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McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Topics Theories to Explain CSR Practices Drivers of CSR Practices by Companies Implications of Climate Change for CSR Regulating CSR Practices Global Reporting Initiative (GRI) CSR Practices by MNCs 15-2 Learning Objectives Explain the meaning of corporate social reporting (CSR). 2. Identify theories used to explain the CSR practices of companies. 3. Describe the current international trend of external reporting. 4. Describe the steps taken at the international level to regulate CSR practices of companies. 5. Discuss the factors that drive CSR practices of MNCs. 6. Identify the organizations that promote CSR at the international level. 7. Discuss the role played by Global Reporting Initiative (GRI). 8. Explain CSR disclosures by companies at the international level with possible reasons for the current trends in this area. 1. 15-3 Also known as: Ecological footprint reporting. Environmental social governance (ESG) reporting. Triple bottom line (TBL) reporting. The goal of sustainable development is to meet the needs of the present without compromising the ability of future generations to meet their own needs. 15-4 Derived from notion of organizational societal responsibility: Which comes from notion of stewardship—the accountability of management for the resources entrusted to an organization. Accountable to shareholders and other stakeholders (employees, creditors, and society at large). Accountability is proactive—not reactive. Example—morally irresponsible for corporations to profit by depleting natural resources or polluting the environment. Learning Objective 1 15-5 Stakeholder theory Environmental disclosures made in response to stakeholder demand for environmental and social information. Major problem-- fails to explain different disclosures by similar industries in same geographic areas. Legitimacy theory Social reporting is means to deal with firm’s exposure to political, economic and social pressures. Behavior motivated by congruence with perceived goals of society to legitimize their performance. Learning Objective 2 15-6 Legitimacy theory (continued) Society’s perceived goals represented by various interest groups such as environmental public interest groups (e.g. motivation for disclosures by other petroleum firms after Exxon Valdez oil spill and expected disclosures from firms other than BP after 2010 Gulf of Mexico oil spill). Has also led to increased skepticism, such as in Ireland who has no demand for CSR, so any attempt at CSR is questioned. Australian managers, on the other hand, consider CSR disclosures useful for maintaining or reestablishing legitimacy. Learning Objective 2 15-7 Largely voluntary in most countries. Wide diversity based on different countries’ drivers. National culture affects CSR practices: E.g. Spanish culture closer to Latin-European and Latin-American countries. Remember Hofstede's four cultural dimensions: Individualism vs. collectivism Large vs. small power distance Strong vs. weak uncertainty avoidance Masculinity vs. femininity Remember also Gray’s relationship between accounting values: Secrecy vs. transparency (e.g. Spain secretive in CSR disclosures) Conservatism vs. optimism Uniformity vs. flexibility Statutory control vs. professionalism Learning Objective 3, 5 15-8 Influenced by organizational culture: Attitude of top management towards stakeholders. “Tone at the top” identified in U.S. Treadway Commission Report. Managers determine relevant audience. Foreign subs may disclose information in line with parent—not local culture. Rate of development of CSR internationally is slow due to cultural factors—economic, political, capitalism, lethargy, inertia AND resistance to change by accounting profession. Learning Objective 3 15-9 Significant shortcomings with voluntary CSR practices. Biased and self-laudatory disclosures—minimal disclosure of negative information. Disclosures insufficient and low in credibility—lack independent verification of performance. Difference between accountability and forced accountability, where spirit of the latter may not exist. Learning Objective 4 15-10 Problems of regulation through legislation Lobbying in favor of economic over social/environmental interests may undermine regulatory enforcement. If corporate legitimizing activities successful—public pressure for governmental disclosure may be low leaving it up to managers to control details of social reporting. Needs to be stringent enforcement mechanism (e.g. Thailand’s social and environmental legislation hasn’t promoted more management CSR disclosure). Regulatory agencies weak due to dependency on expertise and information of those they are trying to regulate. Learning Objective 4 15-11 Regulation of CSR in the United States Chicago Climate Exchange is the only cap and trade system for all six greenhouse gases (GHGs) in North America. Emitting members—voluntary but legally binding commitments to meet annual GHG reduction targets: If below target—can sell or bank surplus allowances. If above target—can purchase CCX Carbon Financial Instrument contracts—tradable commodities (each contract = 100 metric tons of CO2 equivalent and comprised of exchange allowances and offsets). Some efforts have failed since carbon offsets are nearly impossible to verify as to legitimacy. California and nine Eastern Seaboard states have formed Regional Greenhouse Gas Initiative to introduce regs on GHG emissions. Learning Objective 4 15-12 Regulation of CSR in the United States (continued) SEC has taken steps to introduce greater regulatory scrutiny. “Superfund” legislation in the ’80s required corporations to actively remediate past problems (even if not responsible for the contamination). “Superfund” reporting also helped more positive environmental informational financial reporting. Learning Objective 4 15-13 International Arrangements to Regulate CSR Dramatic increase of environmental laws in Australia, New Zealand, the U.K. and the E.U. 2005 Kyoto Protocol ratified by more than 165 countries but not the U.S.: Says atmosphere is a shared resource and countries have common but differentiated responsibilities to control emissions. Must reduce GHGs by 5% from 1990 level to 2011. European Union Emissions