by
Robert Bloom & Mark J. Myring
| Aug 19, 2021
Sustainability reporting, or social accountability as it is sometimes
called, is receiving increased attention. It has been defined as
encouraging companies to go beyond their legal responsibilities
to invest in and improve their human capital, physical environment,
and relations with diverse stakeholders.1 In this column, we
look at the importance of social accountability in the minds
of corporate leaders, review the research that investigates
the performance of companies that embrace sustainability
reporting, and discuss disclosure frameworks.
Corporate Leaders
In August 2019, Business Roundtable, an association of CEOs
of leading U.S. companies, revised its Statement of the Purpose
of a Corporation to assert that companies should serve not only
their shareholders, but also deliver value to their customers,
invest in employees, and deal fairly with suppliers as well as
support the communities in which they operate.2 The statement
was signed by nearly 200 CEOs. On the list were the leaders
of the four largest accounting firms: Carmine Di Sibio (EY), Bob
Moritz (PwC), Punit Renjen (Deloitte), and Bill Thomas (KPMG).
KPMG’s 2020 CEO outlook survey,3 which included responses
from 1,300 CEOs, with a follow-up survey of 315 CEOs, pointed
to a greater emphasis on social accountability. For example,
79% of CEOs reported they have reevaluated their overall
organizational goals as a result of the COVID-19 crisis. Further,
65% of CEOs surveyed observed that the public expects them
to help fill the void on societal challenges.
Microsoft is a leader in sustainability reporting. Its sustainability
report documented significant expenditures:
- $1.9 billion in donated or discounted products and services
to help 243,000 nonprofits globally better serve their
communities.
- $4 billion to diverse-owned businesses, continuing to place
Microsoft in the top 20 companies for diversity spending
globally.
- Microsoft employees donated $221 million (inclusive of
company matching grants) to nonprofits worldwide and
volunteered more than 750,000 hours in the United States.
Company Performance
Despite the increased emphasis, there have been questions
about the impact these initiatives have on performance and
firm value. Considerable research has been conducted on the
impact of sustainability initiatives, their disclosure, and future
performance. In general, these studies suggest that there may
be some financial incentive to adopting or maintaining behaviors
consistent with sustainability.
Research has shown that sustainability disclosures can affect a
firm’s financial standing. Some have shown that social disclosures
reduce the cost of capital of firms.4 There is also some evidence
that corporate philanthropy is associated with future revenue
growth.5 Finally, corporate social responsibility and firm value
have been shown to be positively related for firms with high
customer awareness, as measured by advertising expenditures.6
Reporting
The Securities and Exchange Commission (SEC) recently took
action to increase the disclosures firms are required to make
regarding their human capital with an amendment to Item
101 of Regulation S-K. This change will require companies to
disclose a principles-based, individualistic (not boilerplate)
description of their material human capital resources, including
measures or objectives the company uses to manage its own
operations. This new disclosure requirement is designed to
provide stakeholders with insight into the operating model, talent
acquisition, development, and innovation.7 The disclosures are
expected to include items such as those related
to the attraction, safety, engagement, and
retention of employees.
Most large publicly traded companies
in the United States voluntarily
provide sustainability disclosures.
This reporting typically focuses on
three areas: environmental, social, and
governance (ESG). Ideally, ESG reporting
entails a long-term perspective that
aligns corporate goals with the need
to conserve resources and support the
community. While few companies engage
in detailed ESG reporting within their
annual reports, most provide
social disclosures separately.
There are two primary standard-setting
bodies in the area of sustainability
reporting: the Sustainability
Accounting Standards Board
( SAS B ) and the Global Reporting Initiative (GRI). SASB standards focus on
three attributes:
- Financially material – Identify, manage, and report on the
sustainability topics that matter most to investors and donors.
- Market informed – Standards based on feedback from
companies, investors, and other market participants as part
of a publicly documented process.
- Industry specific – Enable investors and companies to
compare performance from company to company within
an industry.
