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9 CSR Reporting Standards and Practices Shironosov/iStock/Thinkstock Learning Objectives After reading this chapter, you should be able to:1. Understand the history of C SR reporting and past attempts to standardize the process.

2. Explain how t o use Global Reporting Initiative standards to verify CSR and sustainability reports.

3. Summarize the challenges and benefits that org anizations face in creating CSR reports.

2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports Pretest Questions 1. Firms can leg ally report company earnings numbers in just one way. T/F 2. Off ering CSR or sustainability reports remains optional in all industries. T/F 3.

Publicity is the major le verage point for externally motivating corporations to report CSR. T/F Answers can be found at the end of the chapter. Introduction Customers and other stakeholders (even employees) cannot usually become aware of socially responsible behaviors without some effort on the organization’s part. Thus, accurate and timely reporting of CSR efforts can engage stakeholders and provide concrete evidence of sustainability attempts and successes. However, not all firms report the same way, and con- sumers are not always able to protect themselves from false or misleading reports. Also, some firm managers still choose to only report financial returns and don’t discuss the social or environmental aspects of or contributions to those returns.

This chapter addresses types of financial and CSR reporting. It discusses reasons why compa- nies make the effort to report and describe standards and general practices that, if adhered to, can help such reports be maximally useful to customers and other stakeholders. 9.1 Financial and CSR Reports Today the most common type of corporate reports are financial reports. Interestingly, com- panies can legally present investors with two types of financial reports: (a) those that strictly adhere to generally accepted accounting principles (GAAP) and (b) those that include some simplifications or leave out some facts from the main body of the report. The first type is well known to accountants; such reports follow a standardized format that make them easy to compare to reports from other companies that use the same standards. Thus, the GAAP format enables the financial situation of two or more companies to be compared. In contrast, non-GAAP reports feature adjusted figures known as pro forma or non-GAAP numbers. Com - pany leaders have significant freedom in reporting such adjusted numbers, in part because there are no rules about what they can strip from the reporting. This allows executives to paint a simplified or idealized picture of the corporate situation (Morgenson, 2015). Even within the same industry, companies can differ on what they include or exclude from the nonstandard report. For example, one company may exclude facts about how employees are compensated, while another company in the same industry may include such numbers. When these differences occur, it makes it challenging for investors or other stakeholders to compare companies’ performance.

The existence of such different types of reporting means that investors and reporters may pay more attention to the nonstandard and adjusted numbers when making investment decisions \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports (probably because they are typically and purposefully easier to understand). This has ethical implications, should people invest money based on what could be misleading information.

For example, in the case of pharmaceutical company Valeant, there were dramatic differences between the company’s real earnings and its adjusted numbers (and these differences were more dramatic than differences in competitors’ reports). Under GAAP reporting, the com- pany earned $912 million in 2014, but its other report showed “cash” earnings of $2.85 bil - lion for the same year (Morgenson, 2015). Valeant stripped out many expense items from its non-GAAP revenue reports, including costs related to stock-based compensation, legal settlements, and costs associated with acquisitions. In fairness to the company, Valeant did present a list of excluded expenses, but not in a format that was accessible to many investors (Morgenson, 2015). In the last half of 2015, Valeant’s market value dropped by almost $60 billion, largely as a result of investor reactions to the discovery of the variance between the two versions of the report (Morgenson, 2015).

What are government and exchange regulators doing about this issue? In 2003, when pro forma or non-GAAP earnings first became popular, the SEC instituted Regulation G to help investors. Regulation G requires companies that use adjusted non-GAAP figures in regulatory filings to present comparable numbers calculated using GAAP. However, the regulation does not cover news releases, a major source of information for investors.

According to many, this kind of market deception reflects the need for transparency and stan- dardization in reporting, not just for accounting measures (which are only one part of the triple bottom line), but also for CSR (Howell, 2015b). Transparency means being open, hon- est, and direct about a company’s past, present, and future. Standardization means using a common system that allows people to make fair comparisons between similar corporations.

Transparency and standardization are a foundational element of sustainability because they allow companies to fairly measure and compare shareholder value, return on investment in finance, and environmental impact and social contributions to CSR. CSR reports are a rela - tively new phenomenon, and making sure they are useful requires understanding the history of reports, the standards related to reporting, and cases of reporting use and abuse. Doing so also helps explain why some firms continue to resist the practice and why so much variety exists in how and why firms report. It also illustrates how one disaster indirectly led to the creation of a global movement.

History of CSR and Sustainability Reports On March 24, 1989, an oil tanker named the Exxon Valdez, bound for Long Beach, California, ran aground in Prince William Sound, Alaska, spilling 15 million to 40 million gallons of crude oil into the ocean (Skinner & Reilly, 1989). Considered one of the most devastating human- caused environmental disasters in history, the spill eventually spread to cover 1,300 miles of coastline and 11,000 square miles of ocean. Prince William Sound is a remote location acces- sible only by helicopter, plane, or boat. This isolation made government and industry response efforts slow and expensive, which only further devastated local salmon, seals, and seabird populations (Skinner & Reilly, 1989). The fishing industry in that part of Alaska still has not fully recovered from this disaster. The public’s outrage over the event grew as investigations and reports revealed that the crew was overworked and underrested, and that some safety monitoring equipment was broken and deemed too expensive to fix (Skinner & Reilly, 1989). \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports The Exxon Valdez became a symbol of how the drive for profit can conflict with environmental and social respon- sibility, with devastating results. The short-term media and social response was significant, and public outrage and concern continued for years. Some of the disaster’s long-term implications relate to corporate transparency. The spill instigated new pres - sures for firms to report how they were (or were not) protecting workers and the environment. Groups of activists began to push for accountability through vol- untary corporate reporting. One of the leading orga- nizations responsible for demanding more corporate transparency was the Coalition for Environmentally Responsible Economies (Ceres), which was formed in response to the spill.

