Four ways COVID-19 affects CSR reporting (and what to do about it)
How is the COVID-19 pandemic affecting decision making on sustainability reporting, and what can organisations do to mitigate the adverse effects?
A corporate social responsibility (CSR) report, or a sustainability report, is a (usually annual) report published by an organisation with the goal of sharing their corporate social responsibility actions and results, encompassing economic, environmental and social performance. Since 2017, the World Economic Forum's International Business Council has advocated for organisations to align their sustainability strategies with the United Nations' Sustainable Development Goals (SDGs). An annual survey conducted by KPMG on sustainability reporting behaviours globally and locally finds that in 2020, 67 per cent of ASX100 companies disclosed an alignment with the SDGs in their sustainability reporting (up from 29 per cent in 2017).
Recently, however, the COVID-19 pandemic has forced a dramatic shift in focus and priorities for organisations and is affecting how sustainability information is being prepared, assured and used by investors for the future, say UNSW Business School's Associate Professor Kerry Humphreys and Professor Ken Trotman in the School of Accounting, Auditing & Taxation. Their latest paper: Judgment and decision-making research on CSR reporting in the COVID-19 pandemic environment, outlines how the pandemic impacts critical decisions by corporate managers and auditors concerning sustainability information. But just as the pandemic is affecting all of us in different ways, these disruptions have both positive and negative effects on sustainability behaviours and reporting. Nevertheless, their paper provides evidence for what steps organisations can take to improve their outcomes now and post-pandemic.
"The pandemic provides organisations with tangible opportunities to align their strategy and operational initiatives with the priorities communicated in their sustainability reporting," say the researchers. "Yet the pandemic also highlights tensions in delivering positive sustainability outcomes across multiple performance areas. With many organisations experiencing negative economic and financial performance as lockdown conditions restrict revenue and operating capabilities, and travel restrictions limit supply chain movements, while environmental outcomes have been favourable with fewer cars on the road as many employees work from home. At the same time, social outcomes are mixed, as governments seek to support high-quality healthcare provision, while mental health and wellbeing challenges are increasing."
Why is sustainability reporting critical?
Sustainability performance impacts various aspects of an organisation, including financial performance, cost of financing and organisational culture. Therefore, communicating sustainability information through sustainability reports provides decision-relevant information to investors, analysts, employees, and other key organisational stakeholders. In addition, A/Prof. Humphreys and Prof. Trotman explain that sustainability reports reduce information uncertainty and enable enhanced cash flow forecasting by providing information on potential economic, environmental and social risks the organisation faces. In short, sustainability reports identify and help organisations better manage their financial and non-financial risks.
Past research shows the relationships between sustainability reporting and share price performance, cost of capital and analyst forecast accuracy, and has begun to examine the effects of credible reporting on investors' valuation judgments. Essentially, these provide a good business case for organisations to produce credible reporting. These studies provide evidence for quality sustainability reporting as an opportunity to view the organisation's strategy through a long-term sustainable performance and value creation lens.
But this is especially important in the pandemic environment for three key reasons, say the researchers. First, the social purpose and values of organisations are being tested. Organisations are being asked to 'make good' on their commitments to employees and other key stakeholders during economic uncertainty, such as finding alternatives to employee layoffs or improving payment terms for small suppliers.
Second, the need is growing for what the Global Reporting Initiative describes as 'balanced' sustainability reporting – that is, sustainability reporting that covers both positive contributions and potentially negative impacts of an organisation on sustainable development and associated risks and how these are being managed. The paper also considers the sustainability performance trade-offs that organisations may be forced to make during the pandemic. It is important to understand the impact disclosures on these "priority shifts" have on managers’ and investors’ decision making, say the researchers.
Third, with the challenging economic circumstances faced by many organisations during the pandemic, the researchers conclude that whether or not organisations will maintain the level and quality of sustainability reporting in the short term is unknown, and this is a potential problem.
How is the COVID-19 pandemic affecting CSR reporting?
1. The impact on managers. In the paper, the researchers find that border closures and prolonged lockdowns affect how business managers focus on the solvency and liquidity of their organisations and the sustainability of their business models. So how business performance is managed, evaluated and controlled is being significantly impacted by COVID-19. As a result, the researchers suggest that managers need to make decisions that capture their strategic performance and the risks to which they are exposed, including sustainability-related risks.
