Corporate Social Responsibility (CSR) and sustainability
The Assessment Task
Corporate Social Responsibility (CSR) and Sustainability are increasingly seen as critical issues of corporate governance and for board of directors’ decision-making. In addition, addressing environmental, social, and governance (ESG) issues have become a critical part of strategic decision-making (Lokuwaduge & Heenetigala, 2017). Simultaneously, there has been an increase in concerns regarding boards of directors ensuring organisational long-term value creation (Gabrielsson, Calabro & Huse, 2016; Kakabadze, Goyal & Kakabadze, 2018; Veldman, 2019). Consequently, there has been greater pressure on organisations to enhance their reporting on CSR, Sustainability, and ESG.
Your task is to review the theoretical, regulatory, and empirical literature on CSR, Sustainability, and ESG reporting across the globe to critically assess the extent to which such reporting is enhancing long-term value creation in organisations. Your essay should be structured as follows
Introduction – in here you should provide a background to the question, an outline of the aims of the essay, and an overview of the rest of the essay (approximately 300-350 words)
Main Body – here you should put together an argument that includes the following three sections. (1) A review of the theories behind CSR, ESG, and sustainability; (2) a review of national and international regulatory requirements of ESG reporting; and (3) a review of the empirical literature on CSR, Sustainability, and ESG reporting to address the question. Critically assess the extent to which such reporting is enhancing long-term value creation in organisations. (approximately 1300-1400 words)
Conclusion – here you should provide a summary of the main points and answer the aims you set out in the introduction. In the conclusion, you should also include recommendations on what regulatory authorities and board of directors should do on CSR, Sustainability, and ESG reporting to ensure long-term value creation. (approximately 400-450 words)
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
In this study we are going to investigate the issue of corporate governance on the extent of corporate social responsibility (CSR) and sustainability. It is in the public domain that economic result is not the only way at which firms are valued, there are other outcomes that should be considered like social and environmental outcomes (Pamies 2015) mainly because corporate social performance is increasingly perceived as a competitive advantage for firms (McWilliams, Siegel & Wright 2016). Research suggests that corporate social performance of a firm contributes highly to the financial performance because stakeholders of a firm are not only interested in the financial aspect, but also on environmental, social, and governance (ESG) aspects (Campanella, Derhy, & Gangi 2019). Currently, the most important thing in business is sustainable growth that has made the issue of environmental, social, and governance the most important key indicator of management competence, risk management, and nonfinancial performance (Galbreath 2013). It is against this backdrop that this paper investigates how some corporate governance variables affect the environmental, social, and governance disclosure by firms. This paper aims at answering the question, ‘Is there a relationship between board diversity and environmental, social, and governance disclosure?” This study will contribute in providing evidence about governance and corporate characteristics of the firm which directly affect the environment, social, and governance disclosure with an aim of improving the development of corporate social responsibility and sustainability disclosure guidelines.
Theories behind CSR, ESG, and sustainability
There are a number of theories about ESG, CSR, and sustainability among which include the stakeholder theory, the business ethics theory, and the stakeholder theory. According to the stakeholder theory, social responsibility activities and disclosure provides an opportunity to demonstrate an organizations effort toward sustainability, and thus, the company is perceived as trustworthy. Several studies have evidenced that firms’ choices regarding CSR/ESG activities are mainly associated with the demographic of the corporate leaders’ (Borghesi, Houston, & Naranjo 2014).
Second is the business ethics theory that is largely based upon wider social responsibility and the ethical obligation that businesses have towards the society (Campanella, Derhy & Gangi 2019). The theory focuses on three areas: emerging and changing social expectations and social responsiveness to specific social challenges, intrinsic or eternal ethical values often motivated by Kantian ethics; and corporate citizenship (Cronqvist & Yu 2017). Another theory about ESG, SCR, and sustainability is the shareholder value theory, which asserts that the only social responsibility of any business is to develop their profits while observing legal standards and norms (Campanella, Derhy & Gangi 2019).
From the three theories highlighted above, CSR, ESG, and sustainability are composed of four responsibilities. First, is that CSR, ESG, and sustainability of any business is economic obligation of money making. Borghesi, Houston and Naranjo (2014) reason that businesses that do not make profits are doomed to perish. Without profit-making, there is no business as well as business ethics, implying no sustainability of businesses. Similarly, there is the legal obligation to observe regulations and rules about SCR, ESG, and sustainability. There is also the ethical responsibility associated with CSR, ESG, and sustainability of businesses. According to Galbreath (2013), ethical responsibility implies doing what is right regardless of whether it is required by the spirit and letter of the law. There is also the philanthropic obligation associated with the CSR, ESG, and sustainability. Cronqvist and Yu (2017) explain that philanthropic obligation to contribute to projects by societies even when business establishments are independent.
