The Smoke and Mirrors Game of Global CSR Reporting: Issues and Fixes

By Anil Hira

This book examines corporate social responsibility reporting systems. Corporate social responsibility or CSR is the idea that corporations should act ethically, with a sense of obligation to society beyond financial return. We focus on the main ways that corporations report CSR at the global level. We find that the main reporting systems, whether administered through the UN through The Global Compact, or through the various financial reporting systems such as Bloomberg, are fundamentally flawed. In fact, it would be very hard for an ethical investor or consumer to find adequate and accurate information. The book closes with suggestions on how to reform the CSR information system so that corporations can be held accountable and incentivized to do the right thing.

• Language: English
• Publisher: Anthem Press
• Release date: May 16, 2023
• ISBN: 9781839988073

Book preview

The Smoke and Mirrors Game of Global CSR Reporting

The Smoke and Mirrors Game of Global CSR Reporting

Issues and Fixes

Anil Hira

Anthem Press

An imprint of Wimbledon Publishing Company

www.anthempress.com

This edition first published in UK and USA 2023

by ANTHEM PRESS

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Copyright © Anil Hira 2023

The author asserts the moral right to be identified as the author of this work.

All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Library of Congress Cataloging-in-Publication Data

A catalog record for this book has been requested.

2023933027

ISBN-13: 978-1-83998-805-9 (Hbk)

ISBN-10: 1-83998-805-3

ISBN-13: 978-1-83998-806-6 (Pbk)

ISBN-10: 1-83998-806-1

Cover Credit: Photograph of D.C. People with the national flag of the United States

by Jonathan McIntosh/Creative commons

This title is also available as an e-book.

Dedicated to Dr. Andrew S. Wright, business genius and mentor who dedicated his life to saving the environment for future generations.

CONTENTS

List of Figures and Tables

Acknowledgments

Introduction: Overview of the Book and Theoretical Concepts

1. Corporate Social Responsibility: A Good Deed in Name

Introduction

Corporate Motivations for CSR Are Ambiguous as Is the Potential for CSR in Governance

No Clear Definition of CSR

No Profit Incentives for CSR

Questionable Benefits through Consumer Responses

CSR Isomorphism as a Cultural Phenomenon

Institutional Pressures: Unrealized Potential

Conclusion

2. The Shell Game of Global CSR Reporting

Global Reporting as the Solution to the Corporate Collective Action Problem

The Collective Action Problem

Regimes as a Solution

Mixed Regimes: How International Organizations and NGOs Legitimize Corporate Behavior

Case Studies of Global Reporting Regimes: Lots of Reporting, Not Much Accountability

The Global Compact

Global Reporting Initiative

Extractive Industries Transparency Initiative

Conclusion: Global CSR Reporting Is Self-Reporting

3. Socially Responsible Investment Reporting: A Lucrative and Growing Business

Introduction

Evaluating the SRI Indices: Literature Review

Methodology of the SRI Indices: A Review

MSCI (KLD) ESG Ratings

FTSE4Good Sustainability Index

Sustainalytics

Vigeo-Ethical Investor Research Service

Thomson Reuters Refinitiv

Bloomberg

Limitations of Ratings Methodologies

CalPERS: An Example of an Activist Pension Fund’s Perspective

Conclusion

4. How Human Rights Violations Are Systematically Downplayed in SRI Systems

Serious Human Rights Issues Should Be Reflected in ESG Ratings

Mini Case Studies of Ongoing CSR Issues

Pascua Lama

Vale Mariana Tailings Dam Disaster

Apple/Foxconn Suicides

Rana Plaza Factory Collapse

Methodology: Tracing How Serious Human Rights Scandals (Deaths) Are Reported in and Affect Ratings

Mining

Apparel

Electronics

Do Controversies Affect ESG Ratings?

Companies Named in Repeated Issues Are Mostly Covered by Newsfeeds, but in an Episodic and Haphazard Fashion

Money Managers Get Limited and Obscured Data on Egregious Allegations through ESG Indices

Comparing Refinitiv Findings to MSCI Ratings: More of the Same

Summary of How Deaths Are Reflected in SRI ESG Reporting Systems

5. Conclusion: How to Improve the Ratings System Toward Harmonization, Transparency, and Accountability

What Do CSR and SRI Really Mean?

