How do companies measure their CSR impact?

n recent years, consumers, regulators, and investors have increasingly shown an interest in understanding how corporations affect the world around them. To help investors and other stakeholders evaluate companies’ environmental, social, and corporate governance practices, dozens of scoring systems have emerged.

US policy makers have avoided mandating any reporting requirements around corporate social responsibility metrics, potentially making it tougher for anyone—including company executives themselves—to know how one business compares with another in terms of CSR. But researchers at Chicago Booth’s Rustandy Center for Social Sector Innovation investigated what information companies voluntarily disclose regarding their social impact. They find that even without a mandated set of reporting standards, there is a degree of consistency around reporting particular metrics.

Those metrics vary by industry, according to the researchers, who also find that the different ESG scoring systems used by investors may give an incomplete picture of companies’ performance.

Booth PhD student Shirley Lu and the Rustandy Center’s Jingwei Maggie Li and Salma Nassar analyzed the 2017 CSR disclosure statements for all 327 companies in the S&P 500 that released one. They hand-collected information about what each company disclosed, identifying 69 different metrics that appeared in the reports. They designated the metrics as relevant to either social or environmental impact, then further classified them as belonging to one of nine subcategories, such as “diversity” or “safety” for social impact, or “greenhouse gas emissions” or “waste” for environmental impact.

In seven of these nine subcategories, there was at least one metric that was disclosed in 100 or more of the reports, the analysis finds. Furthermore, companies were more likely to disclose metrics for the areas of CSR that were most material to their industries—utilities were much more likely to report water consumption than were insurance companies, for example—so for companies that didn’t report a commonly used metric, in some cases it may have simply been irrelevant to their operations.

Many subcategories featured more than one metric reported by at least 100 companies: the diversity subcategory had at least five, with nearly two-thirds of companies in the sample disclosing their percentage of female employees. The greenhouse gas emissions subcategory featured four such metrics, and the safety, community engagement, and waste subcategories each included two.

Given the ubiquity of complaints about how difficult it is to compare companies’ CSR records, Lu says she was surprised by the degree to which companies coalesced around certain metrics. However, she says the findings don’t necessarily suggest mandated reporting requirements are unnecessary. 

“One metric is likely not enough” to facilitate meaningful comparison between companies or provide a comprehensive picture of CSR practices, Lu says. “Our report is not [suggesting] you don’t need a mandate. It’s more that, if you were to mandate something, maybe regulators could take a look at what these firms are already disclosing, and then leverage that as a starting point to decide what should be mandated.”

In the meantime, investors can use the findings as a supplement or alternative to the various ESG scoring systems used in green investing—many of which give companies credit simply for disclosing information, and not based on performance, the researchers say.  

The weights and assumptions underlying many ESG scoring systems are opaque, so to probe how ESG scores are calculated, the researchers used the data they collected to give each company in their sample an intra-industry rating for both its environmental disclosures and its actual environmental performance. They then compared these ratings to the environmental scores from third-party ESG raters ASSET4, Sustainalytics, and RobeccoSAM.

The researchers’ disclosure ratings were positively correlated with the third-party scores, but the performance ratings were not. Whether a company disclosed information about its environmental impact was more predictive of a high environmental ESG score than was better environmental performance, as measured by the researchers’ performance ratings.

The researchers say the analysts who compile ESG scores can use their findings to identify the metrics that provide the most useful comparisons across companies, while investors can use the research to push those companies that don’t report commonly disclosed metrics to do so. 

Part of the challenge for CSR measurement is “lowering the cost for firms to figure out what needs to be disclosed,” Lu says. “It’s costly on the firm’s side.”

Article Credit: review.chicagobooth.edu

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