Social And Environmental Reporting

Introduction

Over the past few decades, business organisations have devoted increased attention to sustainability. In order to accommodate this increased sustainability awareness, companies are adopting social and environmental practices such as social and environmental reporting (SER), which has resulted in increased attention to SER reporting (Bouten and Everaert 2015). SER practices remain voluntary and as a result some companies disclose this information while others are not providing any information (Vourvachis and Woodward 2015). However, the adoption of the EU Non-Financing Reporting Directive (NFRD) 2014/95/EU by the UK has obligated business organisations in the UK to disclose their non-financial information which includes making social and environmental reports. Despite this regulation, the Climate Disclosure Standards Board reveals that the guidelines have not been widely adopted among organisations in the UK. Within this background, the aim of this essay is to explore the reasons that influence companies to make SER reports and disclosure, the find out the nature of the information that companies disclose, and to find out how the reports and disclosures are compiled. The essay also considers whether or not companies in the UK adopt NFRD guidelines when making their SER reports and disclosure and the motivation of their behaviour.

Why companies make SER reports and disclosure

The UK government expects public interest entities to make non-financial reports which include SER reports. The government adopted NFRD 2014/95/EU policy with an aim of enhancing the effectiveness of the non-financial reports made by companies whose activities are likely to have substantial impact on the economy and the society in which it operates (Gov.UK 2016). With this adoption, the government hoped to increase transparency and accountability in non-financial reports by ensuring companies assess non-financial risks and opportunities and incorporate these in the SER reports so that investors are able to make more informed investment decision and to ensure companies manage environmental and social risks in a proper way (Gov.UK 2016). From this perspective, companies are supposed to make SER reports to show they understand the environmental and social risks associated with their business practice and they are properly managing these risks. Existing literature shows that companies make SER reports with this as the primary motivation but they also have other secondary reasons for making SER reports as detailed in the subsequent paragraphs.

Several theories have been developed and used to explain SER practices and their importance to companies. These theories include the legitimacy theory and the stakeholder theory. Organisations seek legitimacy from their relevant stakeholders through making sure that their value systems are similar or appear to be similar to the values of the society within which the organisation operates (Vourvachis and Woodward 2015). From this perspective, there are various strategies that businesses can use to enhance their legitimacy and voluntary disclosure is one of these strategies. Voluntary disclosure should therefore be focused on changing the behaviour of an organisation or on changing the perceptions of stakeholders about the behaviour of the organisation. Given that legitimacy is needed from the stakeholders, the legitimacy theory and the stakeholder theory must be used together. The stakeholder theory ensures that an organisation is able to identify important stakeholders to whom information should be disclosed in order to gain or maintain support. Therefore, from the legitimacy theory and stakeholder theory we can conclude that companies make SER reports and disclosure in order to manage their image especially when faced with legitimacy crises.

Bradley and Botchway (2018) regard voluntary reporting and disclosure as a company’s willingness to accept the responsibility of understanding and addressing the needs of the wider group of stakeholders. From the same perspective, Bhattacharyya (2016) writes that SER is an important framework through which responsible organisations are able to obtain stakeholder views through engagement and address the needs through continuous dialogue with the stakeholders. In agreement, Dobbs and Van Staden (2016) assert that stakeholder dialogue is fundamental in businesses showing responsibility to stakeholders because through the consultation process, managers develop a better understanding of the expectations of stakeholders, which the company then addresses and reports back to the stakeholders. Nonetheless, Bhattacharyya (2016) notes that stakeholder dialogue seems desirable but it is not always achieved in that SER practices are not usually motivated by managerial desires to discharge moral responsibilities but by the desire of the management to maintain or advance power and wealth of capital. From this perspective, we can conclude that companies make SER reports and disclosure in order to show responsibility to the wider group of stakeholders while increasing the competitiveness of the company.

Companies also make SER reports and disclosure as a reaction to external stakeholder scrutiny and as a response to environmental issues (Bouten and Everaert 2015). Some companies and the large ones in particular make stand-alone CSR reports, which help them convince external stakeholders they are not only interested in profit maximisation but also in responding to the needs of different stakeholders and in conservation of the environment. A study conducted by Bradley and Botchway (2018) shows there is a positive relationship between environmental performance and the level of discretionary environmental disclosures. Therefore, we can conclude that companies make SER reports and disclosure in order to control their impact on the environment and to better respond to the needs of the stakeholders.

Dobbs and Van Staden (2016) identify more possible motivations for social and environmental reporting and disclosure: to educate stakeholders, to indicate to regulators that legislation is unnecessary, to demonstrate the company’s achievements, to persuade the stakeholders that the company is walking the talk, to legitimise the organisation, to counter the claims of environmentalists, to express the commitment of the company, to provide focus for the environmental management systems, and to show the financial stakeholders that the company is managing the environmental risks.

