Lecture 14

CSR reporting
Learning objectives
• After studying this chapter you should be able to:
• Define social responsibility and assess the role of corporate social responsibilities
in the context of the corporate objective of maximizing shareholders’ wealth;
• Explain the different motivations for corporate social responsibility reporting;
• Describe the extent of reporting by entities on their corporate social
responsibilities;
• Identify some proposed methods of accounting for corporate social
responsibilities and understand how these methods may be implemented;
• Explain sustainability reporting;
• Explain integrated reporting
• Discuss developments in accounting for carbon.
Introduction
• The meaning of CSR has been interpreted very broadly, and may be thought of
as the impact of a company’s activities on the welfare of society.
• More specifically, the United Nations Industrial Development Organization
defines

“CSR as policies and procedures adopted by companies to: integrate social and
environmental concerns in their business operations and interactions with their
stakeholders. Corporate social responsibility is generally understood as being the
way in which a company achieves a balance of economic, environmental and
social imperatives (the ‘Triple-Bottom-Line-Approach’), while at the same time
addressing the expectations of shareholders and stakeholders”.
Motivations for corporate social
responsibility reporting
• The literature on the theory of the firm suggests that the primary role
of a company’s management is the formulation and execution of
policies that lead to the maximization of shareholders’ wealth.
• Advocates for maximizing shareholders’ wealth suggest that socially
responsible activities, such as pollution abatement, should not be
undertaken unless they are consistent with the shareholders’ best
interests.
• They suggest that management should confine itself to ensuring the
efficient operation of the company in the interests of shareholders. For
example, detergent company installation of pollution abatement plant.
• Apart from viewing CSR activities as part of charitable good works and
delegated philanthropy, prior research suggests that management may be
motivated to undertake CSR activities because of:
• Enlightened self-interest
• The need for stakeholder management strategy
• The requirement for a strategy to maintain organizational legitimacy
• These last two motivations are drawn from stakeholder theory and
legitimacy theory, both of which have been characterized as systems-
oriented theories. In a systems-oriented perspective, an organization is
assumed to be influenced by, and in turn to influence, the society in which
it operates.
Enlightened self-interest
• The phrase ‘enlightened self-interest’ describes costs that appear to
be motivated by a desire to promote society’s best interest, but which
are also incurred in the hope of generating benefits for the company
that exceed those costs. For instance, corporate philanthropy such as
donations to universities could be expected to lead to benefits for the
company. These benefits could include the promotion of good public
relations and the possibility that graduates may seek employment
with the company
Stakeholder management
• Stakeholder theory suggests that an organization is part of a broader
environment with complex and dynamic relationships with its many
stakeholders.
• A stakeholder is defined by Freeman as ‘any group or individual who can
affect or is affected by the achievement of the organization's objectives.
• The behavior of stakeholders is viewed as a potential constraint on
strategies to match corporate resources with the organization's
environment.
• Stakeholder theory suggests that a major role of management is to assess
the importance of meeting stakeholder demands in order to achieve the
company’s strategic objectives.
Contingency-based conceptual
model of CSR
• Ullman proposes a contingency-based conceptual model of CSR
activity.
• CSR performance and reporting can be viewed as part of a strategy to
negotiate and manage stakeholder relationships, which is determined
by the configuration of the three dimensions of (i) stakeholder power,
(ii) a company’s strategic posture towards its stakeholders (i.e.
reactive, proactive), and (iii) its economic performance
Corporate legitimacy
• Legitimacy theory suggests that the relationship between a company
and society, as a collection of individuals, is subject to a social
contract. The implied social contract provides that, as long as the
activities of a company are consistent with society’s values, the
company’s legitimacy and, ultimately, its continued survival are
assured.
• Examples of failures in corporate performance that give rise to
legitimacy gaps include negative social and environmental impacts
such as a serious accident, a major pollution leak or a financial
scandal.
• The management of a company is motivated to close a legitimacy gap
because members of society may react by imposing legal, economic
or other social sanctions on the company.
• Examples of possible sanctions include consumer boycotts of
products, the limited provision of resources, such as labour and
financial capital, constituent lobbying of government and regulators
for the introduction of regulations, and government intervention.