The Coalition for Environmentally Responsible Economies Ceres was formed by a small group of investors who believed that if firms like Exxon had to publicly admit they were overworking people (a social CSR issue), were failing to invest in safe equipment (another social CSR issue), or lacked the policies to protect the environment in the event of an emergency, they might find reason to fix such irresponsible and unsustainable behaviors. Essentially, the founders of Ceres believed that transparency could herald change.

Over the organization’s 25-year history, its mission has expanded. It has introduced report- ing tools to help organizations weave environmental and social challenges into company and investor decision making. It has inspired a reevaluation of companies’ roles and responsi - bilities as stewards of the global environment when it published the Valdez Principles, later named the Ceres principles. These consist of 10 points of environmental conduct that Ceres encourages companies to publicly endorse (Lubber, 2014):

Pr otection of the biosphere: How well does the corporation protect the general bio- sphere, including by reducing greenhouse gases?

Sustainable use of natur al resources: Does the corporation strive to use renewable resources and reduce the consumption of nonrenewable ones?

R eduction and disposal of wastes: Does the corporation practice lean manufacturing and seek to reduce or eliminate waste?

Ener gy conservation: Does the corporation conserve energy?

Risk r eduction: Does the corporation have safety and accident-reduction programs in place?

Saf e products and services: Does the corporation create products and packaging that are safe for consumers? Are consumers safe when they use the product?

En vironmental restoration: Does the corporation take steps to renew and restore the environment when damage is done? John Gaps III/AP Images In 1989 millions of gallons of oil spilled from the Exxon Valdez tanker, harming the surrounding water, coastline, and wildlife in Prince William Sound, Alaska.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports 8. Inf orming the public: Is the corporation transparent and open in decision making?

Does the corporation alert the public to CSR progress and setbacks?

Management commitment: Is the corpor ation’s management and leadership knowl- edgeable and committed to sound Ceres practices? To general CSR and sustainability principles?

10.

A udits and reports: Does the corporation audit, report, and generate data on envi- ronmental compliance and CSR?

In 1993, after lengthy negotiations, Sunoco (an oil and gas company) became the first For - tune 500 company to publicly endorse the Ceres principles. Since then many others have signed similar agreements to follow the principles, and Ceres is now the largest environmen- tal monitoring data service for companies (Ceres, 2014), although it is not used by all firms.

The creation of the principles and the requirement for supporters to publicly declare support ushered in renewed pressure to make public data on where companies stand in regard to CSR and sustainability. Ceres spearheaded a movement to get firms to publicly report and state sustainability and CSR goals, progress, and setbacks.

Recent research suggests that 93% of the top global companies publish CSR or sustainability reports (KPMG, 2013). The statistic indicates how far sustainability and CSR reporting have come, but the journey was not easy. As Bob Massie, Ceres’s executive director from 1996 to 2002, stated in 2014:

The whole idea of having an environmental ethic, or measuring your perfor - mance above and beyond your legal requirements, was considered completely insane. Sustainability was considered to be a shockingly difficult thing that no company would ever take on as a goal. (Ceres, 2014) As Ceres pushed reporting, it also spearheaded a worldwide effort to standardize and system- atize disclosure on environmental, social, and human rights performance. In the late 1990s Ceres launched a separate entity known as the Global Reporting Initiative (GRI), the aim of which was to create a standardized and transparent accountability process that ensures compliant companies follow the Ceres principles (GRI, 2015). The Global Reporting Initiative The GRI is the most widely adopted framework for sustainability reporting. It was originally created in 1997 to help leaders and managers navigate the process of reporting—there were no standards and very few examples to follow at that time. One of the first steps organiza- tional leaders took was to expand the conversation and terminology so that more industries could participate in the effort. For example, GRI leaders broadened the focus beyond the envi- ronment to also include social, economic, and governance issues. The addition of more topics and keywords served to strengthen the relationship between GRI and basic CSR principles and enabled more organizations to participate. In 2000 the GRI published the first official guidelines for corporate compliance reporting and created a framework for comprehensive sustainability reporting. The GRI team offered consulting services for those who needed advice on how to provide exemplary reports. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports For the first 3 years, GRI kept track of which firms used the guidelines and included links to examples of all types of reports on its website. Over time, enough firms began offering reports that GRI stopped keeping track—a sign it had effectively helped launch a movement.

In response to the GRI guidelines, the leadership at Ceres decided to spin off the reporting efforts from the rest of the organization. Thus, GRI became a separate and independent non- profit institution in 2001. The organization moved to Amsterdam and became part of the United Nations under its environmental program (the UNEP). That same year, in 2002, the second generation of guidelines (G2) was unveiled at the World Summit on Sustainable Devel- opment in Johannesburg, South Africa. The summit was the most important international convention related to climate change, and being part of it was another sign of the organiza- tion’s value and prestige.

Over the next 4 years, demand for CSR reporting guidance grew dramatically, and the third generation of the guidelines (G3) was launched with the help of more than 3,000 experts from multiple sectors, including packaged goods, shipping, agribusiness, and more (GRI, 2015). However, it was not until 2007 that GRI created a product for mass consumption and utility —Pathways I. This publication provides a step-by-step procedure for report makers. To create a regional presence and learn how different regions responded to the document, GRI set up regional offices around the world, beginning with Brazil. Today it has offices in many countries.

