Environmental Sustainability Accounting and the Performance of Oil and Gas Co...
Social and Environmental Reporting - An Essay
1. Social and Environmental Reporting
Semester 6
March 2015
Luyu Gan
Suvi Helenius
Naomi O’Donoghue
BAAF 3
Dundalk Institute of Technology
Lecturer: Brian Morris
Submission Date: 16/03/2015
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Contents
Abstract ......................................................................................................................................1
Introduction................................................................................................................................2
What Is Social and Environmental Reporting?..........................................................................3
Regulations.............................................................................................................................4
Motivation to Report..................................................................................................................4
Stakeholder Theory................................................................................................................5
Legitimacy Theory.................................................................................................................6
Hegemonic Perspective..........................................................................................................6
Case Study - Nike ......................................................................................................................6
Conclusion .................................................................................................................................9
Bibliography.................................................................................................................................
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Abstract
This essay aims to enhance the reader's understanding of social and environmental reporting.
This will be achieved through defining what it is and what it entails; documenting its
emergence and growth; and delving into the motivations behind such reporting. There are
several suggestions as to why organisations make disclosures regarding their environmental
and societal impact; these include the well recognised legitimacy theory; stakeholder theory;
and the increasingly prolific hegemonic perspective which shall each be examined in turn. A
case study of Nike Inc. shall provide further insight, examining how ignoring the social effect
of their practices caused Nike to lose profitability and ultimately how improving their
reporting practices elevated their standing in society.
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Introduction
Social and Environmental Reporting (SER) is a form of Corporate Social Responsibility and
can be viewed as the vehicle through which organisations take responsibility for their impact
on society and the environment. To some extent there has been an element of social and
environmental reporting for as long as there has been financial reporting. Throughout the last
30 years, however, SER has grown in prominence and practice. This may be due to pressure
from non-government organisations and activist groups such as Greenpeace, and scandals
relating to poor working conditions. Societies' increased concern for the environment also
played a role, as did the rise of socially responsible investing (SRI) in the 1990s. The result
has been an increase in the quantity and also the quality of reporting as new subjects and
concerns have been explored and incorporated over time. This was described in 2004 by the
United Nations Environment Programme as a “transparency revolution” (Van der Lugt et al.,
2012).
Disclosed in the reports are issues such as an organisation's carbon emission, natural resource
and energy consumption, commitment to recycling, and employee training and working
conditions, amongst others. A tobacco firm might choose to report the measures it takes to
ensure young people are discouraged from smoking, while an oil corporation may report the
positive externalities of its activities and initiatives (Tschopp & Nastanski, 2014). What has
not changed is that SER remains a form of self-regulation and the emphasis remains on what
is reported, potentially at the expense of what the organisation is choosing not to report and
inform the world about.
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What Is Socialand Environmental Reporting?
The manner in which a firm's operations impact the environment and humanity is
increasingly significant to society. Accountability and transparency are firmly on the agenda
and prioritised by well-informed stakeholders (Van Staden et al., 2011). It is vitally important
to an organisation's performance, reputation and brand, and as such, can have an enormous
impact on current and future success. To this end, more and more companies than ever before
are now engaged in SER (Gray et al., 1997). Through their engagement with SER an
organisation may cultivate their understanding of societies' concerns and expectations, which
affords them the opportunity to recognise new trends in what is considered acceptable in the
eyes of the stakeholders. This may potentially increase their competitiveness and allow an
organisation to identify and create new growth prospects for the future (European
Commission, 2014).