Taken combinedly, the four highlighted obligations are decreasingly pressing in CSR, ESG and sustainability. At the intersection between economics and ethics, sustainability implies the long-term sustenance of balance. According to Hegde and Mishra (2019), economic sustainability treasures long-term monetary solidity over volatile and short-term profits regardless of how high. Li et al. (2018) explain that, in accordance with the triple-bottom approach, large companies have an obligation to develop business plans allowing prolonged and stable actions. Whereas it is true that hypothetical ventures may result in windfalls, they may equally result in collapse. Therefore, sustainability implies valuing business plans that may not result in quick riches, but that which equally avoid calamitous losses. Companies attempting to get away with contaminating the environment or other aspects of the atmosphere may be increasing their bottom line within the short-term period by saving disposal costs. Nonetheless, these strategies may prove risk in the long run.
Social sustainability as an aspect of CSR and ESG. Organizations promoting fair-trade ask business establishment to warrant that suppliers within impoverished countries receive justifiable payment for the services and goods even when the raw economic principles of demand and supply do not require it (Campanella, Derhy & Gangi 2019). Hegde and Mishra (2019) argue that social sustainability does not only end with dollars, but it needs human respect. Social responsibility requires companies as citizens with a particular community of people to uphold a healthy association with individuals.
Similarly, Borghesi, Houston and Naranjo (2014) reason that environmental sustainability starts from the assurance that natural resources are limited such that if they continue deteriorating, the next generation will not have the same quality of resources that we enjoy currently. As such, CSR, ESG, and sustainability theories contend that organizations must minimize the contaminants they release into the environment. According to the stakeholder theory, a firm’s purpose is to optimize profit upon a collective bottom line with profit being defined not entirely as money but the welfare of human being (Galbreath 2013). Organizations’ managers are largely charged not with the duty of representing shareholders’ interests, but with the social duty of coordinating all stakeholders’ interests, optimizing the sum benefits over the long and medium terms and during cases of conflicts (McWilliams, Siegel & Wright 2016). Thus, in most cases, transparency is a crucial value for individuals promoting stakeholder ethics.
National and International Regulatory Requirements of ESG Reporting
CSR consists of aspects such as ethics, governance, transparency, business relationships, financial return, community involvement, product value, employment practices and environmental protection. Hegde and Mishra (2019), therefore, reason that profit maximization should not be the sole objective of commercial organizations. Instead, organizations need to acknowledge the requirements of their internal and external stakeholders and should implement their business strategies in an ethically acceptable and socially responsible manner (Cronqvist & Yu 2017). Various regulatory measures have, therefore, been instituted for ESG reporting. In the United States (US), the most dominant ESG reporting standard is the United Nations-supported Principles for Responsible Investments (UNPRI). Launched in 2006, the reporting standard provides six principles along with a menu of probably reactions to accommodate ESG standards into individuals, companies and organizations’ investment practices across their asset classes (Li et al. 2018). There is also the Sustainability Accounting Standards Board (SASB) that has standards for at least 77 sectors with qualitative and quantitative reporting items. Distinctly, the Task Force on Climate-related Financial Disclosure (TCFD), according to Pamies (2015), has developed several recommendations for climate-associated metrics, targets and risk management for reporting firms to disclose. As a result of the increasing investor demand, there is a rising number of firms incorporating all or some of the metrics in different reports that they share to the public.
Galbreath (2013) states that ESG disclosure standards are in use in the European Union (EU) jurisdiction, with the European Union Commission seeking to further develop in in recent years. The EU, as part of its action Plan for Sustainable Finance, has ratified an ESG-associated Disclosure Regulation and the EU Parliament adopted the text regarding a Taxonomy Regulation. The two are designed to form the fundamental pillars of the region’s new sustainability structure. Along with several other, the Disclosure Regulation has the ability of impacting the US monetary establishments in several ways. These may include controlling affiliates or in certain cases where they trade financial products to the EU investors. Equally, there may be impacts upon US commercial firms as the EU investor community is seeking to collect the information needed for compliance with this current disclosure structure. McWilliams, Siegel and Wright 2016) explain that the Taxonomy Regulation is set to institute an EU-wide taxonomy on ecological sustainability, and will give both financial and corporate institutions a common language to recognize which undertakings and monetary tools may be regarded as sustainable ecologically. Pursuant to the Taxonomy Regulation, companies need to apply technical screening criteria to evaluate whether particular activities that are undertaken by investees contribute to climate change adaptation or to raise climate resilience.
In the United Kingdom (UK), there are moves to reform the ESG space. According to Borghesi, Houston and Naranjo (2014), the Financial Conduct Authority (FCA) has suggested new ESG standards of reporting. The new standards require commercial organizations that have premium listing to make climate associated disclosures consistent with set approach by the TCFD or justify why not (Li et al. 2018). The new standards are making companies to comply with the UK’s 2015 Occupational Pension Schemes Regulations that requires trustees to make open how they have regarded ESG, engagement, and stewardship in their investment strategy (Pamies 2015). Clearly, reforms are taking place across the globe with regard to ESG reporting.
Literature on CSR, Sustainability, and ESG Reporting
Campanella, Derhy and Gangi (2019) consider CSR as a strategic tool that involves profit-making business activities. Cronqvist and Yu (2017) investigated strategic CSR and its elements and found that strategic CSR produces economic benefits. The notion of strategic CSR is in line with the assumptions of instrumental stakeholder theory. This necessitates that organizations should adopt a strategic perspective to CSR, which involves identifying the most beneficial strategies for the organizations (Borghesi, Houston, & Naranjo 2014). Additionally, since companies cannot solve all the problems of the society, they should focus on the specific social issues which they can successfully handle and leave the remaining to other organizations which are capable of solving them (Hegde & Mishra 2019).
