It came with good intentions.
Public listed companies in the country will be required to report environmental, social and governance to the Securities and Exchange Commission. Companies that fail to comply will have to explain the reason for their non-submissions. The ‘comply-or-explain’ regulation was scheduled to take effect by the end of 2018. And the first of these reports is expected to be submitted in 2020.
While sustainability reporting is mandatory in Thailand, Malaysia, and Indonesia, only 11 percent of publicly-listed companies in the Philippines report sustainability performance.
According to reports, an SEC executive replied that the intention is “to promote greater transparency on ESG impacts and to provide an enabling regulation that would allow companies to appropriately communicate with their stakeholders.”
Legitimacy is defined as the “generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within a social system.” Companies adopt policies and practices with the intent, whether consciously or unconsciously, to influence public opinion of them, or as a means to change public perception.
Sustainability reports are important in a company’s process of “legitimacy.” They are material in shaping stakeholders’ attitude and perception of the company through information of corporate activities and the results achieved.
Sustainability reports can be useful. Within the company, these provide a better understanding of its impacts on society, the economy and environment. These can be used as basis to arrive at better and more profitable decisions. Between and among companies, they promote transparency.
They enable companies to choose partners that can provide long-term mutual benefits. Among stockholders, access to a company’s environmental, social and governance performance enables them to make better investment decisions.
In principle, submission of sustainability reports is voluntary. Most adopt the popular Global Reporting Initiative (GRI) framework. Using this template, companies are free to select from a list of at least 79 performance indicators. Although companies are expected to choose indicators that reflect their operations, it is also inevitable that some indicators may be conveniently
excluded. Although mandatory submission of sustainability reports is a welcome move, there is reason to doubt the disclosure quality of the reports.
The quality of disclosure depends on one, what was reported and the quantity of information reported, and two, how this was reported. In terms of quantity, this refers to the “absolute number of items disclosed and its weight in the overall information provided.”
The manner on how this information is presented refers to “the extent to which information helps users appreciate the social and environmental impact of corporate activities.” The relevance of information “is affected by how much it is diluted into the mass of other information disclosed.”
The quality of disclosure may lead a stakeholder to infer “if the company is involved in an effective commitment to CSR… or represent simply an attempt to construct a commitment that is designed to positively influence stakeholders’ perception.”
One study evaluated three CSR reporting practices of 112 unique firms listed in the London Stock Exchange in 2005-2007. These practices are: the use of stand-alone sustainability reports (in contrast to reports that are integrated into annual reports), the use of the Global Reporting Initiative (GRI), and the use of third-party assurance of CSR information.
Empirical results show that the quality of information disclosed in stand-alone reports is no different from that reported in annual reports. Although stand-alone reports provide more information, high amounts of information “tend to be diluted in longer reports.” CSR information is mostly concealed among hundreds of pages of reporting. Technically, relevant information is communicated, but in a way that is difficult for users to find.
Companies that use the GRI framework may appear to “disclose broadly” but the quality of disclosure does not increase. Lastly, the use of a third-party assurance is primarily used to influence stakeholders’ perception of corporate commitment to CSR reporting.
The intent of CSR practices is “to bring changes in organizations, translating into changes in environmental performance,” Therefore, “disclosure would be the natural outcome of the corporation’s use of the broader social and environmental management accounting system, and should, therefore, be informative, able to provide measurable information, disclosed in a way that helps users appreciate the social and environmental aspects of corporate activities as well as
the underlying corporate commitment to CSR.” These are not apparent. Rather, they have been abused “to portray the corporation as socially responsible, independently of whether it really is or not, creating an appearance of concern that does not translate into actual performance.”
Are we going to be any different?
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Real Carpio So lectures at the Ramon V. del Rosario College of Business of De La SalleUniversity. He is an entrepreneur and a management consultant. Comments are welcomed at firstname.lastname@example.org. Archives can be accessed at realwalksonwater.wordpress.com.
The views expressed above are the author’s and do not necessarily reflect the official position of DLSU, its faculty, and its administrators.