Are CSR reports telling the truth?

Introduction

Corporate social responsibility (CSR) reporting is one of the most effective techniques for conveying CSR; it includes rules of conduct as well as online reporting (predominantly CSR reports). These reports are characterised as distinct, independent corporate editorial works that contain CSR information (Biedermann, 2008). Thus, CSR reports are a structured method of communication (Schaltegger et al., 2006) that can take the shape of standalone reports or integrated publications that include economic, social, and environmental data in a single yearly report (Daub, 2007).

Credibility is essential in all forms of communication, whether it be personal contact, a political statement, or a company explaining its position and duties in society. Companies have disclosed increasingly more information about their CSR, but this has resulted in increased distrust among stakeholders rather than increased goodwill (Waddock and Goggins, 2011). Stakeholders frequently perceive CSR communication to be strategic in nature and hence untrustworthy (Elving, 2013). This criticism is directed mainly towards the CSR reports, one of the most significant vehicles for corporations to talk about their CSR efforts, sustainability, and corporate citizenship successes. Just as trustworthiness is important in daily communication (Jackob, 2008), it is also important in this communication tool. As a result, the purpose of this essay is to examine if CSR reports are reliable.

Legitimacy and Stakeholders Theory

There are two systems-oriented theories that are widely used in the literature to explain the motivation behind publishing CSR reports by companies around the world. These two theories are legitimacy theory and stakeholder theory. Other systems-oriented theories include political economy theory and resource dependency theory. These theories imply that organisations are a component of the wider social structure in which they function (Gray et al. 1995).

According to legitimacy theory, organisations are always striving to operate within societal norms in order to guarantee that outsiders see their actions as legitimate. Legitimacy from an organization’s perspective is defined as follows: “a condition or status which exists when an entity’s value system is congruent with the value system of the larger social system of which the entity is a part. When a disparity, actual or potential, exists between the two value systems, there is a threat to the entity’s legitimacy.” Lindblom (1994, p.2). Deegan (2006) observes that when an organization’s legitimacy is endangered, research suggests that strategic disclosure of the information is frequently employed by organisations to restore organisational legitimacy. Cho et al. (2015) apply legitimacy theory to explain why companies feel compelled to voluntarily release sustainability reports. According to the study, companies have utilised CSR reports to portray themselves as socially responsible in order to prevent dramatic changes in their activities.

The legitimacy theory is the most commonly utilised in CSR literature; nevertheless, it is frequently coupled with stakeholder theory. A stakeholder is a person or group who has an interest or concern in the business’s operations. Stakeholder theory was presented by Freeman (1984), who stated that a corporation’s stakeholders include anybody who is affected by the firm and its operations. According to stakeholder theory, firms should pay attention to all of their audiences, such as suppliers, consumers, environmental organisations, media, and so on, who might have an impact on them, rather than simply shareholders. Chen and Roberts (2010) investigate the compatibility of the two theories and find that various stakeholders have varied perspectives on the corporation’s activities; hence, it is up to them to assess the organization’s legitimacy. It is the duty of the company to address the requirements of stakeholders, which may be contradictory, via strategic dialogue.

These theories, however, mostly focus on one aspect of the motivations behind the publishing of CSR reports, which is to gain, maintain, or restore legitimacy in the eyes of the stakeholders regarding the corporation’s actions in society. This suggests that the CSR reports are not reliable as they aim to gain something in return, i.e. legitimacy, rather than provide information regarding the impact of their actions on the society and environment.

Lack of standards and audit

Another notable point in the literature regarding the unreliability of the CSR reports is the lack of standard reporting rules, like those in financial reporting. Al-Shaer and Zaman (2018) argue that companies are increasingly reporting on sustainability issues and having the reports voluntarily assured in order to relieve stakeholder and regulatory concerns. According to the Global Reporting Initiative (GRI), which sets sustainability reporting requirements, the number of firms providing such reports worldwide has grown from 44 in 2000 to 1,849 in 2010. Some nations, such as Sweden and the Netherlands, now mandate them by legislation or as a requirement for stock market listing (Wembridge, 2011).