When the environment is compromised in order for an organisation to achieve success, or
profits are gained at the expense of humanity then an organisation must acknowledge its
position in and obligation to society. Moreover, it must understand that its success can no
longer be measured by financial accounting and profitability alone, but must take these social
and environmental impacts into account (Gray et al., 1997). After all, consumers have proven
through their actions that they are willing to change their purchasing habits due to
environmental reasons. This is evidenced by cases such as Walmart, whose customers
boycotted their stores when unethical practices came to light, and Nike, which is discussed in
detail in the case study which follows. Even in recessionary times, people will pay more for
environmentally friendly cars and fair trade food items. Time Magazine notes that people are
not solely motivated by their own self-interest, but are driven by a collective duty to society
and this has an economic effect. The suggestion is that “corporate America has discovered
that social responsibility attracts investment capital as well as customer loyalty, creating a
virtuous circle” (Stengel & Caplan, 2009).
NTR, a developer and operator of toll roads, is a good example of an organisation that
publishes explicitly about their social and environmental concerns in their annual report. The
report particularly emphasises the sustainability of natural resources. Its subsidiary Airtricity
has made a commitment to Green Policy ensuring that environmental awareness permeates
all of their business aspects. One of its disclosures is their policies on water and plastic
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materials recycling. The environmental concerns of the firm are thus communicated to the
stakeholders (Business 2000, 2003). NTR has deemed it a good business choice to voluntarily
engage in SER, whether this is to appease their stakeholders, improve their image, or perhaps
from a genuine sense of social responsibility and duty of care to the environment.
Regulations
While ISO14000 recommends SER consideration from a strategic business perspective, there
are no legal requirements for companies to include it in their annual report or to produce it as
a standalone document in most parts of the world. While standards and codes of use do exist
there has been insufficient harmonisation of standards which impedes comparability.
Organisations such as the Global Reporting Initiative (GRI) set out to improve this situation
by developing a framework upon which organisations can build their sustainability reports
(Global Reporting Initiative, 2015).
In the UK and Ireland, and most parts of Europe, reporting on environmental and social
issues is still on a voluntary basis. Certain codes have been developed to make sure the
process is verified even if it is voluntary (Gray et al., 1997). Other countries such as Denmark
and the Netherlands passed legislation in 1996 to make environmental disclosure mandatory
for larger companies. In South Africa, the Johannesburg Stock Exchange requires quoted
companies to report on environmental and social sustainability, in addition to the financial
sustainability of their activities (Van der Lugt et al., 2012). As long as SER is a choice for the
organisation without any strict reporting regulations and standards, however, there will be
those who will argue that the entire practice is little more than an elaborate marketing
exercise.
Motivation to Report
In order to appreciate the increase in SER, one must discover what motivates organisations to
assess their successes beyond merely profitability and growth. Why does an organisation
spend time, effort and money to display what might be the negative externalities of their
operations? A study by Ernst & Young (2013) suggests that the gains both financially and
socially will outweigh the cost of SER as there are numerous benefits to the organisation.
Benefits such as an improved reputation are easily understood, but additionally an
organisation may expect to increase efficiency and reduce waste as reporting can improve
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their decision making processes. It can also give them increased access to capital (Ernst &
Young LLP, 2013). Engaging in social and environmental communication can also have a
positive effect on an organisations financial performance and the equity of its brand. Kilian
and Hennigs (2014) summarise the motivating factors as follows: “Customers are more likely
to be positively attracted to products or services provided by a firm that acts socially
responsible, investors are more likely to buy their stocks, and potential employees are more
likely to apply for jobs.” (Kilian & Hennigs, 2014)
In addition to what has already been implied, there are several theories on why companies
voluntarily engage in SER. These include Stakeholder Theory, Legitimacy Theory and the
Hegemonic Perspective.
Stakeholder Theory
One perspective from which to look at the motivations for SER is the Stakeholder Theory.
There are two veins to this idea; the ethical and the managerial. The ethical perspective is
concerned with a company holding itself accountable for its actions. The managerial vein on
the other hand, concerns the stakeholders who have a vast impact on how the organisation is
managed and controlled. The company thus has to preserve the backing and resources of
these stakeholders. If the organisation were to lose their support, it may find itself in a
position of danger. From this perspective, SER can be seen as merely a means to an end, a
way for a firm to manipulate and appease any actions from stakeholders that could damage
them or hinder their strategic goals. Grey et al. (2011) describes it somewhat sinisterly as the
organisation knowing its audiences and providing information through social and
environmental reporting in order to distract or influence them (Mahadeoa et al., 2011).
