Does sustainability reporting improve corporate behaviour

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Does sustainability reporting improve corporate
behaviour?

• Wrong question? Right time?
• Rob Gray
• The Centre for Social and Environmental
  Accounting Research
• University of St Andrews School of Management
• Based on a paper commissioned by the ICAEW and
  forthcoming in Accounting and Business Research

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Does sustainability reporting improve corporate
behaviour?
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What is the problem?

• The performance of companies implementing
  sustainability principles is superior because
  sustainability is a catalyst for enlightened and
  disciplined management...
• Dow Jones Sustainability Group Indexes Report
  Quarterly 3/9
• Sustainability pays off..Companies favouring
  the concept of sustainability outperform the
  broad market
• Oberndorfer (WBCSD), 2004 cover and p3
• all CSR activities are linked to improving a
  company's bottom line.
• MHCi MONTHLY FEATURE (pdf/e-journal) April 2004
  (p. 2)
• By working sustainably, we can increase
  financial capital. Sustainable development aims
  to improve the quality of life for everyone.
• United Utilities, 2004, pp 1 3

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(No Transcript)
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Structure of the Paper

• What do we know about sustainability?
• And is it anything to do with companies?
• What does sustainability reporting actually
  look like?
• Evidence?
• What do we learn from the relationships between
  social disclosure, social performance and
  financial performance?
• Conclusions? Future research?

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What is sustainability?

• If we could shrink the world to a village of 100
  people, pro-rata there would be 57 Asians, 21
  Europeans, 14 from the Western hemisphere, north
  and south, and eight Africans. Eighty would live
  in sub-standard housing, 70 would be unable to
  read, 50 would suffer malnutrition. Six would
  possess 59 of the worlds wealth and all of them
  would be from the US. Only one would own a
  computer.
• Reported in EcoSoundings, Guardian Society,
  Wednesday February 14 2001, p8
• Sustainability or more usually sustainable
  development is typically defined as development
  which meets the needs of the present without
  compromising the ability of future generations to
  meet their own needs (United Nations WCED, 1987,
  p8).

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Is the Planet earth currently sustainable?

• The United Nations Environment Programme (UNEP)
  Global Environmental Outlook (GEO) 2002 (UNEP,
  2000)
• The WWF Living Planet Report 2004 (WWF, 2004)
• Limits to Growth The 30 Year Update (Meadows et
  al, 2004)
• The United Nations Millennium Ecosystem
  Assessment (Millennium Ecosystem Assessment,
  2005)
• .. Make very unpleasant reading
• Human activity is putting such strain on the
  natural functions of Earth that the ability of
  the planets ecosystems to sustain future
  generations can no longer be taken for granted
  (UN 2005, p2)

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WORLD ECOLOGICAL FOOTPRINT 1961- 01
BUILT- UP LAND
ENERGY
FISHING GROUNDS
FOREST
GRAZING LAND
CROPLAND
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WWF 2004 ASSESSMENT OF A SUSTAINABLE EARTH
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GDP AND WELLBEING, USA 1950 - 97
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...but the sums dont work.
Sustainability?


?
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Un-Sustainable So what?
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Sustainability reporting

• The number of companies reporting is
  insignificant. . Organisations general
  understanding of the nature of sustainable
  development is not well communicated by many of
  those reporting. Many reports fail to address the
  biggest sustainability issues (ACCA/Corporate
  Register, 2004, pp13 and 15)
• Practice relatively new Voluntary
• terminology a problem
• E.g. Social Responsibility (e.g. KPMG)
• stand alones
• Steady growth
• 2004 - 52 of Global Fortune 250
• Numbers still insignificant
• Quality is generally low
• Dont directly address global sustainability?

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Does sustainability reporting approximate
reporting on sustainability?