ESG issues are important for stakeholders. According to Cronqvist and Yu (2017), any party, including employees, customers, shareholders, the environment, the society, and investors, who might be affected by the business activities of organizations, should be considered as a stakeholder of an organization. According to stakeholder theory, stakeholders can be briefly defined as parties having an impact on or being affected by an organization (Pamies 2015). It is important that the interests of all stakeholders be taken into account and not only a select few (Campanella, Derhy, & Gangi 2019). Businesses use CSR as a strategic tool to create favourable stakeholder perceptions. In other words, CSR can ensure that stakeholders’ perceptions are not influenced negatively by activities which they might deem unsustainable (Li et al. 2018).
Given this stakeholder perspective to CSR, it is expected that considering the interests of stakeholders is associated with positive financial and economic performance (McWilliams, Siegel & Wright 2016). Although various studies analyzed the relationship between CSR and corporate financial performance, the findings are inconclusive (Li et al. 2018). In a study by Hegde and Mishra (2019), it was found out that companies differ in their degree of stakeholder orientation, which is reflected in the substantially addressed sustainability issues. Similarly, ESG disclosure is also likely to be more credible due to the more effective enforcement of ESG related rules and the stakeholder orientation to enhance this mechanism, which is very important to the growth and long-term profitability of the organization. The sustainability is a crucial element in the organization going hand in hand with the confidence level of the potential investors of the organization.
Previous studies have highlighted that depending on the published context, the focus of ESG disclosure changes. Consequently, the monitoring role of ESG disclosure has evolved into efficient and/or good corporate governance. Thus, corporate governance related goals and company size have been found to affect the quality and content of the ESG disclosure of companies. Similarly, the way of doing business is changing very rapidly. Accordingly, ESG disclosure has become a tool for creating value for shareholders, creditors, and the managers of companies, which has been attracting more and more attention from researchers and practitioners. It is also proven that practical contribution for companies by providing a model for them to use to evaluate stakeholders’ perceptions regarding the relationship between ESG disclosure and financial transparency. They can select the economic sector using a quantitative and objective method by applying this model to ESG category scores and financial or nonfinancial indicators. As can be understood from the results of this research, the content and focus for ESG disclosures are different from one sector to another, and stakeholder need to be reflected in the financial performance reports and financial transparency. Still, the transposition into practice by economic entities of ESG disclosures is done through solid strategic commitments in the form of sustainability reports, based on solid materiality matrices and establishing objectives relevant both for the entity and for the industry in which it operates. It has also been discussed that any organization that includes the ESG in the report has good opportunities of attracting the potential investors since investors will check on the transparence that is given by the organization and can also add in competitive advantage which may lead to a good reputation of the organization. It has also been demonstrated that a corporation cannot exist without its stakeholders, and it must therefore connect with its stakeholders, provide appropriate information, and address the needs of an extensive audience. The most recommendation addresses the need for legislative harmonization on nonfinancial information disclosure and reporting, specifically on ESG elements. This need also stems from legislative, stakeholder, and market pressures. In this sense, the ESG reporting reform along with the financial reporting standards reform started by the International Integrated Reporting Council (IIRC) plans on covering parts of the corporate sustainability expectation gap, with new and improved standards.
Borghesi, R, Houston, JF, & Naranjo, A 2014, ‘Corporate socially responsible investments: CEO altruism, reputation, and shareholder interests’, Journal of Corporate Finance, vol. 26, pp. 164–181.
Campanella, F, Derhy, A, & Gangi, F 2019, ‘Knowledge management and value creation in the post-crisis banking system’, Journal of Knowledge Management, vol. 23, no. 2, pp. 263–278.
Cronqvist, H, & Yu, F 2017, Shaped by their daughters: Executives, female socialization, and corporate social responsibility.’, Journal of Financial Economics, vol. 126, no. 3, pp. 543 – 562.
Galbreath, J 2013, ‘ESG in focus: The Australian evidence’, Journal of Business Ethics, vol. 118, no. 3, pp. 529–541.
Hegde, SP, & Mishra, DR 2019, Married CEOs and corporate social responsibility’, Journal of Corporate Finance, vol. 58, pp. 226–246.
Li, Y, Gong, M, Zhang, XY, & Koh, L 2018, ‘The impact of environmental, social, and governance disclosure on firm value: The role of CEO power’, Br. Account. Rev., pp. 50, 60–75.
McWilliams, A, Siegel, DS, & Wright, PM 2016, Corporate social responsibility: Strategic implications, ‘Journal of Management Studies, vol. 43, no. 1, pp. 1–18. https://doi.org/10.1111/j.1467-6486.2006. 00580.x
Pamies, SD 2015, ‘The relationship between women directors and corporate social responsibility’, Corporate Social Responsibility and Environmental Management, vol. 22, no. 6, pp. 334–345.