply with regulations without a sense of responsibility for their activities, they
may not be truly embracing the notion of accountability.
4. Companies are motivated to engage in CSR practices by many factors, including the
level of media attention to CSR, the extent of demands from social and environmental
groups, and cultural factors (for example, the attitude towards information disclosure
at national and organizational levels).
Further, as Hopwood (2009) points out about environmental reporting [reference to Hopwood
(2009) is in the book], CSR practices serve as a corporate veil, simultaneously providing a new
face to the outside world while protecting the inner workings of the organization from external
view, and this would reduce the questions that might be asked of the firm.
5. As the Stern Report (2007) in the United Kingdom states, human actions over the
coming few decades related to climate change could create risks of major disruptions
to economic activity. The report points out costs of extreme weather alone could
reach 0.5 to 1 percent of world GDP per annum by the middle of the century. It further
states that the scale of economic disruption could approach those associated with the
great wars and the economic depression of the first half of the 20th century.
6. The key terms used in assessing the impact of climate change on a firm include the
following:

Emissions Trading
Carbon Footprints
Carbon Funds
Clean Development Mechanisms
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Chapter 15 - International Corporate Social Reporting

7.

Carbon Neutral
Carbon Tax

CSR practices of companies in many countries are conducted on a voluntary basis.

However, significant shortcomings, including doubts about the reliability of such
disclosures have been found. Similarly, public interest groups argue that voluntary
corporate social reporting both insufficient and low in credibility, due to selectivity in
providing information and lack of independent verification of performance.
Consequently, it has been argued that some form of regulation may be necessary in
order to promote more extensive, reliable and better quality reporting in the interests
of the wider society.

8. The mechanisms for regulating CSR practices at the international level include the
following:

Global Reporting Initiative formed in 1997.

The Kyoto Protocol that came into effect in early 2005.
The European Union Emissions Trading Scheme, also launched in early 2005.
SO 26000: 2010 provides guidance to organizations on a number of aspects/issues of social
responsibility, aimed at encouraging organizations to go beyond legal compliance.
The International Integrated Reporting Committee formed in August 2010.

9. The problems of regulation through legislation include the following:

Lobbying in favor of economic interests over social and environmental interests

may effectively undermine regulatory enforcement.
If corporate legitimizing activities are successful, then perhaps public pressure for
a government to introduce disclosure legislation will be low and managers will be
able to retain control of deciding what items to include in social reports, which
amounts to managerial capture of the meaning of CSR.
For legislation to be effective there should be a stringent enforcement
mechanism, which would be a problem in many countries.
A prime cause for the weakness of regulatory agencies may be their dependency
on the expertise and the information of those very industries whose excesses they
are seeking to mitigate.

10. The items often mentioned in CSR reports include the following:

Economic, environment, and social performance based on metrics from the GRI.
Steps taken to quantify, report, and reduce greenhouse gas emissions from
operations.
Steps taken to disclose energy use, which is also useful for assessing climate
impacts.
Targets to reduce emissions and the financial implications of targets.
Financial benefits from reductions in energy use.
Human resources, community involvement, and employee information.
The company policy on CSR.
The risk of legal action (such as class action lawsuits related to climate change).

11. The Kyoto Protocol, created in early 2005 under the United Nations Framework
Convention on Climate Change (UNFCCC), is a combination of country-specific
greenhouse gas emissions reduction targets and emissions trading mechanisms.
Currently, more than 165 countries have ratified the protocol, It is based on the
recognition that the atmosphere is a shared resource and that countries have
common but differentiated responsibilities to take action to control emissions.
Accordingly, all countries have a responsibility to take action, but industrialized
countries have a specific responsibility to take the lead.
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Chapter 15 - International Corporate Social Reporting

