Rory Sullivan and Paul Hohnen argue that obligatory reporting is good if it helps improve corporate behaviour
It has long been argued (at least in the CR world!) that mandatory reporting should result in companies improving the manner in which they manage social, ethical and environmental issues.
A variety of reasons for this have been advanced. Reporting, it is contended, enables stakeholders to exert targeted pressure on poorly performing companies; reporting forces management to explicitly consider social and environmental issues; and the reporting process helps companies identify, and in turn manage, risks and opportunities.
In short, more and better information, better used by everyone, can make markets operate more efficiently.
While the broad arguments are clear, the supporting literature, at least to date, has been limited, with most articles focusing on the implications of voluntary reporting (where non-reporters are the control group) or on company-specific case-studies. Broadly, these have confirmed that there can be benefits to reporting but have not properly examined the implications of mandatory reporting.
An important recent working paper by Ioannis Ioannou of London Business School and George Serafeim of Harvard Business School goes some way towards addressing this weakness in the CR literature.
Their paper, examining the effect of mandatory sustainability reporting across 58 countries, concludes that after the adoption of mandatory reporting, both sustainable development and employee training become a higher priority for companies, corporate governance improves and companies take action to reduce bribery and corruption. They also find that the credibility of companies improves.
These effects are all larger for countries with stronger law enforcement and more widespread assurance of sustainability reports.
Real reporting benefits
These are hugely encouraging findings, as they suggest that there are systematic benefits to mandatory reporting and that the net effects outweigh those from voluntary reporting alone.
This returns to a recurring theme in previous articles that we, individually and collectively, have written for Ethical Corporation. Ioannou and Serafeim’s research provides further support to our views that governments have a critical role to play in driving sustainability, and that well-designed policy interventions can provide a series of positive spill-over effects.
While we welcome (and indeed encourage more of) this research, three points of caution need to be made.
A slow start
The first is that the number of jurisdictions actually mandating reporting remains small. These are mainly driven by national regulation (eg Denmark’s “report or explain” approach) or private requirements (eg the Johannesburg stock exchange’s adoption of King III).
While many countries offer CR reporting guidance or seem on the cusp on mandating, strictly speaking this is “encouraging” rather than “mandating”. The reason that relatively few companies report is precisely because they are not required to and, one assumes, don’t consider it useful to do so.
This is even the case in countries such as Britain, where the 2006 Companies Act requires directors to report social and environmental issues that they consider to be relevant.
What about performance?
The second, reflecting a key theme in our previous articles for Ethical Corporation, is that Ioannou and Serafeim measure the act of reporting and not actual performance.
While it is plausible to argue that good management processes should lead to better social and environmental performance, this is not a given. There is evidence that measuring and reporting can lead to significant reductions in emissions and resource consumption, but many companies (including some that are regarded as leaders for the quality of their reporting) continue to report increases in their emissions and resource consumption.
Ultimately, the actions that companies take will be critically dependent on what they see as the likely incentives and threats from government. That is, public policy action is not solely about encouraging reporting but also about providing a wider – and predictable – set of incentives for action.
At the end of the day, “what gets mandated gets done” trumps “what gets measured gets managed”.
Reporting flood
The third relates to the fact that quite a few stakeholders (including investors) currently use the breadth of ESG disclosures as a rough proxy for the quality of social and environmental management.
The risk is that by massively increasing the number (but not necessarily the quality) of CR reports, mandatory reporting could reduce the differentiation or first mover advantages that have accrued to those companies that have voluntarily reported on their social and environmental performance.
While we acknowledge that may penalise some of the leaders, we are of the view that the world has moved well beyond the days when the publication of such a report was a legitimate point of differentiation. In our view, such reporting should now be seen as a minimum expectation of all large companies.
The much more important issues relate to actual performance, achievements and impacts. For example, reporting on greenhouse gas emissions is all very well, but means little unless the company is on a trajectory to reduce its emissions and to help the rest of us to reduce ours.
The mandatory reporting debate is overdue and offers the potential to reinvigorate the debate around leadership and innovation, through forcing us all to look beyond the fact that a report has been produced, to looking much more carefully at the substance of that reporting. That can only be a good thing.
Dr Rory Sullivan is an internationally recognised expert on corporate responsibility, climate change and investment-related issues. He is strategic adviser, Ethix SRI Advisers, a senior research fellow at the University of Leeds and a member of the Ethical Corporation advisory board.
Paul Hohnen is an Amsterdam-based consultant who advises, speaks and writes on global sustainable development and CSR issues. Among his affiliations he is an associate fellow of Chatham House and a member of the Ethical Corporation advisory board. For more info visit here.