To encourage the use and enforcement of the current guidelines (G4), GRI launched a 60- question multiple-choice exam that enables individuals to be accredited to use the G4 guidelines. The exam is available in more than 70 countries; successful participants receive a certificate and get their name published on the GRI website for 3 years. While this kind of recognition may seem narrow, it has significant weight with environmentally and socially conscious investors who have come to expect transparent reporting and this kind of standard measurement. Also, certified people can go into business for themselves (or be selected by employers) to help others create better CSR and sustainability reports—this provides a way for CSR and sustainability skills to be turned into financial benefits. The more people who are accredited to the GRI standards, the more the GRI brand grows and the more the reporting movement gains momentum and standardization. GRI’s vision is for organizations to con- sider sustainability throughout their decision-making processes (GRI, 2015). Such a goal puts them in partnership with corporate leaders and individuals who are interested in increasing CSR and sustainability. The emergence of Ceres and GRI illustrate how a small group of individuals can form a collec- tive and ultimately drive major change. The ability of individuals to report, support report- ing efforts, and engage with standardized guidelines has moved from nonexistent in 1992 to being the purview of a few experts to being readily accessible by almost all interested parties.

What have companies done with this ability, and what are the consumer and competitive pressures to conform? As stated earlier, data suggests that each year, more companies report and that these reports are becoming more accessible, detailed, and useful to stakeholders.

The following section highlights this progression. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports The Progression of CSR Reports The three historic phases of CSR reporting clearly show the gradual mainstreaming of envi- ronmental issues, which were once seen as the concern of only a few. Measuring and transpar- ently reporting environmental impacts in a standardized way has become common practice.

However, the journey to get to this point featured several phases, each of which is impor - tant because they illustrate how CSR efforts move in stages. This information can encourage people who want to start a movement related to a different CSR and sustainability issues.

The phases are also important because they illustrate how people come to accept new CSR ideas—and some firms or managers may still be stuck in a mind-set of an earlier phase. The ability to recognize how people and ideas mature can help future leaders and managers work with people of varied mind-sets.

Phase 1 In the earliest phase of CSR and sustainability reporting, corporations were more focused on public image in order to impress shareholders, who mostly expected annual financial reports.

During the 1970s and 1980s, CSR messages (if they existed at all) were based on public rela- tions goals more than truth or adherence to standards. One important breakthrough came in 1972, when a consulting firm named Abt & Associates added an unexpected environmental report to its typical annual financial statements. This pioneering effort focused strictly on sharing data on air and water pollution by the company and its affiliates. Abt & Associates’ financial auditor certified the financial data. But since he was only trained to evaluate finan- cial reports, he disclaimed any responsibility for the environmental data, since no standards existed for such audits. In response, John Tepper Marlin (1973) wrote an article for the Jour- nal of Accountancy suggesting ways accountants could measure pollution; the article included a model environmental report, which was subsequently adopted by a few accounting and auditing firms around the nation (Marlin & Marlin, 2003). Still, neither the practice of report- ing nor the practice of having auditors measure environmental pollution gained much trac- tion until the 1980s.

Phase 2 In the second phase of CSR reporting, Mar- lin continued to innovate and improve on his original ideas. He found an interested innovation partner in gourmet ice cream purveyor Ben & Jerry’s. In a groundbreak - ing deviation from standard practice, Ben & Jerry’s commissioned a social auditor to work with its staff on a report covering the previous year’s activities. This was unusual because most firms only hired financial auditors, not auditors to evaluate social and environmental practices. For 2 weeks, the company’s founders gave the social auditor full access and permission to interview any - one in the company. The auditor visited not Toby Talbot/AP Images Companies such as Ben & Jerry’s, the Body Shop, and Shell Canada were among the first to conduct environmental reports.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.1 Financial and CSR Reports only the main ice cream factory but also the smaller facility where the company made special products, such as its Peace Pops. The auditor was encouraged to speak with dairy industry officials and public and private community representatives—essentially anyone in the supply chain or any stakeholders in the industry. In many ways, by commissioning the audit, Ben & Jerry’s leadership was requesting a fully transparent 360-degree view of the company, prior to the common usage of the term and practice.

The social auditor recommended the resulting document be titled Stakeholder Report. Schol- ars suggest that this may have been the first report directed to and for stakeholders, includ- ing financial shareholders as well as other stakeholders. That first stakeholder report was divided into categories that represented different audiences, including communities (out- reach, philanthropic giving, environmental awareness, global awareness), employees, cus- tomers, suppliers, and investors (Marlin & Marlin, 2003). This was notable because it marked the first time that Ben & Jerry’s considered suppliers to be a stakeholder. The report was also a landmark because it was commissioned by Marlin.

This report, as well as others from similarly progressive companies such as the Body Shop and Shell Canada, helped introduce a new model of corporate reporting—a precursor to the GRI standards. After the first social audit, Ben & Jerry’s continued to issue social reports, using different social auditors to refine the concept and practice of CSR reporting. While these audits still lacked a set of generally accepted standards by which to measure CSR, they were transparent and offered a road map for improvement (and inspired others).

It is important to note that it was not just awareness and goodwill that led to the rise in CSR reporting during the 1980s. Legal issues were also at play in the United States. The open records and meeting laws passed in the 1970s as a result of the Watergate scandal increased the volume of environmental pollution emissions data that entered the public record. In 1987 “right to know” legislation was extended by Congress to establish the Toxic Release Inventory and the Pollution Prevention Act of 1990, which created a database that is used by investors to document environmental progress. It is also a standardized measurement that shows the history of compliance (or noncompliance) to environmental regulation (Katsoulakos, Kout- sodimou, Matraga, & Williams, 2004).