Countries that ratify the Protocol are obliged to enact regulations incorporating the
Protocols provisions on disclosures related to greenhouse gases (i.e., carbon dioxide,
methane, and nitrous oxides). A key aspect of this Protocol is that greenhouse gases
emitted by vehicles, power plants, and certain types of industrial operations need to
be brought to acceptable levels in order to control their global warming effect.
Initially, the countries ratifying the Protocol were committing to reduce greenhouse
gases by 5 percent from their 1990 level by the year 2011.
12. Global Reporting Initiative was formed in 1997 by U.S.-based nonprofits Ceres
(formerly the Coalition for Environmentally Responsible Economies) and Tellus
Institute, with the support of the United Nations Environment Program (UNEP). The
GRI is a collaborating centre of UNEP and works in cooperation with the United
Nations Global Compact. It is a network-based organization that has developed the
worlds most widely used sustainability reporting framework. This framework has
been developed by participants drawn globally from business, civil society, labour,
and professional institutions. It sets out the principles and indicators for organizations
to measure and report their economic, environmental, and social performance.
Currently, more than 1,500 organizations from over 60 countries use the guidelines to
produce their sustainability reports.
GRI Sustainability Guidelines have two parts. Part I defines report content, quality,
and boundary. It provides reporting principles and reporting guidance regarding
report content, ensuring the quality of reported information, and setting the report
boundary. Part II provides standards for disclosure. It specifies the base content that
should appear in a sustainability report. It identifies three different types of disclosure
namely, strategy and profile, management approach, and performance indicators.
Strategy and profile includes disclosures that set the overall context for
understanding organizational performance such as its strategy, profile, and
governance. Management approach includes disclosures that cover how an
organization addresses a given set of topics in order to provide context for
understanding performance in a specific area. Performance indicators are those that
comparable information on the economic, environmental, and social performance of
the organization. It also provides application levels for report makers to indicate that
a report is GRI-based. They are required to declare the level to which they have
applied the GRI reporting framework via the application levels system. Report
makers have the option to request an application level check.
The G3 which was published in 2006 was the so-called third generation of the GRI's
Sustainability Reporting Guidelines, and it outlines core content for reporting and is
relevant to all organizations regardless of size, sector, or location. GRI also issued a
document entitled BiodiversityA GRI Reporting Resource in January 2007. Among
other things, it assists reporting organizations in understanding biodiversity issues
and its relationship to their activities and operations and offers insights on specific
issues and challenges related to biodiversity reporting.
G4 ,GRIs fourth generation guidelines issued in 2013, represents a standardized approach to
reporting, encouraging the degree of transparency and consistency that is required to make
information useful and credible to markets and society. G4 aims to help reporters prepare
sustainability reports that matter, contain valuable information about the organizations most
critical sustainability-related issues, and make such sustainability reporting standard practice. It is
expected that G4 be applicable to all organizations, large and small, across the world.
G4 offers two options for an organization to prepare its sustainability report in accordance with
the Guidelines. The two options are Core and Comprehensive. Both options can apply for an
organization of any type, size, sector or location. Organizations that have prepared a
sustainability report are requested to notify GRI upon release of the report, if the report is in
accordance with the Guidelines Core or Comprehensive option; or if the report contains
Standard Disclosure(s) from the Guidelines but has not fulfilled all the requirements of either in
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Chapter 15 - International Corporate Social Reporting

accordance option. However, reports published after 31 December 2015, are required to be
prepared in accordance with the G4 Guidelines.

Solutions to Exercises and Problems:

1.
In providing solution, visit the Corporate Responsibility Report 2010 of Coca-Cola
Amatil Company through the internet and discuss the strategies, programs, and targets
of the company in relation to each of the global pillars mentioned in the report.
2.
In providing solution, identify a 2010 audit report for a U.S. company, which refers
to
GRI-G3 sustainability guidelines, and compare it with the audit report in Exhibit
15.4, and
explain the similarities and differences between the two reports.
3.
In providing solution, discuss the motivations for a company in any industry (other
than IT
industry) to prepare a CSR report, and identify the nature of the
information which is most likely to be included in such a report.
4.
In providing solution, identify a company (other than Toyota), which has stated
CSR policy
in its 2010 annual report, and compare it with Exhibit 15.10 identifying the
main points highlighted in the two annual reports.

Case 15.1: Modco Inc

This case highlights the dilemma in regard to the implementation of CSR. In many countries including
the United States, CSR reporting is self-regulated. Accordingly, many companies develop their own
codes of conduct, and prepare sustainability reports voluntarily. For this purpose, they claim to use
GRI guidelines which address issues related to, among other things, environmental and social
conduct of companies. On that basis companies also claim that they are being socially responsible.
Modco is a large, profitable US MNC which has subsidiaries in many countries. With regard to CSR
reporting, the company seems to follow the general practice among companies. For example, the
companys CEO, setting the tone at the top, emphasizes that the company is genuinely concerned
about the social and environmental dimensions of its activities. This may be because since the GFC in
2008 the global trend towards CSR and sustainability has influenced MNCs worldwide.
The problem is whether the company management is genuine in making statements such as the
above. Consequently, the reliability of voluntary CSR disclosures is questionable. There have been
public scandals involving issues ranging from environmental pollution to child labour and racial
discrimination. For example, there has been a national class action against Modco alleging sex
discrimination regarding pay and promotion. Modco was also alleged that it used child labour in two of
the factories in Bangladesh. In both occasions, the company did its best to deny these allegations.
Still the company annual report highlighted that it covered three dimensions of people, planet, and
profit following the GRI guidelines. There is no mention of the above class action or the use of child
labour in Bangladesh. The question remains that, if the company is not telling the truth about what
they have not reported, it will be difficult to trust that they are telling the truth about what they have
reported. Therefore, the reliability of the voluntary disclosures in annual reports remains questionable,
as they tend to be biased and self-laudatory.
The natural response to this situation is that there should be some form of government regulation.
However, it is important to recognize that there is a difference between being accountable and being
forced to be accountable, and the spirit of the concept of accountability may not exist in the latter
case. The spirit of the concept of being accountable is the recognition that one is responsible for the
impact on others of ones actions. Further, government regulation has its own problems, for example,
such regulation may be considered by business community as government interference in business,
and it might affect business negatively. This is the dilemma.
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Chapter 15 - International Corporate Social Reporting

It is vitally important that companies such as Modco should be genuine and act according to the spirit
of the concept of accountability, not simply try to show that it has followed the rules.

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