But the researchers also find that organisations need to consider their social purpose and values to make critical decisions on which elements of long-term sustainability – economic, environmental, social – are of most importance to their organisation now and into the future. These decisions impact sustainability reporting priorities, organisational budgeting, resource allocation, and sustainability-related investment decisions, say the researchers.
2. Accountants and auditors. For accountants and auditors, the paper suggests that the long-term impacts on health, economic conditions and the work environment from the pandemic are forcing these professionals to make new judgments in an environment of far greater uncertainty when reporting on and assuring sustainability performance information.
3. Investors. But these issues are also affecting investors. The environment created by the pandemic includes high levels of unemployment, company failures becoming more common, executive bonuses negatively impacted, and increased difficulty of forecasting and achieving targets – all of these things may affect the availability of sustainability information and related assurance of this information for organisations to make sound investment decisions, say the researchers.
As a result, they predict that investors are likely to demand more outcome-focused sustainability reports that report on what is being achieved in this space, more so than initiatives undertaken. During the pandemic, the long-term management of social and environmental risks has also become more important, as the impacts of the pandemic on society and the environment become more apparent. As a result, investors may require more disclosures of sustainability risks and related organisational risk management approaches, suggest the researchers.
4. Behavioural research. The paper also has implications for future research, as it provides a framework for behavioural researchers to examine issues yet to be explored in greater detail in the business world, like changes in the environment in which an organisation operates, sustainability report formats, and the assurance information provided.
Recently, António Guterres, the United Nations Secretary-General, announced: "Behavioural science is a critical tool for the UN to progress on its mandate. It can contribute to combating poverty, improving public health and safety, promoting gender equality, strengthening peacebuilding and all the SDGs".
Acknowledging this, A/Prof. Humphreys and Prof. Trotman say: “Examining how the changes we see now – and may see moving forward – impact the quality of judgments made by managers, accountants, auditors and investors; and testing which factors influence their decisions and under what circumstances, offers essential opportunities for behavioural accounting researchers to shape and inform sustainability reporting post-pandemic."
Four practical tips for better sustainability reporting
So what can organisations do about these changes in a practical and tangible way? The researchers provide four steps organisations can take to address the critical challenges outlined in the paper:
1. Ensure your organisation's values reflect its sustainability priorities. With many employees working from home during the pandemic and hybrid workplaces likely to play a vital role post-pandemic, more formal indicators of organisational culture like company values need to be salient. Encouraging employees to engage in pro-sustainability behaviours requires a clear signal that this is valued by and remains essential to your organisation.
2. Communicate sustainability goals to key stakeholders. Sustainability reporting allows organisations to communicate what they are contributing to sustainable development to their key stakeholders. This works best when sustainability initiatives are aligned with the priorities of those stakeholders. For example, employees concerned about job security during the pandemic are likely to value sustainability initiatives that improve this situation, such as companies that have converted unused operating capacity to manufacture hand sanitiser during the pandemic.
3. Find new ways of communicating critical information. As organisational priorities relating to sustainable development change through the pandemic experience, so will their sustainability reporting needs and associated assurance of the credibility of this information. Working with sustainability assurance providers to consider new approaches to ensure this information is valuable to key stakeholders.
4. Collaborate with behavioural accounting researchers. Finally, the COVID-19 pandemic is increasing the need for coordinated actions to improve sustainability outcomes and the credibility of sustainability reporting for decision making. "We believe the need for continued behavioural accounting research is vital to improving how this information is prepared within our organisations, assured as to its credibility, and ultimately used by investors for decision making.
"One key focus of the Audit and Assurance Research Network in the UNSW Business School is to work with assurance providers, ASX listed companies and the investment community to address many of the questions raised in this paper. We welcome suggestions from our alumni and other interested parties in moving this research forward," conclude the researchers.
Kerry Humphreys is an Associate Professor and serves as Deputy Head in the School of Accounting, Auditing & Taxation at UNSW Business School. Her research investigates when managers make effective decisions incorporating strategy and performance information (including the balanced scorecard), and how new managers can learn to make better decisions using this information. Ken Trotman is a Professor in the School of Accounting, Auditing & Taxation at UNSW Business School. His research interests include judgment and decision-making in accounting.