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Mandatory Environmental, Social, and Governance Disclosure in the European Union. A Case Study

Essay 2014 6 Pages

Business economics - Business Ethics, Corporate Ethics

Excerpt

Executive summary

I.Statement of the problem

II. Causes of the problem

III. Recommended solution, decision criteria and alternative solutions

IV.Implementation and justification

V.Conclusions

Executive summary

In 2011 the European Commission (EC) tried to determine how to address the problem of a Corporate Social Responsibility (CSR) report. The EC wants to figure out which will be the best way to introduce a sustainability report in all member states considering the collected opinions and past experiences. Will it be more efficient to make the reporting mandatory and which key performance indicators (KPIs) are necessary to give out a reliable and adequate report? Furthermore, should only stock listed enterprises provide reporting or also small and medium sized companies? Another problem would be whether the report should be integrated with the existing financial report or be separated.

Due to these political intentions companies have to cope with many changes. So most CEO’s ponder whether a disclosure will be beneficial to them and whether they should participate voluntary or wait till it is mandatory. Even though the numbers of CSR reports are increasing, only a small percentage of companies worldwide and especially companies which are the biggest in the world, disclosure such information. So which factors will encourage firms to make more reports and more understandable ones, so that investors, for example, can benchmark them?

Also by introducing an integrated annual report it will bring the European Union closer to their goals in the European 2020 initiatives for a smart, sustainable and inclusive growth. An integrated report will eventually make the companies realize the consequences of their business performance in a holistic way. The managers will not focus exclusively on short- term earnings but also on a prudent sustainable growth. Even if they want to make fast money the stakeholders and the society will object to these actions because due to the report they have a broader understanding of the ESG impacts.

I. Statement of the problem

Especially after the financial crisis in 2009 the demand for more detailed reporting of companies activities increased. The first country in the world to make CSR reporting mandatory was South Africa. As a result the European Commission (EC) wanted to introduce a standardized guideline for reporting environmental, social and governance (ESG) i.e. sustainability report for the industry in every member states. Therefore they opened a public comment function on this issue mainly addressed at the four stakeholder groups. At that time some member states already demanded from their enterprises indirectly such a report but the EC wanted to operate on a bigger scale.

This ESG information would help the corporate to regain trust of the public and interested parties. These days not only the business performance is of interest but also the deeds towards the society. There is a big public demand to invest and cooperate with companies which are responsible and leave a better world for the next generation. Those firms in general outperform their competitors and promise secure return of investments. Unlike in the past CSR is not a luxury but a necessary lifestyle. Firms which perform CSR have a competitive advantage and exist for a long time. CSR is complementary to business and not at cost of the shareholders.

Companies must now decide how detailed the report should be and whether they cope when the report is mandatory or will they use their chance beforehand. Furthermore is it more effective if the report is made independently from the financial report or is an integrated solution more desirable? According to the EU the report will enable them to realize their agenda, the Europe 2020 initiative, for a smart, sustainable and inclusive growth. After the crisis industry leaders should be forced to not only focus on short-term profit but also on the long-term survival of their companies. One of the reasons of the crisis was the strong short-term aspect which rose significantly in the last decades.

II. Causes of the problem

Corporate Social Responsibility (CSR) first emerged in the 1970s. CSR activities were on a voluntary basis. But nowadays the request for CSR from companies is higher than ever. Stakeholders have a right to know and they want to find out what consequences a business decision will bring with it in a holistic way. So the hidden actions from the agency theory should be minimized. Companies try to build up a good public image with their CSR activities and to distinguish oneself from their competition.

In the last 40 years CSR reports grew exponentially. The average growth is 300% compared to early 90s. Unlike the common assumption the public and investors are most likely interested in these reports, in truth nearly 50% of those readers are internally connected to the company which issue the report like employees and owners. Moreover the reports mostly cover the topics like environment, health and safety but there are only few which also link consequences for the environment to business or socioeconomic information.

