RESEARCH & IDEAS
Corporate Sustainability
Reporting: It's Effective
Published: May 23, 2011
Author: Michael Blanding
In a growing trend, countries have begun
requiring companies to report their
environmental, social, and governance
performance. George Serafeim of HBS and
Ioannis Ioannou of London Business School
set out to find whether this reporting actually
induces companies to improve their
nonfinancial performance and contribute
toward a sustainable society. Key concepts
include:
• In the past 10 years, corporate investors
have shown an increasing interest in the
social responsibility of the companies whose
stocks they pick.
• The researchers compared 16 countries that
required sustainability reporting with a
sample of 42 countries that didn't. Using
several measures, they found that the social
responsibility of business leaders and
managerial credibility increased in those
countries with reporting mandates.
• The data provide the first concrete evidence
that mandating social responsibility
reporting actually makes a positive
difference.
Editor's note: Please see related story,
Leading and Lagging Countries in Contributing
to a Sustainable Society.
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
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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
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require that companies report their financial and of the company. This is an area where much I would prefer to remain
ESG performance in a single integrated annual more work needs to be done." anonymous
report. By hitting “Submit” you
"This increases the visibility of these agree that your comment, in
disclosures and brings them up to the same
About the author Comment: whole or in edited form, may be
level with financial disclosures," says Serafeim. Michael Blanding is a freelance writer who posted online. Comments are
"Moreover, it forces companies to explain the lives in Boston. selected on the basis of
relationship between financial and nonfinancial Post a New Comment: relevancy and variety; not all
measures and how managing these nonfinancial Name: Position: will be posted.
issues contributes to the long-term profitability Organization: Email:

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