Resolving the Collective Action Problem

The Governance Paradox

Moving to a System Based on Impacts Rather than Gestures Requires Shifting Power

References

Appendix A: Allegations of Serious Human Rights Violations Related to Multinational Companies in Mining, Apparel, and Electronics Sectors

Mining

Clothing and Footwear

Electronics

Other Allegations Based on Amnesty International Reports

Index

LIST OF FIGURES AND TABLES

Figures

1.1 Corporate Social Responsibility (CSR) Motivations

2.1 Evolutionary Layers of CSR Reporting

3.1 SRI Ratings Methodology—A Synthesis

5.1 The Governance Paradox

Tables

4.1 List of Major Mining Companies: Alleged Violent Incidents by Multiple Primary Reporting Sources

4.2 Multiple Listings of Alleged Labor Violations by Major Apparel and Footwear Brands’ Subcontractors from Primary Reporting Sources, 2010–19

4.3 Multiple Listings of Alleged Labor Violations by Major Electronics Brands from Primary Reporting Sources, 2010–19

4.4 Refinitiv Reporting on Serious Human Rights Allegations in the Mining Sector and Resulting Category Evaluations

4.5 Refinitiv Scores for the Clothing and Footwear Sector around Serious Human Rights Allegations and Resulting Scores

4.6 Refinitiv Scores for the Electronics Sector around Serious Human Rights Allegations and Category Evaluations

ACKNOWLEDGMENTS

I would like to thank the following colleagues for their helpful comments: Leslie Elliot Armijo; SFU’s School for International Studies; Glenn Powers (SFU Business); Pacific Northwest Political Science Association, particularly Leif S. Hoffmann of Lewis-Clark State College; SFU’s Department of Political Science, particularly Eline de Rooij, Laurent Dobuzinskis, Aaron Hoffman, and Laurel Weldon; and the SFU Clean Energy Research Group for their feedback and support. I would like to thank Patty Hira for editing help, and SFU librarian Mark Bodnar for help in gaining access and learning how to use both the Refinitiv and Bloomberg databases. Parts of the manuscript were vetted with government and corporate officials who work on CSR and ESG and who supported its principal contentions, but prefer to remain anonymous. Finally, I would like to thank several anonymous peer reviewers elicited by Anthem who helped to significantly improve the manuscript.

Introduction

OVERVIEW OF THE BOOK AND THEORETICAL CONCEPTS

There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud.

—Milton Friedman (1962)

Corporations can do well by doing good.

—Most commonly used phrase to explain corporate social responsibility

Corporations have been under fire from critics in government, civil society, and academics since at least the 1970s. Much of the initial literature relayed the disproportionate power of corporations to many governments and civil society actors (Vernon 1971; Moran 1978). The reasons for such concerns are clear and well-founded—from environmental disasters such as the British Petroleum Horizon blowout in Louisiana to the 2008 financial meltdown, wiping out mortgages and savings of many households. Our purpose here is not to revisit such arguments or to pass moral judgment. Our focus is, in fact, rather narrowly limited to the quality of the information that corporations use to report on their level of corporate social responsibility (CSR). The idea behind CSR is that a corporation has a responsibility beyond profits, more broadly to society beyond its board, shareholders, and employees.

CSR reporting is reaching new heights, with an ever-expanding set of suggested responsibilities and indicators to reflect renewed efforts by corporations to demonstrate they are good citizens, as we discuss at length in the first chapter. In this book, we focus on Western corporations, acknowledging that does not mean corporations from other areas do not have any responsibility. Western corporations have started to operate in an evolving system of elaborate claims, reporting, and challenges around responsibility in highly charged public debates; this gives us a chance to test out the evolving reporting system and how well it’s working. The reporting system is the front lines of CSR and we test out whether corporations are following through on their promises.

Our aim in this book is to inform the general debates around CSR through careful analysis of how well current reporting systems are functioning. More importantly, we posit that CSR reporting systems offer an underestimated potential fulcrum for much-needed social change in a variety of areas, from labor standards to climate change to inequality. As of this writing, the most recent climate change talks in Glasgow were accompanied by a bold pledge by the former Bank of England Governor Mark Carney that the private sector will offer $130 trillion in capital for climate change. The opacity of such a pledge, like countless others, has led to accusations of greenwashing, counting already made investments and the fact of continuing financial support to the fossil fuel industry (Walker and Hodgson 2021). Corporations will only be incentivized toward greater (nonprofitable) responsibility if they get credit for genuinely transformative (and costly) actions. In turn, incentives for changing corporate behavior only exist if there is a robust and transparent information system, so corporations can get credit for their good deeds, and be held accountable for their transgressions in terms of environmental damage and labor standards. Thus, our focus here is on whether there is a robust and reliable information system behind CSR. By testing out the system, we show its many flaws as well as ways forward for improvement, such reform could create a solid foundation for a real-life CSR.

Why CSR? CSR is one of the fastest-growing areas of business activity. Virtually every business school teaches, and every major company has, a CSR strategy. To be more specific, 90% of companies on the S&P 500 index published a CSR report in 2017, up from just 20% in 2011. An estimated 80% of all major global companies have a CSR report, and 96% of the top 250 companies do (KPMG 2017, 2020). The most recent estimate we found was from 2013 when Global Fortune 500 companies were spending $20 billion per year on CSR (Varkey 2016), a figure that surely has increased considerably since then. The question this book starts with is, how well spent are the $20 billion in annual CSR investments? Astonishingly, there are no readily available metrics by which to answer this question.

