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Mandatory Social Reporting – An Idea Whose Time Has Come?
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What is the most authoritative starting point for embedding a comprehensive set of social and environmental standards into core business principles, strategy and practice? By Peter Frankental.
The idea that companies can only improve their social and environmental impacts by measuring and reporting on them has become a truism. However, the multiplicity of codes and standards in existence and the diversity of expectations from NGOs and socially responsible investors makes it difficult for many companies to know where to begin. What is the most authoritative starting point for embedding a comprehensive set of social and environmental standards into core business principles, strategy and practice? Should companies be allowed to pick and choose their standards or should these be embodied in regulation? If regulation is the way forward, then should this be applied by national governments, regional trading blocs or through international protocols.
As more and more corporations have expanded their operations beyond national borders, the ability of an individual state to control companies’ social and environmental impacts through national regulation alone has substantially diminished. However, as yet, no effective framework of laws and standards has emerged at the international level to hold transnational corporations accountable for these impacts. Instead, self-regulation in the form of voluntary initiatives, or co-regulation in the form of cross-sector agreements between industry, civil society groups and government now tend to be considered the most appropriate way to set global rules.
The trend towards industry self-regulation or co-regulation has been supported by two beliefs. One is that corporations are becoming more responsible of their own accord, for which the growing number of industry codes of conduct is cited as evidence. According to this view, society no longer needs to insist on legally binding international regulation. The other belief is that transnational corporations have gained so much power in recent decades that it is impossible to regulate them by externally-defined rules anyway. Building on voluntary agreements with corporations is thus regarded as more pragmatic than antagonising them by promulgating binding international regulations.
Against this trend is an alternative view that a framework of law and external regulation, based on international conventions, would benefit society as a whole and provide reassurance that international business is based not on standards set by itself, but on the values that international society has decreed. The existence of such a framework, requiring mandatory reporting on environmental and social impacts, would also enable the market to respond to issues beyond the bottom line and so serve as an effective instrument of corporate change.
These approaches are not mutually exclusive in so far as regulation can be seen as the legal embodiment of values and norms that are already widely accepted. Self-regulation and co-regulation can help give currency to international standards and principles, thereby creating the conditions for these to become the subject of regulation in future. In the meantime it is important that both approaches should be pursued – pushing forward the boundaries of the law while accepting that voluntary regulation is more likely to be the feasible option in the short term.
While recognising that regulation is a long-term process and that certain outcomes may be achieved through other mechanisms, there are a number of issues that can be addressed immediately within the context of the imminent UK Company Law Bill and the European Union CSR process and parliamentary resolution. The first is that there should be a mandatory requirement for all companies to state their policy regarding social responsibility, human rights and environmental performance (even if the company’s decision is not to have a policy on some or all of these issues). The second is to implement legislation requiring mandatory social and environmental reporting. Specific issues that should be considered within such reporting frameworks are a company’s performance against international standards that have been developed within UN bodies, the OECD and the EU. Other issues to be included would be those that represent a potentially significant liability to the company in so far as they could affect its reputation and intangible assets.
There are some obvious arguments in favour of mandatory reporting, strictly from a business case perspective, rather than a public interest one. Firstly, there is the ‘level playing field’ argument. If all businesses were required to report on their social and environmental impacts, then incurring costs for doing so would not be a competitive decision. Mandatory social and environmental reporting can bring about a reduction of costs by limiting the production of high-cost glossy PR reports that have no qualitative value. According to Sustainability (a leading consultancy in this field), some companies spend as much as $1m on such reports. Regulation need not be cumbersome – it need only require firms to report on information that most large companies will already have access to. Mandatory reporting will also simplify processes for companies by establishing definitive standards, limiting the need for bespoke reporting to investors and other stakeholders. This will address the ‘questionnaire fatigue’ that many companies are experiencing. A related overhead for companies is the amount of time and resources devoted by public affairs departments to gauging what is expected of them by the public, consumers and governments. The clarification of responsibilities and their embodiment in a regulatory framework will minimise the need for this.
