A TOOL FOR MEASURING CORPORATE SUSTAINABILITY
Corporate social responsibility (CSR) is an increasingly popular topic in the corporate world and beyond, highlighting a need for best practices and a stronger understanding of what it really means to be a sustainable business. For this to occur, we need ways of measuring corporate sustainability: social accounting is one way of doing so. Adrián Zicari, professor at ESSEC, explains its merits, as well as its limitations, in a recent chapter in the Handbook On Ethics In Finance.
First, a primer: social accounting refers to the measurement of an organisation’s social and environmental performance, recognising the need to go beyond measuring economic impact only. There are a number of indicators that can be used, for example, the disclosure of pollution information or the composition of the company’s workforce, among others. The list of indicators goes on, as assessing social and environmental information is a complex matter. This makes the scope of social accounting quite broad, and also leads to the question of balancing comprehensiveness and comprehension: more information is not necessarily better, as it can make reports hard to understand. Many of these indicators are not measurable in financial terms, so practitioners of social accounting need to go beyond conventional accounting and gather information from different sources. This requires a significant investment. As a result, social reports are more common in bigger companies.
1) The motivation behind corporate disclosure of social and environmental information;
2) The use of social accounting internally for management purposes;
3) The link between social accounting and financial performance;
4) Whether or not regulation contributes to sustainability, and
5) The potential that social accounting has for contributing to sustainable practices.
DISCLOSURE ON SOCIAL AND ENVIRONMENTAL INFORMATION
Today, the disclosure of social and environmental information is usually voluntary, though some European countries have recently implemented regulations. For instance, some companies in France have to present a “déclaration de performance extra-financière”. This means that in many cases, companies can pick and choose what, how, and when they disclose. This makes it difficult to compare companies, as there are many different frameworks in use.
If it is not mandatory, why do companies disclose this kind of information? One reason is to show their legitimacy, that is, living up to social expectations. Others may have a more “defensive” strategy in play, like if they are under fire from environmental agencies. If they do produce social reports, their motivations may impact the content. Researchers have noted that companies with poorer environmental performance tend to talk more about their environmental projects and use more optimistic language.
In other words, companies tend to be strategic when deciding what they share and how they share it, and their motivation is often based on protecting or enhancing the company’s reputation. This does not necessarily mean that companies are acting in bad faith, but it does mean that they may not disclose all their social and environmental indicators. Dr Zicari notes that this can lead to tensions between companies and stakeholders: companies may not disclose all information, while stakeholders may seek more transparency.
SHOULD DISCLOSURE BE MANDATORY?
CSR initiatives and social accounting alike are typically voluntary, but there are increasing calls for more mandatory reporting. This would be beneficial in that it could increase comparability, standardise reporting and boost the scope of information shared, resulting in better-informed consumers.
One way to increase regulation is through “soft-law” initiatives, meaning the use of frameworks that are voluntary but provide structure, like Global Reporting Initiative, SASB, and Integrated Reporting. If a company says that it complies with one of those, then it has to abide by that and provide the according data. This could also boost stakeholder engagement by providing a reference point and also make it easier to compare companies as currently, comparisons are hindered by the many different frameworks out there.
Another option is the use of “hard-law” legally-binding regulations. One example of this is the Directive 2014/95/EU of the European Union, under which companies with over 500 employees disclose non-financial information. Some initial research suggests that this could have a negative impact on information quality, as companies prefer to share good news.
Increased regulations on social reporting could help, but regulation alone will not ensure disclosure, nor does increased disclosure lead to increased sustainability. This suggests that while regulation could be useful, it does not replace the need for stakeholders to advocate for sustainability.
USING SOCIAL ACCOUNTING INTERNALLY
Much of the discussion has focused on disclosure to external parties. What about the goings-on inside the company? Internal indicators can help managers make decisions that align with CSR indicators. However, since the indicators can be hard to decipher, managers may struggle to work with them, especially as CSR work can be siloed within the organisation.
Companies use different approaches when using social accounting internally. An “inside-out” approach highlights the use of internal social accounting information by managers in their decision-making processes; this can be combined with the “outside-in” perspective, wherein external stakeholders use report information to inform their decisions. Both of these perspectives are important in striving for sustainability. To facilitate this process and also help managers interpret the information, CSR discussions should be integrated into corporate performance and dealt with across the organisation, rather than being the responsibility solely of a specialised team.
WHAT IS THE LINK BETWEEN SOCIAL ACCOUNTING AND FINANCIAL PERFORMANCE?
Social accounting is not interchangeable with conventional accounting: how exactly do they relate? Their scopes are different, but there is a lot of overlap, both in content and in audience. For example, perhaps a firm makes an expenditure to make a process greener – this will be reported in Profit and Loss Statements (the cost) and in social reports (the effect of the green initiative). An investor may read both these statements, as the financial statements help evaluate the company’s potential and social reports show its environmental impact.
The research is mixed when it comes to how sustainability actually impacts financial performance. As a result, managers may be unsure about the profitability of sustainable policies, even if they think the ethical rationale is strong. When measuring the situation, managers thus need to carefully consider the framework they use, and whether or not it is appropriate for the situation.
CAN SOCIAL ACCOUNTING LEAD TO ORGANISATIONAL CHANGE?
Even if the link between sustainability and financial performance is unclear, sustainability remains a worthy goal. This means that social accounting, too, is useful, as a tool for achieving sustainability. What can it actually achieve?
Some scholars suggest that social accounting can inform better decision making and facilitate teamwork. Others are less certain, as they argue that it is mainly symbolic and may not lead to significant change. One thing is true: realising true improvements is difficult, and the mere implementation of social accounting processes will not automatically improve sustainability. Further, over-reliance on social accounting may lead to a focus on the “small picture”, rather than truly revisiting conventional business models.
While social accounting is not a silver bullet, it has shown success. The KPMG Survey of Corporate Reporting (2017), studying reporting practices in 50 countries, found that social reporting is widespread, and there is a community dedicated to its improvement and implementation. Social accounting could also help with the “big picture”; while reports may highlight smaller, incremental improvements, these could inform long-term changes to conventional business practices. For example, mining, which is, by definition a polluting activity, but nevertheless one that is necessary for industrial production. Using social accounting could give managers and stakeholders information that could help reduce the environmental impact as a short-term strategy, while preserving the need to look for long-term solutions that are better for the planet.
Social accounting is necessary and helpful for improving business models. Increased disclosure illuminates managers how the company can improve, and informs the company’s efforts to be socially responsible. More transparency will benefit stakeholders and empower the public. We need to remember that social accounting remains a means to an end, and it will be tested by how effectively it creates measurable change in corporate practices.
KEY POINTS AND TAKEAWAYS
- Tension exists between companies and stakeholders, as the former may not share all information and the latter seek greater transparency.
- Regulation could improve report quality, but will not automatically improve disclosure.
- Managers may find it challenging to work with social and environmental indicators, leading us back to the first point: some information may not be disclosed because it is not well understood or not readily available.
- We still do not have a clear picture of the link between sustainability and financial performance.
- We must be clear-eyed on the promise of social accounting. It can help improve existing business models but does not create new ones, and managers should be encouraged to use complementary tools.
- All things considered: social accounting is an increasingly helpful tool for managers and stakeholders, and can help improve corporate sustainability.
Adrián Zicari is Teaching Professor at ESSEC and Julia Smith is Editor-in-Chief of ESSEC Knowledge. This article was first published in ESSEC Knowledge.