Why investors want to see more CSR reporting from companies
Investors and other stakeholders are increasingly demanding CSR reporting to evaluate companies in a more comprehensive and well-rounded manner
In order to meet the information demand of investors, companies need to provide credible CSR information which investors can rely on to inform their decisions. In Australia, 100 per cent of the largest 50 companies disclose CSR information in their reports, and about 50 per cent of them also obtain independent assurance, which indicates a growing trend in CSR and CSR assurance.
In their recent study in the journal Auditing: Journal of Practice and Theory, Senior Lecturer Hien Hoang and Scientia Professor Ken Trotman from the School of Accounting, Auditing & Taxation at UNSW Business School examine the effect of different forms of independent assurance on investors’ valuation judgements. The study finds that credible CSR information that has been independently assured can enhance investors’ fundamental value estimates, and the effect depends on the type of assurance report issued.
There are a number of frameworks and methods that companies can adopt for their reporting on social and environmental performance. Most companies adopt more than one reporting framework, with the most popular frameworks being the Global Reporting Initiative (GRI) criteria and United Nation’s Sustainable Development Goals (SDG).
Companies can also choose different methods for disclosing CSR information, with the majority (57 per cent) preparing a separate CSR report while others including CSR information in their annual report (18 per cent) or an integrated report with both financial and non-financial information (16 per cent), according to a recent study.
Common CSR gaps and challenges
The challenges with CSR reporting remain with its unstandardised nature (much less standardised than financial statements). There is substantial variation in practice when it comes to which reporting criteria to apply, the level of application and quality of reporting. This lack of standardisation makes it difficult for investors to meaningfully compare different companies’ performance and derive relevant information to assist their decision-making.
Another significant challenge of CSR reporting is credibility. Given the subjective and qualitative nature of certain CSR information and the management discretion in choosing which information to report, significant concerns have been raised over the trustworthiness of such information. Unless companies can convince investors that there are appropriate mechanisms in place to address these credibility and “greenwashing” risks, the influence of CSR information on investors judgements will be limited. Dr Hoang and Prof. Trotman find that investors do rely more on CSR information to inform their valuation judgements when there is independent assurance to alleviate such concerns.
Best practice CSR reporting
Research suggests that CSR reporting should focus on the relevant and material issues to their business that can affect stakeholders’ decision-making. These relevant and material issues will vary from industry to industry.
For instance, investors are certainly interested in a mining company’s environmental performance as it is especially relevant, not only to the company’s CSR image, but also to their core business. It is also important that companies maintain a good balance of quantitative and qualitative disclosures, as well as reporting both positive and negative impact of their CSR performance aspects.
As credibility plays an important role in determining the usefulness of CSR information, companies should also consider implementing and disclosing the mechanisms to enhance the credibility of CSR information. One thing they can do is to obtain independent assurance on all CSR disclosures, or at least the key disclosures. The independent assurance provider can verify the reliability of reported information, thus enhancing investors’ confidence.
Internationally, about 51 per cent of companies that disclose CSR information also obtain independent assurance. It is also important to show investors that the company has a strong corporate governance structure to ensure reporting and assurance quality. That is, companies should coordinate the assurance efforts of management, internal auditors, external financial auditor and CSR assurance provider, and disclose such coordinated efforts to investors.
International standards and reporting practices
In terms of reporting standards, the commonly used and/or referenced among Australian companies are Global Reporting Initiative (GRI), United Nations Sustainable Development Goals (SDG) and Task Force on Climate-related Financial Disclosures (TCFD).
In terms of reporting methods and frameworks, 79 per cent of the top 200 companies in the Australian Stock Exchange have adopted principles of integrated reporting, which is a framework for concise communication about an organisation’s value creation over the short, medium and long term, to improve their reporting on social and environmental performance, and shifted their focus to long-term value creation for their investors and stakeholders.
In terms of assurance standards, the International Standard on Assurance Engagements 3000 (ISAE 3000) or the national version of this standard is most commonly used for accounting assurance providers. Other standards being used in the assurance engagements include AA1000AS and ISO 14064-3.
Benefits of good CSR reporting and assurance
There is evidence from previous research that high-quality CSR reporting brings capital market benefits. Companies with positive CSR performance disclosures benefit from lower cost of capital, higher future cash flows, easier access to finance and more accurate and less dispersed analysts forecast. Providing more quality CSR disclosures reduces information uncertainty, resulting in increased investors’ trust and confidence.
In their study, Dr Hoang and Prof. Trotman examine the effect of different levels of independent assurance on investors’ valuation judgements. The main findings are that independent assurance adds value by increasing perceived reliability of CSR information, resulting in more favourable valuation estimates.
Also, investors estimate firm values to be higher when independent assurance is conducted at a reasonable level than a limited level. Auditing standards define reasonable assurance as an engagement that reduces assurance engagement risk to an acceptably low level, as the basis for a positive form of expression of the practitioner’s conclusion. On the other hand, limited assurance is an engagement that reduces assurance engagement risk to a level that is acceptable but greater than a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion.
Dr Hoang and Prof. Trotman believe that the key implication for companies that disclose CSR information is that there are potential benefits in pursuing reasonable assurance as it enhances investors’ confidence and valuation judgements.
Hien Hoang is a Senior Lecturer in the School of Accounting, Auditing & Taxation at UNSW Business School. Her primary research interests are in the areas of behavioural decision-making in CSR and integrated reporting context. Ken Trotman is a Scientia Professor in the School of Accounting, Auditing & Taxation at UNSW Business School. His main current research interests are concerned with judgment and decision-making in accounting, and he has a particular interest in the judgments made by auditors.
UNSW Sydney and UNSW Business School are committed to delivering against the UN Principles for Responsible Management Education (PRME) and UN SDGs. More information is available in the UNSW Business School 2021 PRME SIP Report.