Corporate strategies aimed at
closing a legitimacy gap
• There are various corporate strategies aimed at closing a legitimacy gap.
• The first strategy involves changing corporate performance and activities
to conform to the standards of legitimacy, and communicating this
change to stakeholders.
• The second involves attempting to change external expectations about
corporate performance through communication.
• The third advocates using communication to direct attention from the
legitimacy gap, or to reinforce the community’s perception of
management’s responsiveness to particular social or environmental
issues.
• There is empirical evidence to suggest that managers make strategic use of
social and environmental disclosures. The disclosures tend to be self-
laudatory, with positive news emphasized over negative news, and ‘soft’
disclosures which are not readily verifiable used more than ‘hard’ verifiable
disclosures, particularly in response to specific social and environmental
issues.
• Sustainable Development Policy Institute (SDPI, 2002, p.34) has published a
report, which focuses on the phenomenon of natural disasters and CSR in
the context of Pakistan. Findings of this reports suggests that business’s
social response was reactive rather than proactive in cases of natural
disasters and only those businesses help the society in such scenarios that
are in some way involved directly in the disaster in the first place.
Accounting for corporate social
responsibilities
• The first requirement stipulates that companies include in their Directors’
Report information about whether the entity’s operations are subject to any
particular and significant regulation and, if so, details of the entity’s
performance in relation to the regulation.
• The second environmental performance reporting requirement is entities
must report their annual greenhouse gas emissions and energy usage to the
Clean Energy Regulator.
• Since the mid-1990s, sustainability reporting has emerged as an important
form of corporate responsibility reporting. It has previously been described
as triple bottom line reporting by Elkington because of the focus on reporting
information about the economic, environmental and social performance of
companies.
Additional corporate social
responsibility initiatives

• GRI Guidelines
• Carbon Disclosure Project (CDP)
GRI Guidelines
• Internationally, the United Nations Environment Programme (UNEP)
and the Coalition for Environmentally Responsible Economies (CERES)
formed the Global Reporting Initiative (GRI) in 1997. The GRI is an
independent institution, the mission of which is to develop and
disseminate globally applicable sustainability reporting guidelines.
• The GRI Guidelines are for voluntary use by organizations for
reporting on the economic, environmental and social dimensions of
their activities, products and services. There has been widespread
interest in the GRI Guidelines, which fit well within a sustainability
reporting framework
Carbon Disclosure Project (CDP)
• Another significant international development has been the
establishment of the Carbon Disclosure Project (CDP) in response to a
heightened international awareness of the impact of climate change
on business and the need for that impact to be managed.
• The CDP has its headquarters in London and has 10 offices operating
in 10 other cities throughout the world, including Sydney and New
York City.
• Its stated aim is to ‘transform the way the world does business to
prevent dangerous climate change and protect our natural resources.
• The CDP annually requests data on carbon, water and climate change from the
largest companies globally as measured by market capitalization, as well as
from suppliers of major purchasing organizations.
• In relation to companies, the CDP operates four programs around which the
data are collected, including climate change, water, forests and supply chains,
as well as various initiatives relating to investors, cities, and government and
policymakers. The basic idea is that requiring individual organizations (and
cities) to measure and disclose information will improve the management of
environmental risk:
• We motivate companies and cities to disclose their environmental impacts,
giving decision-makers the data they need to change market behavior [so that
investment decisions take into account these environmental impacts.
Methods of accounting for corporate
social responsibilities
• Descriptive performance reporting
• Quantitative reporting
• Full cost reporting
• Sustainability reporting
• Integrated reporting
Descriptive performance reporting
• Descriptive performance reporting is a common form of CSR reporting.
The disclosures are made in the form of a stand-alone report, as part of
the annual financial statements or on a company’s official website.
• The information generally disclosed includes short qualitative
statements of good citizenship, assignment of responsibility for social
responsibility issues, and statements of policies and the activities
undertaken in accordance with those policies.
• Disclosures typically take the form of an inventory of CSR activities.
Consequently, this reporting approach has also been labelled the
‘inventory approach’.
