March 4, 2017    4 minute read

CSR’s Next Frontier: Integrated Reporting

Responsible Reports    March 4, 2017    4 minute read

CSR’s Next Frontier: Integrated Reporting

Corporate Social Responsibility (CSR); creating shared value (CSV); sustainability; sustainable development; corporate accountability: these are just a few of the numerous ways to describe a phenomenon that, despite being rooted in the past century, is still under the spotlight of companies as well as academics.

CSR’s Shaky Brand Image

Even though the sceptics may argue that CSR is just another fashion for beautifying a company’s image, stealing some space in the news, and generating goodwill towards a brand, research suggests the opposite. For example, a study published in Oklahoma State University’s Strategic Management Journal suggested that CSR actions undertaken by more narcissistic CEOs are negatively related to financial performance.

Firstly, instead of developing from the inside, CSR is usually pushed by external stakeholders, frequently the investors. Secondly, as argued in Management Science in 2014 by Prof Eccles from HBS, undertaking CSR actions brings benefits to the firm itself and in much more tangible terms than increased fame alone.

Specifically, being a good corporate citizen is perceived as a key determinant for long-term prosperity and is positively related to firms’ performance and market value. Indeed, companies with an enhanced CSR profile are more likely to be rewarded by investors and capital markets both in terms of availability of funding and in terms of a more stable shareholder base.

High Compliance

Intuitively, one would expect that companies tend to magnify their commitment to CSR, filling sustainability reports with swaggering words that find less evidence in the facts. Surprisingly, a recent study carried out by the University of South Carolina and London Business School suggests the opposite: the study analysed 1492 unique firms in 33 different countries in the period 2002-2008 and found that it is more common for firms to do more and communicate less, rather than the opposite.

It is not humble bragging: among the reasons for cautious disclosure of sustainability practices are a reluctance to attract the attention of social movements or activist investors and risk-aversion in terms of how analysts may perceive such actions. According to the same study, both internal and external CSR actions are linked to firms’ value and, in order to realise the full benefits of internal actions, an effective communication strategy is key.

Integrated Reporting

This is where Integrated Reporting (IR) comes into play. The Integrated Reporting Framework is a way of disclosing corporate information which aims at being concise yet comprehensive. This is relevant for all stakeholders but particularly informative for shareholders in that it describes the value creation process in detail.

The adoption of IR practices varies a lot throughout the globe. For example, companies listed on the Johannesburg Stock Exchange (JSE) are required to provide investors with such reports. Otherwise, they must motivate their resolutions – whereas other countries like the United States show a much lower IR adoption rate.

Additional complexity derives from the discrepancies in the content of Integrated Reports: some companies merely renamed their annual reports and some instead conformed to the standards set forth by the International Integrated Reporting Committee (IIRC) but have not updated the way they name it.

For instance, even among the adopters listed on the JSE, there are issues related to sectors such as banking and pension funds, as pointed out by Ernst & Young’s 2014 survey. Despite these complications, economics-based studies conducted in recent years and summarised by Prof De Villiers in 2016 argue that IR is associated with greater analyst forecast accuracy, lower cost of capital, higher stock liquidity, firm value and expected cash flows and, last but not least, a more dedicated investor base.

Moving Forwards

In conclusion, as CSR is increasingly under the spotlight, it is essential for firms to find the right balance between what is carried out and what is disclosed. In this sense, Integrated Reporting can be beneficial to both firms and investors.

Applying IR would especially help close the gap between internal and external CSR actions by showing that they contribute to the firm’s value and how they ultimately realise the full potential of such actions. Additionally, IR adoption would increase transparency and set a standard for sustainability reporting, making this type of disclosure more uniform and comparable across firms and countries.

 

 

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