Apart from the lack of a cross-sector consensus, one of the obstacles to legislating for the above is the absence of internationally agreed metrics for assessing the social and environmental performance of companies. It is not sufficient merely to determine the general standards that companies should be expected to conform to. Specific benchmarks and performance indicators need to be determined. Business managers, investors, consumers, governments and others are all beginning to ask how they can obtain a clearer picture of the human and ecological impacts of business, so that they can make informed decisions about their investments, purchases and partnerships. Achieving such clarity in measurement and reporting holds the promise of delivering value both to business by providing a critical management tool, and to external stakeholders by providing timely, relevant and reliable information.
Paradoxically, this shared interest in new approaches to measuring and reporting business impacts has produced a proliferation of inconsistent reporting approaches developed by business, government and civil society. As diverse groups seek information, business encounters escalating demands in queries that are inconsistent, giving rise to ever more confusion and frustration. This is why a cross-sector initiative, known as the Global Reporting Initiative, was established in 1997 to design and build acceptance of a common framework for reporting on the economic, environmental and social aspects of business organisations.
External non-financial reporting to date has not been guided by a widely accepted, common framework of principles and practices as to what should be reported or how, when and where. Organisations have been at liberty to report what they choose about the economic, environmental and social aspects of their performance. Moreover, national and sectoral initiatives have produced diversity in reporting practices, making comparability, relevance and reliability difficult to achieve. Essentially, all that NGOs should be seeking with regard to social and environmental reporting in the 21st century is a similar but more accelerated evolution to the one that took place during the 20th century in the sphere of financial reporting.
From an NGO perspective, it may seem ironic that much of the momentum for social and environmental reporting is being generated by financial markets. But how can pension funds, investment analysts and fund managers assess the sustainability of their investments if there is no requirement on companies to report on all those risk factors which are material to sustainability, including non-financial risk? How can they make informed decisions if they are unaware of the social and environmental performance of the companies they invest in because there are no generally accepted benchmarks in place from which to make comparisons? This is the background to the decision by FTSE, the UK’s leading stock market index company, to launch a series of ethical indices known as FTSE4Good.
Ethical indices such as the FTSE4Good have been criticised for setting the bar too low, with the consequence that even companies operating to standards that would be widely regarded as unacceptable are likely to find themselves included in these indices. However, the FTSE are committed to ensuring a process of continuous improvement. They have recently set up an expert panel on human rights to advise on indicators that could be applied to companies as part of the selection criteria. There is every likelihood that the FTSE4Good bar will be raised year-on-year so that companies will be under constant pressure to improve. There is also a likelihood that such index providers will begin to take a long-term view, realising that wherever companies are today in their development of ethical policies, they need to have an understanding of the kind of benchmarks that will be expected of them in five years time, so that they can plan ahead. Just having a policy on human rights might be sufficient for now, but if companies knew that five years down the line they would be required to integrate human rights into their management information systems, training programmes, appraisal systems, as well as their reporting and external auditing functions, then they would be in a better position to move forward.
This is where government has a role to play in helping to provide companies with the incentives to move down the road of social and environmental reporting. Regulatory mechanisms can play an essential part in creating a system of rewards and penalties that will help embed acceptable standards into corporate behaviour. Such mechanisms are also fair, in so far as they create a level playing field for companies, ensuring that those companies that invest in sustainable business practices do not find themselves at a competitive disadvantage to those that do not.
NGOs have a role in helping to support and shape these initiatives and to encourage and assist companies to respond, recognising that there is still a considerable way to go before we have the social consensus and regulatory expertise essential to imposing the standards which are fundamental to a civilised society and civilised marketplace.
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Peter Frankental is the Business Group Manager of Amnesty International UK. Contact him at Peter.Frankental@amnesty.org.uk. This piece reprinted from Ethical Corporation magazine, a GreenBiz News Affiliate.
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