A company's stakeholders are shareholders, employees, suppliers, customers, the
government, the providers of capital, and the local community. However, for SER purposes,
the most important stakeholders for the company are the employees and investors (Spence,
2009). The KPMG 1997 UK Survey suggested the reasons for this were that reports could be
motivating for employees and give reassurance to investors (KPMG, 1997). The study further
suggested that SER is merely a means for the organisation to inform itself, and that any wider
stakeholders are only targeted in order for the organisation to achieve the image it desires.
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Legitimacy Theory
An organisation must understand its macro-environment and all the factors influencing its
corporate performance. Ever changing legal, political, environmental and social issues can
have an enormous impact on how the company conducts its business and will further
influence how the public perceives it. Social approval is an important objective and forms the
basis of ‘legitimacy theory’. Buhr (1998) explains that in order to achieve legitimacy, an
organisation must demonstrate that their operations are in consonance with the unwritten
guidelines for social conduct expected and desired by society. Social and environmental
reporting in the annual report is a means for the organisation to show society that it complies
with its social contract.
Hegemonic Perspective
The hegemonic perspective suggests that the reason for SER disclosures is merely a means of
satisfying the organisation's desire for control. This is also known as the political economy
theory. Without regulation and standards on what must be disclosed, the power to
communicate selective elements to stakeholders lies with the organisation. Guthrie and
Parker’s study of US Steel and BHP’s corporate reports in 1989 found inconsistencies in their
disclosure policies that directly contradicted the legitimacy theory. The companies did not
disclose with an appropriate level of frequency. At times when events affecting their
corporate social responsibility took place, they did not always report it, instead making
reports when no such events had occurred. It suggests that these disclosures were not
“attempts at candid appraisal of their social performance" (Guthrie & Parker, 1989).
Case Study - Nike
In the early 1990s, Nike suffered from bad publicity regarding business practices in their
outsourced factories. However, the organisation managed to improve its image in the public
eye by engaging in SER and operating as the flagship of reporters for multinational
corporations. This case study highlights the purpose and benefits of reporting social issues
and environmental impacts in a real world situation.
Nike, Inc. is an American company that designs, develops, and manufactures footwear,
sportswear and equipment. In 2012, the brand alone was worth $19 billion (Ozanian, 2014).
Nike bases its profitable business on outsourcing its manufacturing into Southeast Asian
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countries such as China, Thailand, Indonesia and Vietnam. In fact, in 2014 the company
outsourced to nearly 1 million employees in 44 countries (Nike, Inc., 2014). In 1991 the
founder of Press for Change, Jeff Ballinger, published a report documenting low wages and
poor working conditions in a Nike plant in Indonesia (University of Michigan Law School
Asia Law Society, 2009), and in 1992 Ballinger continued to uncover unlawful and unethical
behaviour in Nike's subcontractors in Indonesia. For instance, a worker was shown to earn 14
cents per hour, which was less than the Indonesian minimum wage of 50 cents (Ballinger,
1992) (Islam & Nazara, 2000).
For the rest of the decade, Nike experienced the wrath of the general public as the
mainstream media turned their attention to the business practices that Nike had employed.
When Nike attempted to promote its products, their events were turned into mass protests. In
addition, sports media began to confront sports personalities for wearing Nike products
(Nisen, 2013). By 1998, Nike had to lay people off to deal with diminishing demand. Though
global footwear revenues were down 16 percent, Nike reported a 69 percent decrease in
profits (The Times Union, 1998). It was clear that shifting blame to its subcontractors was not
going to work with the public.
