Recently, I received two queries from a reporter on corporate social responsibility (CSR) and CSR reporting. These were my responses.

Query 1

“Why evaluate companies from the CSR point of view at all? What good does it serve, especially considering the many flaws in CSR research cited below?”

Companies should report on issues described as “CSR”.

First, they should because reporting will improve the corporate decision-making reflected in it. What gets reported gets managed. Second, accountability is part of the price corporations pay society for their privileges. It’s just part of the deal.

Corporations cannot ignore environmental, social and governance issues (ESG). To do so while ignoring the understanding humans now have of the inter-connections of these issues and “business” issues makes as much sense as buying groceries without checking the “sell by” date.

In fact, corporations had best integrate ESG considerations in their decision-making processes. Why? Because the institutional investment signatories to the UN’s Principles of Responsible Investment – representing US$13 trillion – have committed to evaluate their investments incorporating those considerations.

Query 2

“CSR evaluation has many flaws. It favors large companies that have resources to create a thick sustainability report. It depends more on what companies say (on their report, website and so on) than on what companies actually do. Since it’s more qualitative than quantitative, the results can vary depending on organizations that conduct the evaluation. Can these flows be overcome in the near future, even partly? If so, how will it be improved?”

I reject every hypothesis embedded in this question.

Status of Current Reporting

We are at the dawn of corporate awareness of the importance to their stakeholders and the relevance to their decision-making of environmental, social and governance (ESG) dimensions of their actions. Not surprisingly, they are still in the night as to how to report on these issues.

Corporate stakeholders tend – within their areas of interest – to be ahead of corporations on ESG issues, but they, too, struggle with issues largely unframed as recently as thirty years ago. It’s worth recalling that the ecological paradigm was a new concept in the 1970s and only entered curricula in the 1980s.

In this context, stakeholders and their representatives do the best they can to frame questions to corporations. With their far more limited resources and narrower interests, it is absurd to blame stakeholders for not having worked out corporate reporting. Indeed, they are trying to do the companies’ work for them through efforts such as the Global Reporting Initiative.

Imagine the state of ESG reporting if all publicly traded companies diverted the resources – financial and human – they expend on golf club memberships and golfing holidays into analyzing these issues….

Large Company Bias

As of KLD’s last survey for CERES, less than half of the companies on the S&P 500 – a fair proxy for the largest US corporations – reported in any form on sustainability. So a fair number of large companies make no effort in the area at all.

Of course, companies that make the effort to report get credit for it. But they’ve also exposed themselves to criticisms of what they report. While I can only speak for KLD, I can say I don’t know of an instance where a company got some sort of “pass” from one of our peers just for reporting.

Big companies have tended to report both earlier and more comprehensively than small. That’s hardly surprising. They are accustomed to dealing with numerous, diverse stakeholder groups. They are more scrutinized. They have the resources. From those to whom much is given, much is – and should be – asked.

As reporting expectations become more standardized, more built into auditing and managerial practises, more companies of all sizes will report. ESG reporting – just like financial reporting – will vary with the size and complexity of the corporate operations. But beyond question, across all areas of size, reporting will increase and improve.

Qualitative v. Quantitative Judgments

Of course stakeholder judgments of corporate performance on ESG issues are mainly qualitative, not quantitative. That’s true of most human judgments including those in the financial sector. Consider the phrase “quality of earnings” for a moment.

There are now thousands of corporations that operate across borders. Those in the top half by size are complex micro-cultures employing tens, if not hundreds, of thousands. Corporate micro-cultures intersect and interact continually with themselves and the micro-cultures and larger cultures in which they operate.

How can anyone – companies included – judge a corporation’s record on equal employment issues across all these intersecting, if not conflicting, expectations except qualitatively?

Only a small number of criteria – of any sort – are susceptible to quantification, and a very small subset of these offer useful comparisons to companies in other sectors. It is useful to seek these out. It is futile to hope they will substitute for the hard work of qualitative analysis.

Variations in ESG Evaluations

If highly trained financial analysts can look at the same data from a corporation and reach opposite buy-or-sell recommendations, why shouldn’t that be true of analysts evaluating data that are at least equally complex in the ESG area?

Expecting agreement amongst diverse stakeholder and research groups…. As the American frontiersman and Congressman Davy Crockett said 170 years ago, “It don’t even make good nonsense.”

The Future of CSR Reporting

Eighty years ago less than half of publicly traded US companies issued formal financial reports of any sort. Harvard Business School professor Thomas K. McCraw has noted of two important companies of that time:

It was the established policy of the Singer Sewing Machine Company, for example, never to issue annual reports and to give such information as it chose to make public orally at stockholders’ meetings. The Royal Baking Powder Company published no reports during the first quarter of the twentieth century.

Public expectation, regulation and litigation changed all that.

What happened to financial reporting will happen to ESG reporting. In eighty years, it will be inconceivable corporations once did not report formally on the social and environmental impacts of their businesses.