• A company’s activities in the area of social responsibility may be
grouped under six main headings:
• Physical resources and environmental contributions. This includes
activities that are directed to the alleviation or prevention of pollution
and the conservation of natural resources. Activities in this class would
include recycling aluminum cans or paper, and the landscaping,
beautification and restoration of the environment.
• Energy. This includes activities directed to the reduction of energy
consumption and the use of waste materials as a source of energy.
• Human resources. This includes activities directed to the wellbeing of
employees – training programs, improvement of working conditions,
provision of employee benefits such as childcare facilities, and health and
safety activities.
• Product or service contribution. This includes activities concerned with
the impact of a company’s products or services on society. Activities
under this heading include product quality and safety and packaging.
• Community involvement. This includes those socially oriented activities
that are primarily of benefit to the general public. Probably the main
activity under this heading would be corporate philanthropy, including
grants to education and the arts.
• Other. This category includes those socially responsible activities not
covered by the above categories and may include work experience
programs and the use of local suppliers.
• Issues: One difficulty with this approach is keeping the list within
realistic limits. A list of socially responsible activities could be virtually
endless since, in one way or another, most of a company’s activities can
be construed as being socially relevant. Another, probably more
important, drawback of this approach is that it would be almost
impossible to make intercompany comparisons, as there is no
benchmark that can be used in association with the list to assess a
company’s social responsibility.
Quantitative reporting
• Quantitative corporate social responsibility reporting attempts to
quantify a company’s social and environmental interactions.
• This approach is based on a more systemic view of a company’s
interaction with the environment than descriptive performance
reporting.
• For example, a company may attempt to quantify the environmental
impact of one of its products over its life cycle, which can also be
expanded to apply to a division or to the entire company. Of interest
are the resources used and the efficacy of their usage over the life
cycle of a company’s products.
• Typically, an Eco Balance discloses the physical inputs into the
operations of the Ricoh Group, including the amounts of chemical
substances (tonnes), water (cubic metres), fossil fuels (kilolitres) and
electric power (KWh) used, and the subsequent outputs such as
greenhouse gases (carbon dioxide equivalents), landfill waste
(tonnes), and water discharged (cubic metres).
Full cost reporting
• A feature of quantitative and descriptive performance reporting that
causes concern is that these approaches stand apart from the
financial disclosures and calculations.
• Full cost corporate social responsibility reporting systems attempt to
‘allow accounting and economic numbers to incorporate all
potential/actual costs and benefits including environmental (and
perhaps social) externalities.
Early full cost experiments
• During the 1970s, several approaches were proposed to incorporate
social and environmental externalities in financial statements. To
illustrate, we consider the socioeconomic operating statement
experiment of Linowes (1972).28 Table 1 shows a summary of the
proposed socioeconomic operating statement.
Table 1
Issues
• No measurement techniques existed that were capable of assigning a value to social benefits
such as the aesthetic pleasure provided by an architecturally magnificent building or to costs
such as air pollution.
• There were also doubts about the possibility of drawing meaningful inferences from interim
financial measures. For example, making large expenditures on socially responsible activities
did not mean that correspondingly large benefits would result.
• A further concern related to the objectivity and reliability of estimates of environmental
impacts
• These measures could not be attested to by an independent third party, and differences of
opinion were likely on these estimates among valuation experts.
• A final measurement problem was ‘additivity’. Different measurement bases were incorporated
into each social responsibility report, making a sensible financial result impossible.
• Put simply, these financial environmental reporting experiments ‘in effect, add possible apples
to approximate pears and subtract the results from hypothetical oranges’
Maintenance cost approaches
• Maintenance cost approaches focus on the maintenance of natural
capital to ensure the sustainability of a company’s operations.
• Reporting on the sustainability of a company’s operations is done by
estimating the ‘sustainable cost’ associated with negative externalities
resulting from its activities and adjusting the profit figure accordingly.
• A company’s ‘sustainable cost’ is equal to the additional costs to be
borne by it if its activities are not to leave the planet worse off. This
may be estimated by considering the cost of purchasing the most
sustainable alternative on the market and the cost of remediation of
environmental effects arising from operations.
