Transcript Learning Objectives - McGraw Hill Higher Education

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:

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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:

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
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Individualism vs. collectivism
Large vs. small power distance
Strong vs. weak uncertainty avoidance
Masculinity vs. femininity
 Remember also Gray’s relationship between accounting values:

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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:
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
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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
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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
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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.
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Ensures quality of reported information.
Learning Objective 7
15-19
Part II
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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
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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.
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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.
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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