Measuring CSR Performance

With the rise of CSR, we have seen a rise in CSR measuring and non-financial
reporting by many companies throughout the world, informing various stakeholders
about their performance with regard to social and environmental issues. 90 percent of
the top 100 companies in Europe reported annually about their social performance, 59%
in USA and 61% in the rest of the world.

Rationale for Measuring and Reporting CSR

1. Instrumental/economic reasons – Social and environmental issues might pose

a threat to the company’s financial performance. If businesses will not address
social issues, they may experience consumer boycotts or may suffer from
fines/penalties. In order to manage these risks, companies need to know about
them, monitor these risks across time and inform their stakeholders about the
responsible practices of the business in responding to these social issues.
2. Political reasons – Large multinational corporations perceived as increasingly
powerful institutions in society. This increased power might call for more
transparency and accountability to the public in terms of how the corporation has
impacted on society.
3. Integrating demand from stakeholders – CSR reporting helps companies to
improve their interaction with stakeholders.
4. Ethical reasons/responding to external pressure – Companies face growing
pressures from governments, investors, customers and competitors to live up to
ethical standards. CSR reporting is a tool by which a company can communicate
about its ethical values and how well they have performed against these goals.

Understanding Basic Accounting

In order for an organization to reflect the sustainability, responsibility and ethics

focus in daily activities and to constantly monitor the attainment of responsible business
goals, an appropriate accounting process that individuates measurement systems and
management tools should be put in place.

Phase 1: Data Gathering – we identify the groups of data- environmental, social,

ethics, and stakeholder information- to be gathered, and prioritize them.

Phase 2: Data Evaluation – measuring social and environmental benefits and costs
and considering impacts on both the company and society, both current and future.

Phase 3: Reporting – disseminating information found to stakeholders of the company,

both internal and external.
Phase 4: Controlling – elaborates on how to use data internally in order to manage
what was measured.

Goal: Stakeholder Accountability –To be able to account for and to be held

accountable for the triple bottom line, stakeholder impacts, and the ethical outcomes of
one’s management activity by a broad set of stakeholders of this activity.

It is a process of providing relevant information to stakeholders that allows them

to hold the organization accountable for its activity and outcomes. However, the giving
of account is just one part of the accountability framework, as this also requires that the
accountee has “the power to hold to account the person who gives the account.

Responsible Accounting and Sustainability Accounting

• Responsible Accounting and Controlling – integrates sustainability, responsibility

and ethics into a company’s accounting and controlling systems, in order to
create stakeholder accountability.

• Sustainability Accounting and Reporting – a subset of accounting and reporting

that deals with activities, methods, and systems to record, analyze and report
environmental, social and economic impacts.

The drivers behind and the emergence of social and environmental accounting
reflect the same pressures that have raised the profile and importance of responsible
business and management in other management disciplines and operations, namely,
the increased importance of stakeholders and the realization that companies have
responsibilities that cannot always be expressed in traditional financial terms.

Some distinctions of sustainability accounting from financial accounting are:

 The focus is on ethical, social and environmental data.

 The accountees include not only shareholders but also a wide range of
stakeholders.
 Sustainability accounting is voluntary and not yet regulated by law.

According to Adams, “rather than being concerned with profits and financial
accountability, accountability demonstrates corporate acceptance of its ethical, social
and environmental responsibility.”

Phase 1: Identify the account and gather data

In traditional accounting, most indicators are based around economic

performance. With responsible accounting, the realization has come that other, more
expanded indicators must be used to better understand, predict and take into account
the increasing pressures, risks, and opportunities facing companies.

In the first phase, the organization must first identify all the broad groups of
sustainability information required using the stakeholder accountability approach. The
different stakeholder issues should then be prioritized. This process depends on how
organizations define their level of sustainability disclosure- also referred to as ESG
disclosure- which is the act of communicating organizational performance on material
matters relating to ESG activities.

Materiality –Materiality helps elucidate how important certain issues are to the
stakeholder of a company.

An important methodology for defining the materiality of responsible business

data is the one advanced by the Sustainability Accounting Standards Board that is
sector based.

Phase 2: Evaluation and Elaboration of the Data

In this phase, organizations measure a broad set of social and environmental

benefits and costs and consider impacts on both the company and the society.

Cost Accounting

Both academicians and practitioners have developed economic and financial

analysis techniques to provide reasonable estimates for social and environmental
performance.

 Full-cost accounting – allocates all direct and indirect costs to a product or

product line inventory valuation, profitability analysis and pricing decisions. It
attempts to capture the total costs resulting from an organization’s economic
activities, including social and environmental costs, and to value those impacts in
financial terms.
 Activity-based costing – assumes that activities related to products, services and
customers cause the costs.
 Life-cycle assessment – a design discipline used to minimize environmental
impacts of products, technologies, materials, processes, industrial systems,
activities and services.
 Natural capital inventory accounting – involves the recording of stocks of natural
capital over time, with changes in stock levels used as an indicator of the quality
of the natural environment.
Responsible Business Performance Metrics and Indicators

These are qualitative or quantitative metric used to assess social, environmental

and economic activity and performance. The GRI Sustainability Reporting Guidelines
utilize a wide array of indicators to measure performance toward the goal of
sustainability.