• Most (96 of 60,000 MNCs) companies do not report
• Best (of the 4) reporting approximates GRI
• 149 companies in accordance with GRI (Jan 06)
• GRI approximated Triple Bottom Line
• TBL Reporting ? Sustainability

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So what is sustainability reporting if it is
not about sustainability?

• the capacity to endure as a group, by renewing
  assets, creating and delivering better products
  and service that meet the evolving needs of
  society, delivering returns to our shareholders,
  attracting successive generations of employees,
  contributing to a flourishing environment and
  retaining the trust and support of our customers
  and the communities in which we operate
• (Making the right choices BP Sustainability
  Report 2004)

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So what is sustainability reporting if it is
not about sustainability?

• Thus sustainability is about
• the foreseeable future of the business and
• nothing to do with the state of planet
• which is excluded from conception
• Sustainability Reporting conveys an impression
  of connectivity with sustainability whilst having
  no discernible link with it

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Does sustainability reporting improve corporate
behaviour?
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Does such (non-sustainability) reporting improve
corporate behaviour?

• Commentators widely draw from and use
• Circumstantial evidence
• FTSE4Good
• Sustainability pays off
• Dow Jones Sustainability Index
• Field Work
• Formal evidence from annual reports

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It pays to be good but not too goodMintzberg
(1983, p10)
Financial Performance
Social Environmental Performance
Social Environmental Disclosure
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Social Environmental Disclosure
Based on Annual Reports rarely stand
alones Measured by Content Analysis - volumes of
disclosure Mostly poor quality
Social Environmental Performance
Varied metrics Reputation ratings Fines
Disclosure SRI or CEP ratings Pollution
expenditure TRI Charitable giving
Financial Performance
Firm Characteristics profit, RoCE etc Market
characteristics Share returns, share prices etc
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Are Social Responsibility and Profitability
Compatible?
Perhaps positive after all
Financial Performance
Social Environmental Performance
Inconclusive but looks unlikely - or even inverse
Mostly inconclusive but predisposition may be
positive
Social Environmental Disclosure
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So what does the literature tell us?

• Probably positive relationships between social
  disclosure, social performance and financial
  performance,
• These probably only hold as long as
• The quality of reporting is fairly low, patchy,
  selective and unconnected with sustainability
• The proxies chosen for social and environmental
  performance are closely connected with good
  management and have pretty direct
  financial/risk/reputation effects in the markets.

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So what does the literature tell us(2) ?

• The relationships are thus based on tautologies
  (Orlitsky et al, 2003)
• The evidence thus has no bearing on
• Social and environmental accountability or
• Substantive social and environmental performance
  leading towards sustainability
• To infer that this literature can tell us
  anything about sustainability
• is mischievous at best and
• downright life-threatening at worst.

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Does sustainability reporting improve corporate
behaviour?

• Yes, but only so long as
• Reporting is undertaken by a minority
• Reporting has nothing to do with sustainability
  and
• It remains inconceivable that there can be
  conflict between financial and social/environmenta
  l performance.
• It might change corporate behaviour if
• Reporting was mandatory
• Reporting discharged accountability
• Showed that companies cannot be sustainable
• Showed that companies cannot be responsible.

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Conclusions? 1

• The sustainability of the planet is now very
  seriously in danger
• The quality and range of this data cannot be
  ignored
• Un-sustainability arises from
• population and economic activity.
• substantial proportion of which derives from
  astonishing success of modern company in
  capitalism.
• Companies and representative bodies
  (successfully?) claim modern corporate activity
  is
• (at best) sustainable or
• (at worst) contributing towards a path of
  sustainable development

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Conclusions? 2

• There is no evidence which supports this so..
• Either companies must be challenged to
  demonstrate that their claims about
  sustainability and wider social responsibility
  are substantiated
• through substantial and complete sustainability
  reporting
• Or companies must stop suggesting/claiming to be
  sustainable/on a journey to sustainability/contrib
  uting towards sustainable development etc
• - BECAUSE THEY ARE NOT

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Thank You