Phase 3 In the third phase of CSR reporting, the need for third parties to verify reports emerged as a requirement (see Chapter 8). Verification bodies such as Ceres and GRI accredit and certify organizations’ behaviors, products, and practices using transparent environmental and social standards, though these had to be created. This newer phase of CSR reporting makes the social auditor stronger and less idiosyncratic and independent, meaning that social auditing individuals and teams follow more standards and produce reports that are more consistent across and between industries.

The third phase introduced advances that continue to define CSR reporting. Now, when social auditors identify a violation, they record the situation, and the facility has an opportunity to \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits take corrective action. Violations range from small infractions such as a minor waste problem that does not endanger certification, to egregious concerns that jeopardize the environment and the possibility of achieving report certification. Auditors are generally solution oriented and tend to give the corporation time to address any violations before the problems affect certification. Reporting in general, and the role of auditors in that process, has matured into an industry where auditors receive standardized training and follow specific CSR standards before certifying a company and its reports.

Several agencies and organizations stand out as early leaders in the final phase of CSR reporting. Among them is Social Accountability International, which was founded in 1997 (Marlin & Marlin, 2003). Other auditing pioneers include the FSC, the International Foun- dation for Organic Agriculture, and the Fairtrade group. Together, these groups formed a larger organization called the International Social and Environmental Accreditation and Labelling, which sets reporting standards internationally and provides uniform training to thousands of social auditors. This group uses GRI standards as well as others that change by industry.

Such agencies help companies assess, measure, and certify CSR and environmental compli- ance. The very existence of such a wide number and variety of certifying organizations indi - cates how CSR and sustainability reporting has become an established feature of modern organizational life. Such reports provide customers, employees, competitors, governments, and other stakeholders the ability to evaluate whether firms are moving toward CSR and sus- tainability or not. Reports provide a way for people to better understand and engage with the CSR journey. However, reports are only valuable if they represent the truth, and third-party certification helps ensure such honesty. 9.2 CSR Reports and Audits Reporting and obtaining certification via an audit is a complex process that requires sup- port and expertise. For organizations interested in starting or dramatically improving sustainability reports, the GRI offers guidelines on how to start. As companies begin to create CSR reports—and as these become more accessible, valuable, and informative— new formats and publishing platforms emerge. For example, most reports are published on paper, but a company named Symantec published both a paper and an online CSR report in 2015.

A detailed outline of how to create and publish a viable CSR report is outside the scope of this chapter, but every employee and future leader will likely need a high-level understanding of the process (see Figure 9.1).

Identify Step 2:

Prioritize Step 3:

Validate Step 4:Review CSR Report Principles Materiality Stakeholder Inclusiveness Sustainability Context Completeness Source: Adapted from “How to Define What Is Material,” by G4 Online, 2013 (https://g4.globalreporting.org/how-you-should-report/how- to-define-what-is-material/Pages/default.aspx To begin, a publisher would focus on the steps of the process—identification, prioritization, validation, and review—to determine the organization’s most significant economic, environ- mental, and social impacts. The next task is to utilize four reporting principles that define report content. These include the following:

1. Materiality: Information must relate to the firm and its operations and cannot be unrelated or distracting.

2. Stakeholder inclusiveness: The report must not leave out key participants in the value chain or stakeholder set.

3. Sustainability context: Reports need to be clear about what is and is not included for evaluation.

4. Completeness: Report authors need to clarify how thoroughly they followed an issue or topic (GRI, 2015).

The principle of materiality refers to the data’s relevance to day-to-day operations. Think back to the discussion of greenwashing in Chapter 8—when reports offer interesting but noncen- tral data, companies end up reporting on nonmaterial aspects of the business that might be misleading. The principle of stakeholder inclusiveness is foundational to the process—recall how the early report from Ben & Jerry’s revealed to the company the then radical idea that \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits suppliers were stakeholders. This type of awakening is possible in every industry as leaders fine-tune the definition of stakeholder inclusiveness. The principle of sustainability context ensures that reports include how an organization’s performance influences sustainability in a wider context (locally to globally). Finally, completeness ensures the report’s topics are adequately covered to provide stakeholders with sufficient information about the organiza- tion’s economic, environmental, and social performance. The report should also detail its own process and methodologies used, as well as mention any trade-offs or assumptions involved in creating the report. Once the report is ready, many companies ask a third-party agency to verify and validate it.

CSR Report Auditors Earlier in this chapter, we discussed the way GAAP guidelines inform the financial audit of any publicly traded firm. While corporate financial audits were and are a standard practice, CSR audits are less common—a fact that began to change in 2002. That year, two of the then major accounting firms, PricewaterhouseCoopers and KPMG, jointly signed and verified a CSR report from Shell Oil. This represented a landmark event for CSR and sustainability efforts because it marked the moment when mainstream financial auditors became willing and able to offer CSR audits, too.

It is important to note this change, because even GRI representatives cannot consult on the verification of reports, as doing so would be a conflict of interest and violate the GRI mandate to remain independent and impartial. Thus, GRI does not recommend or endorse any audi- tors or consultancies. However, it does suggest guidelines on where to find auditing agencies and how to engage with them. In selecting service providers, organizational managers should primarily consider the level of expertise and competency with sustainability disclosures. To ensure results are objective, managers should choose an external provider who is indepen - dent of the hiring organization.