The information contained in SER reports and disclosure

The NFRD 2014/95/EU policy requires companies to include the following information in their non-financial disclosures (Gov.UK 2016). First, companies should disclose their understanding of environmental, social and employee matters anti-corruption and bribery, and respect for human rights matters. Second, companies should indicate the policies they have adopted in relation to the matters above, the measures they have adopted, and the outcomes they have realised. Third, the reports should include information on the risks that the companies face in relation to those matters and how the risks are managed. Fourth, companies are required to disclose a diversity policy indicating how its handles issues related to education, gender, age, and professionalism. Lastly, companies should use key-performance indicators which allow them to numerically measure their progress against various targets. Companies have complied with these requirements but the compilation of SER reports differ across countries. Below is an overview of how organisations compile SER reports and disclosure.

In the SER reports, companies majorly disclose sustainability information in relation to social, environmental, and societal matters. Given there is an increasing demand for companies to show accountability to social, environmental , and societal matters, Kaya (2016) asserts that organisations should give comprehensive reports by providing information on their (i) aims and intentions, (ii) actions, and (iii) subsequent performance on the social, environmental, and societal sustainability issues. On the other hand, Kaspersen and Johansen (2016) argue that accountability requirements in SER have expanded requiring companies to cover staff-related ethical aspects such as codes. In the same vein, Bouten and Everaert (2015) write that sustainability reporting should also include social-ethical issues and employee and community matters in particular. Further, Vourvachis and Woodward (2015) note that SER reporting and disclosure should contain any non-financial information regarding the social, environmental, and societal aspects. From a different perspective, Michelon et al. (2015) write that SER reports and disclosure should identify challenges to social and environmental sustainability and then detail the goals that a company has set towards social and environmental sustainability, the actions the company will/has taken to achieve these goals, and the progress the company has made in relation to the set sustainability goals. Therefore, the key content of SER reports and disclosure is non-financial information relating to social, environmental, and societal matters not forgetting organisational goals, actions, and subsequent performance in these matters.

How disclosure or SER reports are compiled

As earlier mentioned, the NFRD) 2014/95/EU policy requires companies to use non-financial key-performance indicators which gives a numeric measure of a company’s progress against certain targets (Gov.UK 2016). In practice, SER reports and disclosures are compiled using sustainability indicators. According to Bradley and Botchway (2018), sustainability indicators disclose information about a state or condition, translates sustainability challenges into performance measures, and provides the information flows necessary to legitimise the activities they reflect. These indicators arise from values since a company measures what it cares about, and create values given that companies care about what they measure (Bradley and Botchway 2018). This implies that in SER reporting and disclosure, a company should identify the indicators of social and environmental sustainability and show how their actions contribute to the attainment of this indicators, which is then reflected in subsequent performance. For example, if a company considers carbon reduction an indicator of environmental sustainability, then the company should be able to show the actions it has taken to promote carbon reduction and then show how these actions has contributed to carbon reduction in quantitative terms. It is also advisable that the company ensures that the adopted social and environmental indicators correspond to sustainability challenges that the stakeholders recognise (Dobbs and Van Staden 2016).

Conclusion

The aim of this essay was to explore the concept of social and environmental reporting by business organisations. The essay establishes that companies make SER reports in order to manage their image, to show responsibility to the wider group of stakeholders, and to control their impact on the environment and the society in which they operate. In addition, the essay shows that SER reports disclose non-financial information related to social, environmental, and societal matters. The reports should contain the aims and intentions of an organisation, its actions, and subsequent performance as far as social and environmental sustainability is concerned. Finally, the essay establishes that SER reports are compiled using social and environmental sustainability indicators.

References

• Bhattacharyya, A., 2016. Factors associated with the social and environmental reporting of Australian companies. Australasian Accounting, Business and Finance Journal, 8(1), p.2014.
• Bouten, L. and Everaert, P., 2015. Social and environmental reporting in Belgium:‘Pour vivre heureux, vivons cachés’. Critical Perspectives on Accounting, 33, pp.24-43.
• Bradley, O.J. and Botchway, G.O., 2018. Communicating corporate social responsibility (CSR) in the coffee industry. Sustainability Accounting, Management and Policy Journal.
• Dobbs, S. and Van Staden, C., 2016. Motivations for corporate social and environmental reporting: New Zealand evidence. Sustainability Accounting, Management and Policy Journal.
• Gov.UK 2016. EU directive on non-financial reporting. [Online] Available at https://www.legislation.gov.uk/ukia/2016/243/pdfs/ukia_20160243_en.pdf [Accessed 13 May 2020]
• Kaspersen, M. and Johansen, T.R., 2016. Changing social and environmental reporting systems. Journal of business ethics, 135(4), pp.731-749.
• Kaya, I., 2016. The mandatory social and environmental reporting: Evidence from France. Procedia—Social and Behavioral Sciences, 129, pp.206-213.
• Michelon, G., Pilonato, S. and Ricceri, F., 2015. CSR reporting practices and the quality of disclosure: An empirical analysis. Critical perspectives on accounting, 33, pp.59-78.
• Vourvachis, P. and Woodward, T., 2015. Content analysis in social and environmental reporting research: trends and challenges. Journal of Applied Accounting Research.