Furthermore there is a broad supply of guidelines to report such nonfinancial information. This is the reason behind why nobody sees through the presented information. All those frameworks how to make such a report are voluntary and every company can make changes to the suggestions like optional parts. So it is difficult to compare and benchmark all these reports because they have no standardized scheme. In addition the fewest make an integrated report which links their economic performance with environmental, social and governance results. The three listed obstacles to do so are the absence of standards for measuring ESG, the lack for a uniform process for producing a report and lastly insufficient criteria to assess the quality of a report. SO CEO’s haǀe little ŵotiǀatioŶ to ƌepoƌt ǁheŶ the ƌepoƌts doesŶ’t eŶaďle theŵ to ďeŶĐhŵaƌk theŵselǀes ǁith theiƌ Đoŵpetitoƌs to gaiŶ aŶ advantage.

Also even though the number of CSR reports increased in the past, in 2010 one could notice that oŶlLJ a sŵall Ŷuŵďeƌ of ĐoŵpaŶies ǁoƌldǁide do these ƌepoƌts aŶd theLJ doŶ’t eǀeŶ publish them on a regularly basis. And from those reporting companies only few belong to the biggest industry leaders. So now is the question: are there benefits for firms to disclosure ESG information compared to the effort and cost to gather the information and what circumstances impede a motivation for disclosing?

III. Recommended solution, decision criteria and alternative solutions

In a first step the International Integrated Reporting Committee (IIRC) declared five objectives to make ESG reporting more reliable, clear and concise. The framework for a report demands broader and long-term consequences of decision making. Above all the interconnections between economic performance and ESG must be clear. Also it must be possible for the CEOs to take environmental and social factors into account when making a decision. It is difficult for firms to measure the impact for environment and society unlike the financial report. This is one of the reasons for the low quality and poor attendance of the CSR reports. Companies also will be forced to rebalance their performance metrics from short- term activities to long-term sustainable growth through the disclosure. Then, in the end corporations have the responsibility to preserve their business for their employees and all stakeholdeƌs to eŶĐouƌage sustaiŶaďle gƌoǁth. These ƌespoŶsiďilities shouldŶ’t ďe oǀeƌlaLJ ďLJ the short-term greed of CEO’s.

Moreover to reduce the disadvantages for institutional investors and shareholders of information asymmetry due to agency problems, transparency from companies is demanded. A trustworthy report is essential to benchmark it against competitors and gain a competitive advantage like in a brand strategy. For a healthy growing Europe it is inevitable for the enterprises to perform cost efficient and resource sustainable. They need to pay attention to their ecological footprint and the environmental impacts.

Fuƌtheƌŵoƌe goǀeƌŶaŶĐe iŶfoƌŵatioŶ ŵust ďe disĐlosed foƌ the puďliĐ to assess a ĐoŵpaŶLJ’s performance. Also a less authoritarian governance style of the board of directors has a positive influence to report non-financial information voluntarily.

Also another aspect whether the companies comply or explain depends on the size of the business. There is a chance that small and medium sized companies may be excluded from the disclosure if it will become mandatory. Therefore companies with more than 500 employees are confronted with the issue. Big firms have more spare capacity to collect the needed information.

The industrial sector in which the enterprise operates has an influence how the board of directors assess the CSR report. For example, chemical companies have a high pressure to ĐoŶǀiŶĐe the soĐietLJ that theiƌ pƌoduĐts aƌeŶ’t eŶǀiƌoŶŵeŶtal haƌŵful.

Lastly, if there is a big competitive pressure enterprise will also likely disclosure ESG information when all their competitors do so to not lose their customer base. Their experience and expertise with the production of the report enable the enterprises to welcome the idea of mandatory disclosure in the EU.

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Details

Pages
6
Year
2014
ISBN (eBook)
9783668050990
ISBN (Book)
9783668051003
File size
490 KB
Language
English
Catalog Number
v304608
Institution / College
Catholic University Eichstätt-Ingolstadt
Grade
1,0
Tags
Governance Disclosure European Union Environmental Disclosure Social Disclosure CSR corporate social responsibility

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Title: Mandatory Environmental, Social, and Governance Disclosure in the European Union. 
A Case Study