External auditing firms generally fall into three categories: accountancy, engineering, and sustainability services. There are different advantages to each type. Accounting firms typi- cally connect to global networks; they usually have a business focus and expertise in finan- cial and nonfinancial reporting. Engineering firms, on the other hand, may be able to offer technical certifications and assurance, including the ability to conduct important tests and other scientific and technical verifications related to, say, toxicity (or lack thereof ) of ingredi- ents. Furthermore, engineering firms understand complex processes and are typically famil - iar with risk-based analyses. Finally, sustainability services firms understand sustainability issues. They are typically smaller than the other two types of firms and are often locally based and well versed in stakeholder management issues. Each type of provider has a different but compatible value proposition, and some firms may need to hire more than one, depending on operational and manufacturing factors. This means that a technology firm might employ both an engineering firm and a sustainability services firm to provide different stakeholders the assurances they desire.

According to the GRI Sustainability Disclosure Database, a large majority of GRI reports are assured by accounting firms, less than a quarter are assured by sustainability services firms, and slightly over 10% are assured by engineering firms. While this breakdown illustrates that accounting firms dominate the category, the fact is that all three types of providers \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits have paying customers and an ongoing value proposition in the auditing and third-party validation space.

Verification and Assurance Standards One of the first decisions that leaders of any organization seeking to validate reports must make is which reporting standard to adopt. This decision can impact the type of report, the choice of assurance agency, and the focus of report-related research. (GRI, 2015). While there are multiple approaches, three international standards are the most widely used—ISAE 3000, AA1000AS, and ISO 26000.

ISAE 3000 The International Standard on Assurance Engagements (ISAE) standard known as ISAE 3000 offers guidelines for any assurance engagements other than financial audits or reviews of historic financial information. The standard came from the International Auditing and Assur- ance Standards Board of the International Federation of Accountants; it was formed in 2003.

It emphasizes comprehensive procedures for evidence-gathering processes and assurer independence (GRI, 2015). Assurance reports in accordance with ISAE 3000 standards can only be issued by a certified accountant, as they must also comply with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants. Non - accountants can use the assurance methodologies or combine elements of ISAE 3000 with other methodologies, but they cannot certify the results. There are related ISAE standards between 3000 and 3999, depending on the specificity of the topic (for example, ISAE 3410 relates to assurance of greenhouse gas emissions). Leaders in some industries will value that accountants have verified and issued the company report; in other industries the extra effort to obtain this certification may not matter. Different types of certification exist because some firms value one kind of certification or assurance over another.

AA1000AS The AA1000AS certification standard leans a bit more toward sustainability issues, as it relates to a document called the Accountability Principles Standard that many organizations use to guide their approach to sustainability. AccountAbility, an advisory firm famous for being an early provider of certification, published the 2008 version. In response to foundational con- cerns of AccountAbility principals, the AA1000AS standard focuses heavily on whether the organization and its sustainability reporting respond to stakeholder concerns. This certifica - tion matters most to firms that want to be associated with AccountAbility and its brand or to firms that really want to signal they care about stakeholders.

ISO 26000 After 5 years of negotiations between multiple stakeholders around the world, the ISO launched ISO 26000:2010. While not widely used, it is an extension of EMSs. The resulting document provides guidance rather than requirements, so unlike most well-known ISO stan- dards (such as the more famous quality standards known as ISO 9000), organizations cannot \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits be certified for being compliant. However, the guidelines clarify the concept of social respon- sibility, help translate key principles into effective action, and provide examples of best prac- tices in CSR from around the world. The document also helps organize and unify activities and verbiage, which is helpful as more organizations adopt the principles and guidelines. ISO 26000 was developed by a working group of more than 500 experts (ISO, n.d.b). According to the ISO, the working group disbanded after the standard was published, but the leaders were retained to provide support and expertise for those who adopt the standards.

The United Kingdom’s Marks & Spencer provides an example of how a major retailer inte- grated ISO 26000 into its operational strategy. CSR and Sustainability in Action: Marks & Spencer In late 2015 Marks & Spencer introduced ISO 26000 standards to its largest suppliers.

By voluntarily adopting ISO 26000, suppliers agree to conduct business in a more transparent and accountable manner, which helps them comply with the sustainability goals to which Marks & Spencer has publicly committed. In this way the standard helps Marks & Spencer nudge suppliers in a new direction and gives the suppliers a head start in meeting goals that Marks & Spencer has set. In particular, given the volume of clothing the retailer sells, the company uses ISO standards as part of its effort to track the supply chain and check the source of raw materials and labor conditions in supplier organizations. Although ISO 26000 is not an approved GRI standard, it still provides useful information for companies that want to improve CSR and sustainability. After voluntarily implementing the standard, the firm garnered free publicity, gained additional industry attention, and learned where it was weak and strong in terms of CSR goals and progress.

Since the firm sells a wide range of product categories, the ISO 26000 data can be used to appease a wide range of stakeholders, which offers Marks & Spencer a strategic market advantage. For managers deciding which reporting standards to follow, it is important to consider that GRI recommends using external third-party validation for sustainability reports. However, GRI does not require third parties to prepare reports in compliance with the G4 guidelines.

This means that various reports approved by GRI associates may have a different look and feel. As a result, reports continue to differ widely, and there is likely to be continued variety in terms of what constitutes a “good” report—this is because even with third-party validation, subjectivity surrounds the issue. This means there is a real opportunity for different orga- nizational leaders to help improve and standardize CSR reporting. If companies voluntarily follow GRI report guidelines and validate reports, they can make them easier to compare and understand. Essentially, those firms that provide validated reports that stand out to stake- holders have a real opportunity to set the tone for multiple firms and industries.