To neutralise the bad publicity the sweatshop scandals had caused, Nike employed an activist
and diplomat Andrew Young to examine its labour activities abroad. Nike was quick to
publish his subsequent report, which was widely criticised as Young did not address the low
wages and was not allowed to access the factories alone. Accounting firms such as Ernst &
Young and PricewaterhouseCoopers were contracted to conduct spot checks in its factories,
but they were seen as biased as they were being paid by Nike. In May 1998, the then CEO
Phil Knight spoke out about the controversy:
The Nike product has become synonymous with slave wages, forced
overtime, and arbitrary abuse. I truly believe the American consumer
doesn’t want to buy products made under abusive conditions (Nisen,
2013).
During the speech, Knight announced that Nike planned to change their policies by increasing
the minimum age of workers and improving general factory conditions (CNN Money, 1998).
In 1999, Nike founded the Fair Labor Association, which is a not-for-profit group of socially
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responsible companies, universities and civil society organisations. The aim of FLA is to
create lasting solutions to abusive labour practices by conducting assessments of factories and
advocating for accountability and transparency from companies (Fair Labor Association,
2012).
During the years 2002-2004 Nike set up its own division to deal with labour issues and it
performed hundreds of audits of factories to determine the extent of the problems. Human
rights organisations acknowledged that these activities were dealing with the worst of the
problems, while some issues still remained (Nisen, 2013). Nike recognised that the division
would need to be linked to its core business functions and be managed as any other aspect of
the organisation. Their approach to labour issues changed as they interviewed approximately
9,000 young workers in Indonesia about their needs and incorporated their findings into their
recommendations. In 2004 Nike hosted international labour, development, human rights and
environmental groups at its corporate headquarters (Kytle & Ruggie, 2005).
In 2005, Nike became the first company in its industry to publish a comprehensive list of
factories as well as reports on factory pay and other factory issues to show its commitment to
social corporate responsibility (Pradhan, 2014). Multinational companies have traditionally
avoided publishing such lists as it opens them up for scrutiny.
Since 2005, Nike has continued to publish reports on its corporate responsibility, detailing the
goals set and reached as well as any shortcomings. In the end, by accepting the allegations
and criticism, Nike has acted as a pioneer for companies who outsource. Even though they
admitted that some abuse remains in their factories, the progress that has been made through
transparency and effort is remarkable. From 2009 through to 2013 both the Return on Capital
Invested and Earning per Share have steadily grown (Nike, Inc., 2013). This is due in part to
Nike's realisation that social and environmental reporting must be strategically linked to its
core business functions to be able to become more profitable and sustainable.
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Conclusion
An organisation's success is dependent on a combination of different factors, not just its
profitability. This is clearly illustrated in the case study of Nike, where the corporation was
left red-faced after shortcomings were revealed in its outsourced factories, which led to
decreasing profitability and lay-offs. Multinational corporations that experience high public
visibility can find it difficult to abstain from reporting social and environmental effects even
though the disclosures are completely voluntary in most countries.
Despite social and environmental issues being difficult to quantify and to measure, some
organisations go into great lengths to provide their stakeholders with information about their
social and environmental impacts. While these disclosures can be directly linked to public
relations and the image the company wants to express, divulging more information to its
stakeholders can help reduce the agency gap between the directors and the shareholders.
In the words of Broadbent (2014), SER at present is mainly "descriptive ... and lacking
theoretical bite". Perhaps the development of further theoretical guidelines and framework
would enhance the quality of SER as well as make it more appealing to more companies. In
the future, SER is likely to become more regulated and enforced, as government bodies are
determined to introduce legislation relating to SER to better understand the societal effects of
organisations and to encourage social responsibility. Moreover, human rights organisations
and environmental activist groups as well as not-for-profit bodies will want to participate in
the creation of such regulation and practice. In the future it is certain that this area of
accounting will continue to evolve and mutate and the potential benefits for both the
environment and society will be immense.
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