Corporate Social Responsibility (CSR) reports are a critical source of information for anyone interested in the actions a company is taking, and goals it has set, regarding environmental and social issues. But that doesn’t mean that most (or, from a cynic’s perspective, any) CSR reports are as helpful as they should be. We know, because we comb through every inch of just about every CSR report we can find.
Why do companies issue CSR reports at all? Is it a feel-good exercise? Is it a waste of time and resources? The Legitimacy Theory is often used to explain why firms should and do make these disclosures. The theory holds that firms are part of a broader social system and they do not have an inherent right to use/exploit/exhaust societal resources. Society at large grants firms their legitimacy, and that legitimacy is vital to their survival.
Hey, Chat GPT – can you define a good CSR Report?
So, we can state with a clean conscience that requiring companies to issue CSR reports shows that we expect them to show that they are using society’s resources responsibly (or not). This leads us to the question, “what makes for a good CSR report?” Out of curiosity, we posed that question to ChatGPT (yes, we jumped on the bandwagon). Here is a slightly abridged version of its response (shortened because the tone was so flat and mechanical, we didn’t want you to have to slog through it all).
A Corporate Social Responsibility (CSR) report should be comprehensive, transparent, and informative. Here are some key features that make for a good CSR report:
- Materiality: A good CSR report should identify the key social, environmental, and economic issues that are relevant to the company and its stakeholders.
- Stakeholder engagement: The report should show that the company has engaged with its stakeholders to understand and incorporate their concerns into its CSR strategy.
- Goals and targets: The report should set out clear goals and targets, including measurable indicators and timelines.
- Performance data: The report should provide data and evidence that demonstrate the company’s CSR performance, including both positive and negative results.
- Reporting standards: The report should follow recognized reporting standards such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), to ensure consistency and comparability.
- Communication: The report should be written in clear, accessible language, and should be communicated through the company’s website, social media, and other platforms.
- Verification: The report should be independently verified by a third-party auditor to ensure its accuracy and reliability.
Overall, a good CSR report should demonstrate the company’s commitment to responsible and sustainable business practices, and its willingness to be held accountable to its stakeholders for its social and environmental impacts.
It’s a decent summary (particularly if you like dry, expressionless writing). We don’t disagree with any of these points. Some favorites: CSR reports should be transparent, meaning they should clearly explain how a company defines and measures whatever it claims to be doing. Materiality is also essential. Focus on how the company is addressing ESG risks that it thinks are likely to impact its profitability and competitive position in its industry. Third-party verification would also be welcome, as companies might be tempted to stretch the truth, extrapolate or copy directly from last year’s report, or otherwise take shortcuts.
But this doesn’t really get at what’s on our minds. Trying again, we rephrased the question, asking “What are the problems with CSR reports?” ChatGPT’s writing style was still bone dry, but the content was actually not bad (we did some heavy editing again, for brevity, eliminating basic “Sustainability 101” definitions – you’re welcome). Here is the response
- Lack of standardization: Companies use different methodologies and metrics in CSRs, making it difficult to compare the information across companies.
- Greenwashing: we deleted the rest – it was basic and self-explanatory
- Limited scope: Many CSR reports focus on a narrow set of sustainability issues, such as carbon emissions or waste reduction, providing a skewed view of a company’s practices with respect to issues such as human rights, labor practices, etc. (we replaced the rest of this list with “etc.” because it included some things that felt biased).
- Lack of verification: CSR reports are often self-reported by companies, and there is no requirement for independent verification of the reported data.
- Inaccessibility: CSR reports are often long and technical, making them difficult for readers without a background in sustainability to understand. This can limit their usefulness and hinder efforts to hold companies accountable for their sustainability performance.
What isn’t in CSR reports that should be?
KPMG’s 2022 global Survey of Sustainability Reporting (“Big Shifts, Small Steps”) states that, of the world’s top 250 companies, 96 percent provide some form of sustainability reporting. And while reporting is increasing in most of the world, in South America coverage is declining – roughly one-quarter of the companies in that region do not provide a CSR report. That means investors who are interested in how sustainability affects companies in that region are at a disadvantage.
KPMG’s survey offers good news for those of us who like comparability in investment reporting: companies are increasingly using third-party standards for their CSR reports. However, when it comes to reporting on the United Nations Sustainable Development Goals, KPMG says that CSR reports prioritizes quantity over quality. We find it interesting that three SDGs are the frequently covered in CSR reports, #8: Decent Work and Economic Growth; #12: Responsible Consumption and Production; and #13: Climate Action. Why these and not others?
Many CSR reports still do not meet the criteria that Chat GPT identified in responding to our first question, and suffer from a number of the problems noted in its second response. But here’s an even tougher question: How often are companies honest enough to disclose the fact that they do not address issues we know are important? How many companies publish a CSR report that says, “we do not attempt to recycle much, we ignore signs that our suppliers are using child labor, and a tiny percentage of our managers are women”?
That kind of information would be quite useful to asset managers and investors, as well as consumers, but would take some aggressive detective work to uncover. An academic study titled “Negative disclosures in corporate social responsibility reporting” analyzed CSR reports from 75 large firms and found few negative disclosures overall (no surprise there). The number of negative disclosures varied by culture: reports from Germanic/Nordic Europe had the highest number, Confucian Asian companies had the lowest, and the number reported from Anglo countries fell in between.
Attempts to define and standardize what should be included in a CSR report are laudable and should continue, but we’re not there yet. The top hits from a Google search on “Best CSR Reports” (excluding sponsored items) are from sources that include a job recruiting firm, a university, a not-for-profit organization that supports other not-for-profits, and a couple of software vendors. As we often say, when choosing to rely on any information, it’s important to consider the source (that includes ChatGPT).
We were comfortable using ChatGPT to help with this discussion about CSR reports because our existing knowledge allowed us to readily confirm or reject what the algorithm generated, though we would not advise that you use ChatGPT for investment advice (yet). With that said, we know that artificial intelligence can be a great tool for sifting through massive amounts of information efficiently. We know, because we’re doing it. We use AI, including natural language processing and sentiment analyses to “read” a vast amount of content, CSR reports and much more, to construct timely, comprehensive data on ESG issues. Contact us to learn more.