The next section discusses reasons leaders should validate reports with external auditors and use third-party verification.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits Benefits of Verified CSR Reports Some leaders might argue that CSR reporting simply poses another cost, possibly one that lacks a clear benefit. Additionally, adding CSR compliance to GAAP compliance can overwhelm management. Even though CSR reporting and standards are not universally accepted, they are widespread enough that scholars and practitioners are beginning to see the advantages of CSR compliance. This section documents reasons to create CSR reports that are certified by auditing agencies.

The mere act of seeking external validation can increase a report’s recognition, trust, and credibility. Given that reports cost time, talent, and resources, it makes sense to follow the right process to get reliable results that can be benchmarked each year to chart improve- ment. Organizational stakeholders—including investors, employees, or neighboring commu- nities—are more likely to have confidence in an audited and validated report. In an era of increased cynicism toward business, verification can prevent corporate claims from being dismissed or discounted. Also, seeking verification indicates that the company believes its own story; it reflects a seriousness about the topic that investors, customers, employees, and other stakeholders may value highly. Rating agencies and analysts increasingly look for audits and verification when making investment and rating decisions (Corporate Register, 2008).

Reduced Risk and Increased Value The top international accounting and auditing firm, KPMG (2011), reported that one third of the 250 largest global companies amended reports after auditors identified errors in the company’s CSR compliance. This statistic feeds the cynicism that companies issue untrue or confusing data that they only correct once caught. Using a qualified third-party reviewer means there is a greater chance that the report reflects the truth about a company’s efforts; auditing reduces data-quality risks. Given how quickly news can spread in our connected age, firms can take extra steps to ensure that information is checked before going public. GRI documents also suggest that when firms make the effort to produce robust, audited, and cred - ible documents, the reliability and value of the entire reporting process increases (GRI, 2013).

Improved Board and C-suite Engagement Decision makers at all levels should evaluate choices based on the best available data. This fact about decision making holds for CSR and sustainability decisions as much as for other invest- ment and personnel decisions. Thus, when top management teams must decide whether to enact or otherwise support CSR and sustainability efforts, they are more likely to consider data from competitors and others if that data is verified as reliable. In particular, members of the company board of directors and top-level managers across the C-suite (the chief executive officer, or CEO; chief financial officer, or CFO; chief information officer, or CIO; and so on) are more likely to utilize audited documents to make CSR improvements to organizational strat - egy. The logic is that the higher the quality of decision-making inputs, the higher the quality of decisions that flow from those inputs. Audited and verified documents have a high value for market stakeholders as well as nonmarket ones. If you want to convince upper management to enact a policy or product change, you may have an easier time doing so if you show evi- dence from the CSR and sustainability reports of other firms that had success with the idea. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.2 CSR Reports and Audits Gathering, reading, and sharing the verified CSR and sustainability reports of other compa- nies is one strategy to help you and others make sound CSR-related comparisons.

Improved and Stronger Internal Reporting and Systems As an extension of the benefit of improved board and C-suite engagement that stems from val - idated reports, such robust reporting systems can also help employees at all levels improve results. If the validation process includes feedback on errors, it can lead to learning, training, and improved behaviors. External validation can also confirm the presence of good practices and processes, which further encourages and supports positive efforts. For these reasons, the process of reporting on CSR efforts and getting third parties to verify constituent data can offer a firm many benefits, even if it is in the early stages of enacting CSR and sustainability projects.

Improved Stakeholder Communication As mentioned before and as evidenced in the Ben & Jerry social audit, many (but not all) report validation processes involve the review (or inclusion) of stakeholder engagement efforts. Once such processes are examined, they can be complimented and broadcasted or criticized and improved upon. Publishing results allows others to copy good processes and practices, which can improve the status quo across multiple industries and organizations.

Some organizations even use reporting processes as an entry point into conversations with stakeholders; the reporting process can be an icebreaker that helps start a conversation that may not otherwise take place. For example, if a firm wanted to create its first CSR report, managers could contact key stakeholders and request a meeting to learn which CSR topics concern them. Managers could then use the information to tailor the reporting process. Apply Your Knowledge: Plan a CSR Report Suppose you have been named the CEO of a midsize company in a small community that manufactures automobile parts. The plant sits in what were once wetlands next to a large river. The company has 125 plant employees and 17 administrative and sales staff.

All manufacturing processes take place in the plant, where raw materials are shipped in and product is shipped out. You were named CEO because of your willingness to accept responsibility for CSR reporting. No one in the plant has any experience with this, but the accounting department has filed an annual report using GAAP principles. You are being required to launch CSR reporting by the owners of the plant. How do you begin?

Identify the following:

Stat e what issues you will be addressing. 2. Describe ho w you will measure each of these issues.

Prioritize the issues.

4. Describe ho w you will get third-party verification for each of the issues. 5. Identify an y shortcomings or barriers to providing a complete report.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.3 Using CSR Reports 9.3 Using CSR Reports Thus far, this chapter has addressed the history of CSR reporting and introduced the concept and benefits of third-party assurances for CSR and sustainability reports. What remains to be covered is how both the organization and the public can interpret and use CSR reports.

Publicity Organizations that create CSR and sustainability reports have the power to influence readers and stakeholders—and it is safe to assume that most people create CSR reports to garner stakeholder goodwill. However, reactions to reports can be positive or negative.

An example of positive publicity comes from a study done by Reputation Institute, a New York–based consulting firm. In early 2015 the institute invited approximately 55,000 con- sumers to participate in a study that ranked the world’s 100 most reputable companies (“The 10 Companies,” 2015). It found that 41% of how people feel about a company is based on their perception of the firm’s CSR. As a result of this finding, Reputation Institute separately ranked the top 10 firms with the best CSR—and it did this in part by focusing on CSR and sustainability reports.