• The maintenance cost approach was used in the ‘Net Value Added’
experiment (1990–1994) by BSO/Dutch Origin (a Dutch computer
consultancy organization).
• It was also used for the ‘Sustainable Cost’ experiment of Landcare Research
New Zealand (a New Zealand-based Crown research institute concerned
with sustainable management of land ecosystems) by Bebbington and Tan,
and for Interface Europe (a multinational manufacturer of carpet tiles and
floor coverings) by Howes.

• In all these experiments, difficulties were experienced in measuring the

costs of some environmental and social impacts.
 Asset valuation approaches
Asset valuation approaches to full cost accounting focus on valuation of environmental
assets and changes therein.
An example is the ‘Supplementary Economic Accounts’ experiment (1995–1998) of
Earth Sanctuaries (an Australian company that operated sanctuaries for the
conservation of native fauna).
• Earth Sanctuaries Ltd prepared a supplementary economic statement of financial
position that included three types of natural assets – vegetation, wildlife and habitat.
It also produced an economic profit and loss statement in which increases in the value
of these natural assets were included in economic profit, and then transferred from
profit to an economic valuation reserve.
• A unique approach was used to address the problem of how to value the natural
assets.
• The asset ‘vegetation’ was valued at the cost per hectare that the
South Australian government spent to save vegetation, the price per
tone for firewood for old-growth forest, or the capitalized cost
discounted using a 10-year bond rate for vegetation planted by Earth
Sanctuaries.
• The valuation of wildlife depended on whether the species was
endangered, common but subject to restrictions on its sale, or able to
be sold.
• Endangered species were valued using a general application of the travel
cost method (an environmental economic valuation technique), based
on the assumption that the value of a whole species was equal to 3% of
total expenditure by tourists visiting Australia.
• Common species that are subject to restrictions, such as the platypus,
were assigned a conservative estimate of the amount reasonably
expected to be recovered over a five-year period.
• Species that could be sold, such as rare fish, were assigned half the price
for which they could be sold.
• The objectivity and reliability of these valuations was one of the most
strongly criticized aspects of this full cost reporting experiment.
Damage cost approaches
• Damage cost reporting systems are concerned with communicating
estimates of external environmental costs from a company’s
operations.
• The group ‘Environmental Profit and Loss Account’ prepared by the
multinational sport/lifestyle company PUMA Corporation and its
French parent company Kering adopts this general approach
Example
• In November 2011, the German company PUMA Corporation
published its first ‘Environmental Profit and Loss Account’ (EP&L) for
the year ended 2010. This was subsequently extended to the
preparation of EP&L for selected products in 2012 and then to a
group-wide EP&L in 2013 and 2014 requiring collaboration between
PUMA and Kering. The aim of the EP&L project is to report on the cost
of all types of capital used to produce its goods, from raw materials
right through to the retail transaction. The following extract from the
2014 Kering Group EP&L explains the rationale:
• Kering Group EP&L was prepared using external consultants to apply
environmental economic modelling techniques to estimate the total
cost of the Group’s operations across areas such as air pollution,
greenhouse gas emissions, land use, waste, water consumption and
water pollution. For 2015, the total cost disclosed by the Kering Group
amounted to €811 million.
Impediments to full cost CSR
• The ability to measure the financial value of social and environmental impacts remains
one of the most significant impediments to full cost reporting, even after nearly four
decades of experimentation.
• Practical measurement issues include data availability, additivity of measurement units,
and the reliability and suitability of estimates of social and environmental impacts.
• There have also been questions about the validity of attempting to value the
environmental and social dimensions of corporate activities. In fact, it has been argued
that such attempts are counterproductive. Gibson illustrates this point as follows.
• When reported in economic terms, the emissions of sulfur dioxide appear benign,
whereas their seriousness becomes readily apparent from a historical and scientific
explanation of the effect of sulfur dioxide emissions on people, air, water, flora, fauna,
and buildings and other infrastructure.
Sustainability reporting
• The practice of measuring, disclosing and being accountable to
internal and external stakeholders for organizational performance
aimed at achieving sustainable development.
