Corporations have to disclose the money they make and spend, but not the waste or labor conditions they create. “As a society we spend enormous resources on trying to get financial reporting right,” says George Serafeim, an assistant professor of business administration at Harvard Business School. “If as a society we think that corporations can have a role in the environmental, social, and governance space, we’d better have transparency in this space as well.”
Some 16 countries have already made sustainability reporting mandatory. Serafeim and his co-author used these countries, and 42 that don’t mandate the reporting, as an experiment to see whether sustainability reporting makes a difference to socially responsible management practices. “Reporting can have a real impact on how organizations behave, and mandatory reporting can have an effect at the country level, because collectively all organizations change their practices and their behavior,” he says.
The IMD World Competitiveness Yearbook annually ranks countries on criteria that include environmental, social, and governance issues. Looking at the changes in these ratings after each country’s reporting laws went into effect, and comparing countries to each other, Serafeim found that when sustainability reporting is mandated, corporations introduce more ethical practices, increase their investments in human capital, and have more credibility as well as less bribery and corruption. This is more true in countries where enforcement is stronger.
With sustainability reporting increasingly on the public agenda—several groups worldwide are working to establish standards, and the G20 is due to discuss integrated reporting at its November meeting—it’s good to know that it is effective. “Becoming transparent on how you’re performing along these dimensions creates awareness, and as a result it is a driving force for improvements and real change,” says Serafeim. “It’s a process by which you are disciplined to think in a rigorous way about what is going on inside the organization, and for people outside the organization to question what you are doing.”
Robert Eccles, a professor of management practice at Harvard Business School, has been encouraging this revolution for decades. “Before the US Securities and Exchange Commission, before the Great Depression, there were no accounting or auditing standards. It took regulation to make that happen. And today we sort of take it for granted, but we wouldn’t have the capital markets that we have today without mandated financial reporting, to a set of standards, with some kind of verification,” Eccles says. “I think we’re at that next stage.
“If you’re going to have not just sustainable economies but a sustainable society, you need to have this information. Otherwise people end up just focusing on short-term financial earnings, and there are all kinds of problems that come out of that.”
Read more stories by Jessica Ruvinsky.