This example also portrays how CSR rankings and reports remain vulnerable. After the rank - ings came out, at least two of the companies, Sony and Volkswagen, experienced dramatic events that called into question their ranking and that no doubt will result in lower rankings from future polls. Sony experienced a computer hacking incident that compromised confi - dential data, including information about the company’s unfair hiring and salary practices (Phelan, 2015). Volkswagen faced reports of fraud, including how the firm purposely misled consumers by cheating on emissions tests and lying about its vehicles’ fuel efficiency (Phelan, 2015). Consumers and leaders must work harder than ever to continuously monitor firms as they progress in the pro-CSR and sustainability journey.

It is also common for companies to experience some negative publicity when they report early CSR efforts. Sometimes, early efforts seem small or insignificant, given the organiza- tion’s size, or early reports mention baseline numbers that draw criticism. Some stakehold- ers may interpret the report data negatively. In these situations, it is best to continue on the path toward CSR and sustainability, so that with time naysayers can come to realize that early efforts were real and part of a longer commitment to CSR and sustainability.

In other cases reports about CSR or sustainability efforts do not originate from companies themselves. Nongovernmental organizations also monitor corporate behavior and may report on findings that benefit larger society but that companies may prefer to downplay or ignore. Many organizations feel they have an ethical duty to reveal and advertise negative corporate activities as a way to motivate change. For example, the Business & Human Rights Resource Centre, a nonprofit organization dedicated to advancing human rights in business, tracks more than 6,000 companies and works to help eradicate abusive corporate behavior.

Part of the organization’s mission is to broadcast when companies fail to protect and advance sustainability. The organization creates an annual report titled “The Public Eye Awards,” an account of companies with the worst CSR records for the year. The following are the 2014 Public Eye Award “winners,” including the allegations against companies:

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Section 9.3 Using CSR Reports • BASF, Bayer, Syngenta: Used pesticides to kill bees, which are vital for the environ- ment, agriculture, and food production.

• Eskom: Negatively affected South Africa’s health and environment by using coal power stations.

• International Federation of Association Football: In preparation for the World Cup, forcefully evicted local communities in Brazil.

• Gap: Not being committed to effectively protecting the health and safety of workers in Bangladesh.

• Gazprom: Responsible for oil spills that negatively impact the environment.

• Glencore Xstrata: Negatively impacted the rights of local communities and indig- enous groups.

• HSBC: Provided funding to companies that do not uphold CSR ideals, such as Sime Darby & Wilmar, a company accused of human rights abuses.

• Marine Harvest: Caused damage to the environment and negatively influenced the livelihoods of the indigenous people of Chile (Business & Human Rights Resource Centre, 2014).

Lists such as these can make the public more aware of problems and also bring negative public attention to offending companies. When this happens, managers and leaders may react more quickly or choose a more sustainable response than they might have without the reports and related negative press. In the long term, such reports can benefit society. Changes that firm leaders eventually enact have the potential to succeed in the future and avoid being criticized for poor CSR efforts. Overcoming Challenges Negative publicity is not the only risk faced by companies in creating CSR reports. A study undertaken by the accounting firm Ernst & Young and the Center for Corporate Citizenship at Boston College offers some insight into why firm managers might resist reporting. Survey respondents disclosed three primary challenges (Ernst & Young, 2013): 1.

A vailability of data: Sometimes the data that stakeholders want requires extra time or money to acquire. It may warrant new tests on chemical composition, worker welfare, or end-of-life product treatment,—information that may not be readily available.

A ccuracy or completeness of data: Sometimes data is available but is insufficient, as it only covers some portion of the product or some aspect of use. In such cases firms need to work harder to obtain more data, and this process can take time and money.

Int ernal buy-in: Sometimes people within a firm do not understand or support the logic behind obtaining more information; in such cases people may resist data collection.

An added challenge for some larger organizations is to find subsidiaries and suppliers that are large enough to help them implement sustainable practices and support sustainability reporting.

Given that CSR reporting can be a challenge and, in some cases, be used against a firm, what are the arguments in favor of it? The next section addresses this question.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary Benefits of Creating CSR Reports The four primary motivations for reporting are:1. T ransparency: reports can improve investor confidence, trust, and employee loyalty.

Competiti ve advantage: reports serve to differentiate the company from its competitors.

Risk management: r eports allow managers to identify and address potential envi- ronmental and social risks.

Stak eholder pressure: reports can appease certain stakeholders or alert new ones to key firm accomplishments or goals. (Ernst & Young, 2013) Reporting CSR and sustainability efforts can also help recruit and retain employees.

There is also a financial advantage to shar- ing CSR reports. Research shows that the most transparent companies tend to have higher cash flow (Margolis, Elfenbein, & Walsh, 2007).

In addition to the survey results, data from other sources suggest ways that CSR and sustainability reporting benefit a firm’s bottom line. GRI Chief Executive Ernst Lig- teringen has seen companies change their practices as a result of increased report- ing. General Electric (GE) and Siemens, for example, focused on increasing energy effi - ciency and lowering emissions, both of which have helped the company grow. GE’s “ecoimag- ination” initiative is a company-wide effort to use sustainability concepts to drive innova- tion. The initiative has brought more than $160 billion in revenue since 2005, while lowering greenhouse gas emissions 34%, reducing freshwater use 47%, and saving the company $300 million (Ceres, 2015).

Ceres (2015) finds that sustainability reporting is becoming more mainstream in the United States and abroad. Further, some governments even require mandatory reporting—the Euro- pean Union and India, for example, are in the process of adopting mandatory sustainability disclosure requirements. The integration of financial and sustainability data by many firms creates an opportunity to enhance the data on CSR and sustainability practices (Ceres, 2014).