• A report published by a company or organization about the economic,
environmental and social impacts caused by its everyday activities. A
sustainability report also presents the organization's values and
governance model and demonstrates the link between its strategy
and its commitment to a sustainable global economy.
• Economic performance refers to the traditional business profit, as well
as issues such as the long-term sustainability of:
• a company’s costs (e.g. can the company sustain its current cost
levels?);
• the demand for its product;
• its pricing and profit margins; and
• its innovation programs.
• Environmental performance encompasses issues relating to the
sustainability of a company’s use of natural resources.
• Social performance is often concerned with a broad concept of social
capital that encompasses not only human capital – in the form of
public health, skills and education – but also society’s health and
wealth creation potential
• It is obvious from the general nature of the definition of sustainability
reporting that this form of CSR reporting is in an early stage of
development. There is no accepted national or international framework
for sustainability reporting.
• Instead, in many countries, government and industry are developing
guidelines to assist interested companies with the implementation of
sustainability reporting.
• sustainability reporting involves the communication of a range of
qualitative, quantitative and financial information about a company’s
economic, environmental and social performance to key stakeholder
groups.
• To assist in this communication process, there has been a focus on the
development of performance indicators.
• The idea is that accepted performance indicators provide a means of
benchmarking a broad range of information on economic,
environmental and social performance over time and between
entities
There are several possible formats for communicating information about a company’s
economic, environmental and social performance. To date, sustainability reporting has
generally taken the following forms:
• an environmental and social section within a company’s annual report;
• a separate report, either on the environment or on the community;
• two separate reports, one with an environmental focus and the other with asocial focus
• a combined social and environment report; and
• a full sustainability report

In many cases, these reports are supported by a company’s website. A recent trend has
been for shorter, more concise reports that are supported by more detailed material on
an entity’s website.
For example, the GRI Guidelines provide recommendations on the content of a full
sustainability report. The suggested disclosures of a GRI-based report are: General
standard disclosures, comprising:
• strategy and analysis – a description of the reporting company’s strategy for
sustainability, including a statement from the CEO;
• organizational profile – an overview of the reporting company’s structure and
operations;
• material aspects and boundaries – an overview of the process used by the
organization to define report content, material aspects (i.e. a subject covered by the
guidelines) and their boundaries;
• stakeholder engagement – an overview of stakeholder engagement during the
reporting period;
 report profile – a description of the basic information in the report, including a
GRI content index (a table identifying where the information on performance
indicators is located within the reporting company’s report), and the nature of
external assurance;
• governance – discussion of the governance structure and peak governance
bodies, the skills, performance evaluation, remuneration and incentives of the
peak governance. bodies, as well as their role in risk management,
sustainability reporting and evaluation of the economic, environmental and
social performance of the organization; and
• ethics and integrity – an overview of the organization's values, principles and
standards, processes for advice on and reporting of ethical issues and matters
of integrity
The Guidelines categories specific standard disclosures into economic,
environmental and social dimensions, which are further sub-categorized into
multiple aspects. For example, the environmental dimension covers 12 specified
aspects which are:
• materials;
• energy;
• water;
• biodiversity;
• emissions;
• effluents and waste;
• products and services;
• compliance;
• transport;
• supplier environmental assessment; and
• environmental grievance mechanisms.
Verification
• A key issue that arises is how users of reports assess the reliability of the large
amount of descriptive, quantitative and financial data that is communicated as
part of sustainability reporting. There are neither legislative requirements nor
generally accepted standards for the preparation and attestation of sustainability
reports.
• Two general options are available for independent verification or assurance of
sustainability reports or sections.
• Assistance can be sought from large international chartered accounting firms or
major engineering consultancies that have consulting practices specializing in the
verification of sustainability reporting.
• Alternatively, the expertise of smaller environmental and social consultancies or
individuals with strong social credentials can be sought.
Integrated reporting
A process founded on integrated thinking that results in a periodic
integrated report by an organization about value creation over time and
related communications regarding aspects of value creation.
An integrated report is a concise communication about how an
organization's strategy, governance, performance and prospects, in the
context of its external environment, lead to the creation of value in the
short, medium and long term.