Generally, GRI standards – the older of the two – cater to
enterprises in general, while SASB focuses on specific disclosure
standards in 77 different industries. GRI is oriented to all
stakeholders, while SASB primarily deals with investor needs.
Neither framework is required in the United States, but both
have been adopted by international business and nonbusiness
enterprises. Sustainability reporting is mandatory in European
Union (EU) countries, with GRI standards commonly used to
fulfill the requirement. The standards from both organizations
follow the United Nations’ 17 Sustainable Development Goals and
emphasize cost-effectiveness and decision-relevance in adoption
and implementation of their
disclosure metrics. The
standards are not static
in either framework, but
are reviewed and revised periodically
under ongoing research projects.
A movement is underway to consolidate
and coordinate sustainability reporting
disclosures. GRI and SASB, along with the
Climate Disclosure Standards
Board, the International
Integrated Reporting
Council (IIRC), and CDP
Worldwide, released a joint statement8 proclaiming the
sustainability reporting frameworks are complementary rather
than competitive. The statement recommends that various
frameworks be used together in an effort to move toward a
single, comprehensive global framework to promote uniformity,
comparability, and risk assessment across industries worldwide.
Also reflective of a consolidation of standards, SASB and IIRC
recently announced a merger. The International Accounting
Standards Board announced its intention to launch a sustainability
reporting framework to go along with its IFRS financial reporting
standards.
Considerations in the Choice to Report ESG
Companies considering reporting ESG items must carefully
evaluate the benefits and costs of this type of reporting in the
context of industry trends and political climate. The cost of
producing an ESG report must be weighed against the benefits,
both financial and nonfinancial. Gaining a better understanding
of sustainability reporting standards offers CPAs the opportunity
to help clients carefully examine the framework of the different
systems of reporting standards to determine which best fits the
strategic vision of the company.
Robert Bloom, PhD, is professor of accountancy,
Anderson Fellow, for the Boler College of Business at
John Carroll University in University Heights, Ohio. He can
be reached at rbloom@jcu.edu.
Mark J. Myring, PhD, is associate dean for graduate
programs and strategic initiatives and alumni
distinguished professor of accounting for the Miller
College of Business at Ball State University in Muncie,
Ind. He can be reached at mmyring@bsu.edu.
Reprinted with permission from the Pennsylvania CPA
Journal, a publication of the Pennsylvania Institute of Certified
Public Accountants
This article appears in the summer 2021 issue of the Washington CPA magazine. Read more here.
- Jean-Michel Sahut, Marta Peris-Ortiz,
and Frederic Teulon, “Corporate Social
Responsibility and Governance,” Journal
of Management and Governance (June
26, 2019.) pages 901–912. https://doi.org/10.1007/s10997-019-09472-2
- https://opportunity.businessroundtable.org/ourcommitment
- https://home.kpmg/xx/en/home/insights/2020/08/global-ceo-outlook-2020.html
- Alan J. Richardson and Michael Welker,
“Social Disclosure, Financial Disclosure
and the Cost of Equity Capital,” Accounting,
Organizations and Society (26 [7/8],
2001) pages 597– 616 . https://doi.org/10.1016/S0361-3682(01)00025-3
- Baruch Lev, Christine Petrovits, and
Suresh Radhakrishnan, “Is Doing Good
Good for You? How Corporate Charitable
Contributions Enhance Revenue Growth,”
Strategic Management Journal (31 [2] 2010)
pages 182–200. https://doi.org/10.1002/smj.810
- Henri Servaes and Ane Tamayo, “The Impact
of Corporate Social Responsibility on Firm
Value: The Role of Customer Awareness,”
Management Science, (Vol. 59, No. 5,
2013) pages 1045–1061. www.jstor.org/stable/23443926
- https://www.pwc.com/us/en/cfodirect/publications/in-the-loop/sec-new-human-capital-disclosure-rules.html
- Statement of Intent to Work Together
towards Comprehensive Corporate Reporting.