Trading Scheme (EU ETS) launched in 2005 created EU-wide market for emissions trading linked to Kyoto Protocol. Learning Objective 4, 6 15-14 Climate change • International Panel on Climate Change (IPCC) has found concentration of carbon dioxide in the atmosphere has increased by 35% in the past 250 years (by far exceeding such variations over preceding 10 million years). • 1995-2006: rank among warmest years for global surface temperature. • 2007 Stern Report in the United Kingdom on the Economics of Climate Change: our actions resulting in climate change risk major disruption in economic activity (e.g. could cost .5% to 1% of world GDP per annum by mid-century and could be likened to economic depression of first half of twentieth century). Learning Objective 5 15-15 Climate change—key concepts Emissions Trading—tradable carbon credits must be purchased or pay a fine if certain emission limits exceeded. Carbon Credits—reductions in greenhouse gases with tradable financial value. Carbon Funds and Emissions Brokerages—funds set up to purchase carbon credits and brokerages mediate between buyers and sellers of the credits. Clean Development Mechanism (CDM)—promotes reductions in emissions of developing countries. Carbon Neutral—emissions offset by removal of an equal amount of gas from the atmosphere. Carbon Tax—tax on use of fuels causing carbon dioxide and greenhouse gas emissions—based on type and quantity---promotes fuel efficiency. Learning Objective 5 15-16 Several international bodies—World Bank, IFAC, Kyoto Protocol. World Bank set up “Prototype Carbon Fund” (PCF) to stimulate development of emissions trading market: Assists companies and governments to invest in carbon credits generated by Kyoto Protocol. Investors receive pro-rata share of the carbon credits. London has “Alternative Investments Market” (AIM) with funds set up by large banks and private entities for carbon credit trading on behalf of companies or for speculation. “International Finance Corporation” (IFC), together with GRI, has “Good Practices Note” to help businesses achieve better value through sustainability reporting. Learning Objective 7 15-17 IFAC developed “Sustainability Framework” using Web to target professional accountants who can influence organizations integrate sustainability into objectives, strategies, etc. IAASB expected to develop an assurance standard on GHG statements by firms. 2005 “Asia-Pacific Partnership on Clean Development and Climate” signed by Australia, Canada, China, India, Japan, Korea and the U.S. GRI is independent with Secretariat in Amsterdam, but remains collaborating center of “United Nations Environmental Program” and works with “U.N. Global Compact.” GRI produces one of world’s most prevalent standards for sustainability reporting. Learning Objective 7 15-18 As of January 2009 more than 1,500 organizations from 60 countries use guidelines to produce sustainability reports. Part I Defines report content, quality and boundary. Ensures quality of reported information. Learning Objective 7 15-19 Part II Standards for disclosure. Base content. Three types of disclosure: Strategy and profile (overall context for understanding organizational performance). Management approach (how an organization addresses given set of topics). Performance indicators (economic, environment and social performance). Learning Objective 7 15-20 In October 2006 GRI launched G3—third generation of guidelines consisting of principles and disclosure items: Principles include materiality, stakeholder inclusiveness, comparability, and timeliness. Disclosures include management of issues and performance indicators (e.g. total water withdrawal by source). GRI is a network-based organization—has developed world’s most widely-used sustainability reporting framework. Has international certified training program “GRI—Certified Training Program”. Learning Objective 7 15-21 May 2008—GRI sponsored “Global Conference on Sustainability and Transparency” with main outcome: By 2015 all large and medium companies in OECD countries and large emerging economies will be required to report on ESG performance or explain why they don’t. By 2020—generally accepted and applied international standard effectively integrating financial and ESG reporting by all organizations. August 2010—GRI and “Prince of Wales Accounting for Sustainability Project” announced formation of “International Integrated Reporting Committee” (IIRC): To develop framework to bring together financial, environmental, social and governance information. Clear, consistent, comparable and integrated manner. Learning Objective 7 15-22 UPS 2009 annual report states that it follows GRI guidelines: Shows plans to cut airline carbon emissions. Shows how it responds to each of G3 indicators. GRI research indicates worldwide trend towards sustain-ability: Helps build and maintain brand. Strong correlation between high profitability and sustainability in top international businesses (e.g. Coca-Cola, Microsoft, IBM, GE and Nokia). Senior management clearly express commitment to CSR. Hard to find examples of companies quantifying financial cost or benefit of reducing greenhouse emissions. Learning Objective 8 15-23 Items disclosed and methods of CSR disclosure vary in different countries. Items Disclosed U.S., U.K. and Australia mostly disclose human resources and community involvement. Thailand mostly discloses employee and environmental information. Learning Objective 8 15-24 Methods of Disclosure U.S. and U.K. use both monetary and nonmonetary disclosure. Australia usually nonmonetary and more favorable to company even around time of negative events: Also haven’t adopted compliance-with-standard style of stakeholder reporting as in Europe. Little reference to reporting standards or necessity of disclosure. Learning Objective 8 15-25 Extent of Environmental Disclosure Varies Canada more extensive than U.S. Firms from countries that ratified Kyoto Protocol seem to have higher disclosure indices related to pollution and greenhouse gas emissions. Japan stands out as a country with high rate of reporting on climate change. Learning Objective 8 15-26 Extent of Environmental Disclosure Varies Few companies report on risk of legal action or business disruptions caused by climate issues. Learning Objective 8 15-27