by Michael Connor
Requiring that companies report on their environmental, social and governance (ESG) initiatives leads to broad improvement in socially responsible management practices, according to new academic research.
A working paper based on the research – The Consequences of Mandatory Corporate Sustainability Reporting by Ioannis Ioannou of the London Business School and George Serafeim of the Harvard Business School – concludes “that sustainability reporting not only increases transparency but can also change corporate behavior.”
According to the researchers, “mandatory disclosure of sustainability information leads to a) an increase in the social responsibility of business leaders, b) a prioritization of sustainable development, c) a prioritization of employee training, d) more efficient supervision of managers by boards of directors, e) an increase in the implementation of ethical practices by firms, e) a decrease in bribery and corruption, and f) an improvement of managerial credibility within society.”
The researchers applied an econometric model to data from 58 countries regarding laws and regulations that mandate a minimum level of disclosure on environmental, social, and governance matters. These ranged from the Sarbanes-Oxley Act in the U.S. to the King Code of Governance Principles for South Africa.
The paper notes a widespread increase in reporting of non-financial information, mostly on a voluntary basis, over the last decade. According to the Global Reporting Initiative (GRI), only 44 firms followed GRI guidelines to report sustainability information in 2000. By 2010, the number of organizations releasing sustainability reports grew to 1,973.
“Disclosure of ESG information forces companies to manage these matters effectively in order to avoid having to disclose bad ESG performance to their multiple stakeholders,” the working paper states.
“To our knowledge, this study is the first to show that mandatory sustainability reporting may effectively promote socially responsible management practices and may improve perceptions of corporate social responsibility by stakeholders,” the researchers write. “These results are potentially economically important because socially responsible managerial practices could enhance the competitiveness of a country by generating higher levels of trust in business and its leaders.”
The working paper concludes: “An implication for regulators is that if they want companies to perform better on ESG metrics then reporting could be a useful means to achieve this objective. An implication for companies is that reporting could change the way they conduct business. If better ESG performance provides a competitive advantage and leads to higher economic value, as it has been argued…then reporting could enhance the economic value produced by a firm.”
This article was first published on April 27, 2011.