Ioannis Ioannou and George Serafeim are exploring the value of forcing corporations to issue sustainability reports, which provide information about corporate performance in terms of social, environmental and governance issues.
In a breakthrough study, they asked: what is the effect of mandatory sustainability reporting on management practices across the world?
Tate & Lyle, the global supplier of food and beverage ingredients, was founded in the UK in 1921 and is headquartered there today. It operates more than 45 production facilities globally and employs more than 5,600 people, and its products are used by millions of consumers daily. Check its online annual report for 2010, and you’ll find an interesting change in how they summarise their operations:
This year, we have changed how we report corporate social responsibility (CSR). We have incorporated those areas in which we measure performance — safety, environment, community — into this ‘Business review: Performance’ section, emphasising their importance to the long-term success of the business. The other two parts of our traditional CSR report, namely how we manage our relationships with commercial partners and suppliers, and our approach to employee health and wellbeing, are covered in the ‘Business review: What we do’ section, since they are an integral part of how we do business.
We believe that changing the way we report CSR more accurately reflects the central role it plays in the way we do business – which, for Tate & Lyle, means operating to high social, ethical and environmental standards in all circumstances. (Source)
Such changes in how companies disclose their sustainability activities to their stakeholders (and, via online presentations, to the rest of the world as well) are part of a trend that many have noted and in which we have taken a strong interest. In many countries around the world, for instance, non-financial reports on environmental, social or governance activities now occur because of mandates imposed by government legislation. . The question then, that demands more attention, is whether such sustainability reporting laws and regulations change how companies actually behave and the way they engage with their key stakeholders and the broader society.
We have analysed the impact of mandatory sustainability reporting on a number of measures reflecting socially responsible management practices in 58 countries around the world. Our research shows that mandatory sustainability reporting does make a significant difference. It leads to a multitude of benefits both for firms as well as for the country as a whole, namely:
In our own research we found that while reporting on non-financial matters is important, reporting alone is not enough. We found that countries with stronger enforcement mechanisms see a higher level of social responsibility in its business leaders, the elevation of sustainable development in its corporate goals and more substantial investments in employee training. Then, too, third-party validation of sustainability reporting provided additional insurance that the reports were not simply public relations ploys.
Our research is important because socially responsible managerial practices can enhance the competitiveness of a country by generating higher levels of trust in business. Regulators and policymakers should take this into account when considering mandating integrated or sustainability reporting. We found it noteworthy that the European Union has consistently emphasised the importance of sustainable development and building trust between business and society to increase Europe’s competitiveness.
Moreover, the results suggest that managers can use reporting as a tool for building better and more effective communication channels between the firm and its stakeholders, making the firm more transparent and more accessible. Developing a reputation for responsible corporate behaviour also could result in a competitive advantage in labour, product and capital markets and consequently, higher economic value. The message is clear: ensuring that companies take a good look at and report on how they are doing in non-financial areas makes a real difference to how they behave.