It also can lead to more CSR behaviors by a greater number of organizations. Chapter Summary This chapter discussed the history of CSR and sustainability reporting to clarify how the prac- tice has changed over time. It also discussed the need for CSR and sustainability reporting and its benefits. As more companies provide reports, scholars and practitioners learn more about how to report and how communities and shareholders benefit. In particular, all stakeholders Manuel Balce Ceneta/AP Images Companies that prioritize CSR and sustain - ability can be profitable. For example, GE and Siemens create innovative products that are energy efficient.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary benefit when reporting standards are fully developed and deployed. While the GRI standards have inspired many firms’ reports, there remains to be one standard that is adopted by all firms. Furthermore, CSR reporting remains a voluntary activity in the United States and most other countries, aside from India and some parts of the European Union. Accordingly, there are several common reporting standards used in different industries, and some fragmenta- tion in how and even why firms report.

Finall y, this chapter described the value of third-party verification and assurance of compli- ance to CSR standards and closed by describing a few uses for CSR reports.

Posttest 1. Best tr ansparency practices involve .

k eeping important company information secret b.

opening all files t o all employees c.

pr oactively publishing all relevant information about the corporation d.

hiring a public r elations firm to release information that makes the company look good 2.

C SR reporting standards were indirectly born as a result of .

the publication of S ilent Spring by Rachel Carson b.

the f ounding of the U.S. Environmental Protection Agency c.

the w ork of several major accounting firms d.

the Exxon Valdez disaster 3.

Which of the f ollowing is currently a leading reporting method for CSR?

ISO 6000 b. AA1000A S c.

ISO 1000 d. GRI G2 4. A ccording to a survey by Ernst & Young, which of the following is a motivation for reporting CSR?

risk management b. r educing environmental impact c.

g aining goodwill d.

go vernment pressure 5.

All of the f ollowing are difficulties in the CSR reporting and assurance process EXCEPT .

a vailability of data b.

accur acy and completeness of data c.

int ernal buy-in d.

e xternal pressure \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary 6. A ccording to the GRI, the following are all principles that should define the content of a CSR report EXCEPT .

stak eholder inclusiveness b.

mat eriality c.

completeness d.

prioritization Answers: 1(c); 2(d); 3(b); 4(a); 5(d); 6(d) Critical-Thinking Questions 1. Discuss the o verall advantages of CSR reporting. When can transparency be a liabil- ity and expose a company to risk?

Ho w is reporting CSR similar to a publically held corporation’s responsibility to report finances using GAAP? How are they different?

What ar e the three kinds of CSR auditor, and what are the advantages and disadvan- tages of each?

Suppose a small compan y would like to create a CSR report. What are some sug- gestions you could make to the company regarding how to start the report? What strategies would you recommend to ensure accuracy and prevent negative publicity?

What ar e some ways CSR reporting can become more standardized for all companies on a global scale?

What does the hist ory of CSR and sustainability reporting illustrate about the power of a small group of individuals to instigate positive change?

What kinds of v alue does sustainability/CSR reporting create inside a firm? What kinds of value does it potentially create outside a firm? How might your answer change based on a report’s content? Additional Resources Learn more about GRI by visiting: ht tps://w w w.globalreporting.org/Pages/default.aspx For an example of a Symantec CSR report, see: ht tp://w w w.symantec.com/content/en/us/about/media/pdfs/2015-corporate -responsibilit y-report-en-us.pdf Review the Public Eye Awards 2014 and corporate responses here: ht tp://business-humanrights.org/en/documents/public-eye-awards-2014 Answers and Rejoinders to Chapter Pretest 1. F alse. Non-GAAP members have considerable freedom and can report earnings in various ways.

T rue. There are no government or industry requirements.

T rue. There are few actual requirements enforced globally, but good public relations motivates many corporations to report CSR.

\251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. Chapter Summary Rejoinders to Posttest 1. Best tr ansparency practices include making sure all relevant information about the corporation is published in a timely manner.

Among the long-t erm consequences of the Exxon Valdez oil spill was a push for more accountability through voluntary corporate reporting, which eventually led to the creation of CSR standards.

The AA1000A S is a certification that focuses heavily on whether the organization responds to stakeholder concerns.

Ernst & Y oung found that the four main motivations for reporting CSR were risk management, transparency, competitive advantage, and stakeholder pressure.

Ext ernal pressure is not a difficulty in the process, but should rather motivate com- panies to report on CSR.

A ccording to the GRI, prioritization is part of the process of creating a CSR report, but not one of the principles that should guide its content. Key Terms AA1000AS CSR standards based on AccountAbility principles that focus heavily on whether the organization and its sustain- ability reporting respond to stakeholder concerns.

Coalition for Environmentally Respon- sible Economies (Ceres) An organization that supports reporting tools that include environmental and social responsibility.

Ex xon Valdez An oil tanker that ran aground in Prince William Sound in Alaska in 1989, causing one of the worst environ- mental disasters in history.

gener ally accepted accounting principles (GAAP) Accounting standards and proce- dures defined by the accounting industry and adopted by nearly all publicly traded companies in the United States. Global Reporting Initiative (GRI) A framework for sustainability reporting that was originally created to help leaders and managers start reporting.

ISAE 3000 The ISAE standard for any assur - ance reporting that is not a financial audit or review of historic financial information.

ISO 26000 The ISO standard that provides guidelines for corporate social responsibility.

social auditor An external expert charged with certifying annual progress on social issues within a corporation.

standar dization Using a common system that allows for fair comparison between like corporations. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution. \251 2016 Bridgepoint Education, Inc. All rights reserved. Not for resale or redistribution.