Why it’s Time to Stop Accepting Unaudited CSR reports

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We are usually very excited to hear about every CSR report that gets released, as we know this is an indication of another company that is moving forward on sustainability. We read these reports, sometimes raising questions about one point or another and in some cases even criticize companies for missing information. One thing we don’t do is check the correctness of the data presented to us in the report. We just don’t have the means to do it, so usually we assume it is correct. Unfortunately, as a new research suggests, this is not always true.

Conducted by researchers from Leeds University in the UK and with Euromed Management School in France, the study analyzed 4,000 CSR reports, rankings and surveys, published by companies worldwide over the past 10 years and “found unsubstantiated claims, gaps in data and inaccurate figures.” This study brings up interesting questions about the value of unaudited  CSR reports and whether we’ve got to stop celebrating the growing number of reports and start paying more attention to their quality. And let’s not forget GRI- shouldn’t they do something about it?

According to the State of the Green Business Report for 2011, 230 S&P  500 companies released CSR reports in 2010 – that’s 46 percent of the companies on the index, almost 17 percent increase over 2009. Only 197 of these reports were GRI compliant compared to 81 reports in 2009. Yet, when it comes to assurance, or third party verification, the situation is much worse – only  9.6 percent of the reports in 2010 were verified. According to the report, this figure  hasn’t  reached  more than 14 percent in the last seven years. In Europe, the situation is a bit better, but still far from being satisfactory with verification  rates  that  run in the low to mid-20 percent range.

When so many CSR reports remain unaudited it’s not a big surprise to find mistakes in many of them. The Leeds/Euromed research found some mistakes that are almost amusing – in one case, the Italian energy company ENEL (2009) report claimed that its carbon emissions amounted to 122,089 million tons – the equivalent of four times the emissions of planet earth. In another case, both the German carmaker Volkswagen and power company E.ON decided not to include a massive coal plant in Germany in their emissions records: VW because it was owned by E.ON, E.ON because it was run by VW.

These mistakes were probably not intentional, but nevertheless, they indicate poor fact checking of the reports in general. One of the authors of the report, Dr. Ralf Barkemeyer of Leeds University told the Guardian that “the quality of environmental data in sustainability reports remains appalling at times, even today. In financial reporting to leave out an undisclosed part of the company in the calculation of profits would be a scandal. In sustainability reporting it is common practice.”

CSR reports and financial reports have many differences, starting with the fact that one is voluntary while the other is required by law. Yet, one of the big differences between them is auditing. It’s not that auditors provide 100% protection from mistakes, but they do provide a much better assurance that what we read is actually true. You can usually trust financial reports (well, to some degree…), but you can’t say that yet about CSR reports.

It’s true that the CSR reporting space is still relatively young and that we’ve seen a lot of improvement in the last few years, but the question is if it’s the right time to shift our focus from quantity to quality. It might be the time to be less occupied with the number of companies that release a report and more occupied with the quality of the reports. With the GRI, becoming de-facto the standard of sustainability reporting, it looks like auditing can be the game changer in terms of improving the quality of the reports.

It also might be the time for the GRI to step up and take the lead in this quest for further assurance. Right now, external auditing is only recommended by the GRI. For each of the GRI application levels – A, B and C –  a “+” can be added when a reporting organization has had its reporting externally assured.

This is nice, but not enough. I doubt how many stakeholders know the difference between an A and A+. At the same time, I think the difference between B and A is more obvious. Therefore, maybe the GRI should consider changing its criteria and to make the A level only available to to audited reports. The letter grades currently indicate completeness of the report, but a report is not complete if it contains gross inaccuracies.

Other measures should be considered as well to encourage companies to approach CSR reports in the same way they approach financial reports, including the external auditing. Only when companies will start doing so, we will be able to refer to their CSR reports as trustworthy. Until then, all unaudited reports should be taken with a grain of salt.

Raz Godelnik

Raz Godelnik is an Assistant Professor and the Co-Director of the MS in Strategic Design & Management program at Parsons School of Design in New York. Currently, his research projects focus on the impact of the sharing economy on traditional business, the sharing economy and cities’ resilience, the future of design thinking, and the integration of sustainability into Millennials’ lifestyles. Raz is the co-founder of two green startups – Hemper Jeans and Eco-Libris and holds an MBA from Tel Aviv University.

One response

  1. Great points! It is definitely time to shift focus to quality over quantity!
    People just assume that the letters indicate performance. I know from experience that most people would consider an A report to indicate that a company has excellent sustainability performance whereas a C+ would be considered too poor to even mention the grade. But you’re correct that a report is not complete if it has gross inaccuracies.Unfortunately, the which isn’t really objective, independent verification. I suspect the assurance providers wouldn’t get asked back if they found too many problems or refused to assure the report.Do we need an independent body – the equivalent of the SEC – for sustainability reporting? Without the same economic motivation as the financial reporting sector (mandatory reporting, strict auditing, heavy fines as a deterrent (and loss of shareholder confidence) then the comparable specialized industry required to support the adoption of widespread validation won’t develop.

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