Globally, the International Integrated Reporting Council (IIRC) was
established in 2010 with the aim of incorporating integrated reporting
and thinking within mainstream business practice in the public and
private sectors
• The Integrated Reporting Committee (IRC) of South Africa suggests that
integrated reporting is based on the concept of value creation, which stems
from changes in the value of a company’s capital over time. The IRC identified
six types of capital, as follows:
• financial capital (e.g. debt and equity capital);
• manufactured capital (e.g. equipment, public infrastructure);
• intellectual capital (e.g. patents, research and development, internally
developed technological systems);
• human capital (e.g. employees’ skill base);
• social and relationship capital (e.g. stakeholder and community relationships);
• natural capital (e.g. natural resources)
• The objective of an integrated reporting process is to assist internal
participants and external stakeholders to understand the implications
of decisions regarding the organization's capital.
• That is, an integrated report highlights an organization's use of its
capital, how decisions made have affected capital, and the trade-offs
between the types of capital in its valuation creation process.
• There is not a standardized approach to integrated reporting, with the
form of the reporting left to management.
Accounting for carbon
• There have been several decades of discussion and debate about the
reduction of greenhouse gas emissions.
• The current central policy initiative to reduce greenhouse gas
emissions is the Emissions Reduction Fund (ERF).
• Launched in July 2014, the ERF has three components:
• Crediting
• Purchasing
• Safeguarding emissions reductions
Crediting
• The ‘crediting’ element requires interested businesses to identify
emissions reductions projects that are additional to their ‘business as
usual’ activities.
• Examples might include capturing landfill gas, reducing waste coal
mine gas and managing fires in savannah grassland
Purchasing
• The Clean Energy Regulator was established on 2 April 2012 and is an
independent statutory authority administering various climate change
initiatives of the Commonwealth Environment Department.
• At the auction, businesses submit their proposed carbon abatement
projects, setting a bid price they are willing to accept. In return, the
Clean Energy Regulator acquires the lowest-priced carbon emissions.
• The selected businesses must deliver the agreed carbon reductions at
the auction bid price in order to receive payment the Clean Energy
Regulator.
Safeguarding
• The final ‘safeguarding’ stage is focused on businesses which report
their emissions as part of the National Greenhouse and Energy
Reporting System (NGERS).
• The aim of ‘safeguarding’ is to monitor total business emissions to
ensure that the ERF projects do not result in increased emissions
elsewhere in the businesses.
Reporting on carbon emissions
• Accounting regulators have produced little formal guidance on accounting for
carbon emissions. One notable exception is the IASB’s formulation of
accounting regulations following the development of the emissions trading
scheme (ETS) of the European Union (EU).
• The EU ETS is a ‘cap and trade’ scheme whereby a cap or limit for emissions is
set for each industry.
• Firms within an industry have an allowed emissions limit. For those below
their cap, the unused allowances can be traded in the carbon allowance
market. Interested buyers include speculators and firms exceeding their cap
in the current period and seeking to purchase allowances to be within
prescribed emissions limits. In this way, a market develops for emission
allowances.
Approaches to accounting an
emissions trading scheme

Typically, there are two approaches to accounting for the rights and
obligations arising from an emissions trading scheme:
• The gross approach
• The net approach.
.
Gross approach
• The requires firms to record carbon emission allowances as assets
measured at their fair value, which reflects the view that emission
allowances are rights to emit a quota of pollutants.
• Similarly, as emissions are released, firms are required to accrue the
associated carbon liabilities. Thus, there is no offsetting of carbon
assets and obligations arising from the emissions trading scheme.
Instead, gross assets and liabilities are reported
net approach
• In contrast, under the net approach emission allowances are recorded
as assets, and carbon liabilities are only recorded when carbon
emissions exceed allocated allowances. Thus, there is an offset of
rights to emit pollutants against actual emissions and only the net
obligation is reported.
Example
Permits (intangible asset) 120000
Government grant (deferred income 120000

Government grant (deferred income) 55000

Income 55000
Emissions expense 66000
Provision for delivery of permits 66000
Government grant (deferred income) 65000
Income 65000
Emissions expense 71500
Provision for delivery of permits 71500