A Harvard Business School Report notes the following statistics that highlight why businesses are investing more effort into CSR (Stobierski 2021):

•70% of Americans think it’s important for companies to make the world a better place; 55% believe that companies should take a stand on major social, environmental, and political issues

•41% of millennial investors, 27% of Gen X, and 16% of baby boomers state that they consider a company’s CSR in making investment decisions

•93% of employees in the United States state that companies must lead with purpose; 95% state that businesses should benefit all stakeholders, including communities

•90% of executives believe that a strong sense of collective purpose drives employee satisfaction

CSR, in short, is an inescapable element of strategy for large businesses. There is, consequently, a significant and growing CSR industry of reporting, auditing, aggregating, consulting, and assessing that lacks precise estimates but surely is in the hundreds of millions. Business scholars celebrate a dawn of change in business activities, that such shifts reflect. New business models see the significant role that the private sector can play in offering technological, financial, and management skills to social and environmental problems, even as the businesses see such issues as part of their responsibility as good citizens to solve (Bocken et al. 2014). Harvard professor Michael Porter popularized the notion of compatibility between profits and social responsibility through the term shared value, stating that companies need to recognize that societal needs, not just conventional economic needs, define markets. On a broader scale, scholars see that business is starting to assume social and political responsibilities that go beyond legal requirements and fill the regulatory vacuum in global governance (Scherer and Palazzo 2011).

There are at least four major reasons given for broadening measurements of corporate performance beyond financial return: appeals to morality and citizenship; the need for sustainability in that environmental conditions or poor education or health care, etc. will affect businesses’ ability to operate successfully in the long run; the need for a social license to operate, so society can shut down or prevent bad actors; and the benefits to corporate reputations and brands, as reflected most clearly in companies that make sustainability part of their brand, such as Patagonia. Regardless of the ultimate source, what is clear is that corporate social responsibility is a factor for shareholders in judging management performance (Yuan et al. 2019), and that it may play a role in attracting and retaining highly qualified employees (Ng et al. 2019). Similarly, CSR corporate governance issues such as increasing diversity are argued to lead to better financial performance as well as social and customer support (Hoobler et al. 2018). CSR is also increasingly seen as a reflection of managers’ personal values (Hemingway and Maclagan 2004).

In the business literature and world, this is celebrated as a shift toward the triple bottom line of profit, social, and environmental measures of performance. CSR performance should thus be measured alongside financial performance. In some cases, these could clearly work together, such as improving energy efficiency to reduce energy costs. In many other cases, however, the differing goals of profit and social responsibility do not clearly mesh, and measurement of them is very problematic. We return to this question throughout the book.

Before we get to that we should also acknowledge another side of the debate, as reflected in the general critiques of the sustainability of global capitalism (Jacobs and Mazzucato 2016). Arguably, these date back at least to Polanyi’s (1944) discussion of the need to temper capitalism’s excesses through social regulation at the turn of the twentieth century. While orthodox Marxism may have seen its best days behind it, more recent variations such as the regulation school continue to point to the inherent contradiction of markets that rely upon institutional rules for their functioning, such as contract enforcement, while at the same time suggesting any interference in markets is suboptimal (Boyer and Saillard 2001). Such critical perspectives are important, for examining the way that our economic systems operate at the global, national, and local levels, and to whom the costs and benefits of the system accrue. Changing the capitalist system would require revolutionary change, and a prerequisite to that would be a breakdown of the system. We do not see the system as anything near collapse. Moreover, for system change to take place, one needs to offer a cogent, convincing, and pragmatic alternative to global capitalism, one that critics have yet to offer. Simply put, critics do not seem to have any clear recommendations for changing policy or for how social movements can spark systemic change. More fundamentally, they ignore the basic paradox of their critique—that power resides primarily with states and corporations, and not with revolutionary forces. Unless there is a major crisis that upends power relations, only states and corporations, responding to civil society pressures, can instill change.

There is no question that corporations are serious power brokers, influencing the course of politics through lobbying, often under the veneer of CSR and charitable giving and more direct campaign contributions to their political allies (Bertrand et al. 2020). Yet, for the moment, civil society is not pushing for radical change; people, in general, are not calling for a shift toward government ownership or highly progressive taxation, for example, even as populist movements signal growing unhappiness at forces such as inequality and slipping living standards (Hira 2019). What we are proposing in this book is rather more narrow and pragmatic in its approach to provide information that can shift things in the immediate term in a realistic manner. That is, by providing accurate information on the state of CSR reporting so that business managers, policymakers, and more importantly civil society actors, particularly institutional representatives such as pension fund holders and activist shareholders, can be empowered to push for change. The change we are proposing here will not appear to be radical on the surface, but it will be radical if put into practice, akin to the workplace safety and social safety