Global Reporting Initiative (GRI)- is a non-profit, network based organization that

works toward a sustainable global economy by providing sustainability reporting
guidance that is broadly used around the world. An organization following the GRI
guidelines should report on core indicators unless they are deemed not material on the
basis of the reporting principles. The dimensions include:

 Economic performance indicators – addresses the organization’s impact

on the economic status of its stakeholders and on economic systems at
local and international levels.
 Social performance indicators – divided in four different categories: labor
practices, human rights, society and product responsibility..
 Environmental indicators – covers performance related to inputs and
outputs, biodiversity, environmental compliance, and other relevant
information such as environmental expenditure and the impacts of an
organization’s products and services.

Value Added Model

It describes the economic value created by the organization and how it is

distributed among stakeholders. The corporation carrying out its productive activities
rewards investors and creditors for risking their capital but at the same time employs
people, contributes to societal costs by paying taxes, and contributes to the community.
By combining financial and social value added, the expanded value added statement
highlights the link and interdependence of the economy, community and environment.

Social Return on Investment

It is a framework for measuring and accounting a much broader concept of value;

it seeks to reduce inequality and environmental degradation and improve well-being by
incorporating social, environmental and economic costs and benefits. It measures
social, environmental and economic outcomes using monetary values to represent
them. As a result, a ratio of benefits to cost is calculated.

Phase 3: Reporting

In the first two phases, the core topics are identified and the key performance
measurements for the expected contributions of responsible business also were
identified, following the designed path of responsible accounting driven by the target of
stakeholder accountability. Reporting is the dissemination of information to internal and
external users. This process must be based on three key questions:

• Which are the qualitative criteria that responsible accounting information should
represent?

• What is the appropriate format of responsible accounting reports?

• Which are the tools and mechanisms that responsible accounting information
should use for the internal and external disseminations?

To answer these questions, influential standards and guidelines have been developed
to guide leading.

 GRI G3 (Global Reporting Initiative)

o Are process-oriented standards with a particular focus on how to create
the reporting document, are the world’s most used responsible business
reporting framework. According to KPMG 2011 International Survey of
Corporate Responsibility Reporting, 80% of the largest companies in the
Fortune Global 500 list and 69% of the 100 largest companies in 34
countries are now aligning to GRI reporting standards.
o In order to guarantee the quality of measurements, GRI reporting
principles identify criteria that sustainability reports must follow in order to
give a truthful view of the economic, social and environmental status of the
reporting organization. Using the same principles can increase the timely
timely comparability between organizations situated in different
geographical areas and over time.
o It also provides other documents for reporting such as:
 Sector supplements – guidance that captures sustainability issues
faced by specific industry sectors
 Technical protocols – detailed definitions, measurement methods
and procedures for reporting on indicators contained in the core
guidelines (Ex. energy indicators)
 National annexes – providing national country perspectives and
particular influences, issues and contexts related to sustainability.
 Issue guidance documents – on topics such as, among others,
diversity and productivity.

Integrated Reporting

It integrates social, environmental and ethics data with traditional financial

reporting data. In other words, the responsible business dimensions are not
supplemental to the financial accounting, but rather integrated with is as one topic with
four aspects. The GRI is one of the initiators of the International Integrated Reporting
council and considers integrated reporting to be the next step in responsible business
reporting. Integrated reporting shows connectivity between parts and explains how the
parts affect the ability of an organization to create and sustain value in short, medium
and long term.

It makes visible an organization’s use of and dependence on different resources

and relationships, or “capitals”; its interactions with external factors, relationships and
resources; and its access to and impact on them. IIRC designates six capitals; financial,
manufactured, human, intellectual, natural and social capital.

Auditing and Assurance

• Assurance – is the external verification and endorsement of accounting process

and outcomes.

• Audit – the investigation and review of actions, decisions, achievements,

statements or reports of specified persons with defined responsibilities, to
compare these actions with norms, and to form and express an opinion on the
result of that investigation, review and comparison.

• Approximately 45% of G250 companies currently use assurance as a strategy to

verify and assess their Corporate Responsibility Reporting Information.

• Social auditing – provides mechanism for decision makers to evaluate

environmental, ethical and planning and facilitate stakeholder engagement in the
social, environmental and ethical decision making process of an organization.

• Two main international standards: ISAE 3 issued by IAASB, and the AA1000AS
issued by Institute of Social and Ethical AccountAbility and is addressed to
anyone who provides external verification process. The AA1000 framework
emphasizes three principles: Completeness, Materiality, and Responsiveness.

Phase 4: Management Control

• Once the data are reported, the responsible business performance can be
evaluated by comparing the results achieved with the objectives indicated during
the programming phase.

• It can identify significant improvements to add to responsible management

activities, and revisits the targets in setting out new objectives.
Guide questions:

1. What do you think will be the benefit if sustainability reporting will be

implemented by all companies? Explain.
2. Do you think sustainability reporting for companies should become mandatory?
Why? As an accountant, do you think you are ready for this?