Beyond the glossy images and good intentions, CSR reports, in theory, give a window into the inner workings of a firm, improving transparency and providing shareholders with a better understanding of variables that influence decision making. As energy prices rise and environmental concerns grow, more businesses are turning to sustainability reports to demonstrate how socially and ecologically aware actions help the bottom line. Programs to minimise the usage of power and reduce the carbon footprint, for example, are not only helpful to the environment but also cost-effective (Wembridge, 2011).

However, unlike published annual reports, CSR reviews do not follow a set format. Instead, the firm may select which facts to spotlight. Although there are voluntary recommendations, such as those issued by the GRI, they are not binding, thus CSR evaluations do not have the same weight of authority as yearly reports.

Specious Targets

According to a study conducted by Bjorn et al. (2016) of more than 40,000 CSR reports, less than 5% of reporting firms mentioned the ecological limitations limiting economic development. Even fewer—less than 1%—said that they included environmental aims that fit with experts’ understanding of planetary limitations while creating their goods. Instead, most businesses create objectives based on their skills or desires. Science-based objectives, as well as business emissions allocations in line with them, have grown increasingly prevalent since that research, although they remain aspirational at this point (Pucker, 2021).

Opaque Supply Chains

Today, at least 85% of the footwear brands’ production is done in other countries, especially in Asia. Furthermore, supply chains have become multitiered across the sector, and contractors have increasingly outsourced to subcontractors, making traceability difficult. Audits have also failed to prevent social and environmental violations. Many other businesses, such as food, automobiles, and construction, are also affected by opacity. Andy Ruben, Walmart’s first chief sustainability officer, observes that “even companies with Walmart’s influence find it challenging to really understand what is going on in an increasingly global and interconnected supply chain.” (Pucker, 2021).

What the literature suggests:

According to research based on legitimacy theory, CSR disclosures are made in response to public pressure and media attention. Cho (2009) demonstrates this by highlighting the tactics employed by Total SA, one of the world’s major integrated oil and gas companies, to legitimise its activities following two disasters that endangered its legitimacy – the sinking of the Erika oil leak and the AZF Toulouse explosion. Total is confronted with ethical and societal concerns that put pressure on it to participate in CSR activities and maintain a positive corporate image. The number of disclosures increased significantly in the year of the event compared to the previous year, according to the findings. Following the Erika crisis, Total utilised Image Enhancing disclosures providing positive news, with legitimacy disclosures visible in its press releases and other disclosures. Total used communication techniques to legitimise its activities following two incidents, and they believe that environmental disclosures are just instruments for creating legitimacy rather than real responsibility.

Beelitz and Merkl-Davies (2011) identify this as symbolic management, one of the techniques to re-establish legitimacy; it focuses on altering outsiders’ perspectives on the organization’s actions and ideals. This is a type of impression management that is generated from a strategic viewpoint in order to change stakeholders’ attitudes. It is found in numerous studies, e.g. Hooghiemstra (2000), Cho (2009), and Patten and Zhao (2014).

Lock and Seele (2016) investigate the reliability of CSR reports; their findings suggest that European CSR reports are not credible, leaving significant opportunities for improvement. According to the study, standardisation and content are the most important factors in determining reporting trustworthiness; external effects are only secondary, at best. CSR reports must first be comprehensible to their readers in order to be deemed credible; moreover, credibility entails honesty, sincerity, and stakeholder specificity. Voluntary standardisation improves the credibility of CSR reporting, but the legislation does not yet have the same effect. This shows that a wide part of the literature suggests that the CSR reports are not a credible tool rather they act as a tool for building a positive image regarding their actions.

Conclusion

CSR reporting has had a mixed reaction from the stakeholders over the last few decades as their quantity has increased significantly over the years, however, the environmental deterioration and social inequality have also increased. The legitimacy and stakeholder theories suggest that CSR reports are merely a tool for building legitimacy around the corporation’s activities to be seen as legitimate in the eyes of stakeholders. Whereas, for the point of non-standard reporting rules also contribute towards the problem of unreliability of CSR reports as they allow corporations to cherry-pick the information to highlight in these reports and skip any of the negative or legitimacy threatening details of their activities. Therefore, it can be concluded that CSR reports are largely unreliable, and a lot of work needs to be done especially in building standard reporting guidelines and proper auditing of these reports.

References

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