Corporate social responsibility (CSR) reporting is the disclosure of business practices that fall outside of the activity normally disclosed in GAAP-based financial statements and that provide benefits to society. These practices include philanthropy, ethical business practices, stewardship of the environment, and positive interactions with the community. Over the past 10 years, voluntarily reporting on CSR activities has become a standard business practice for the world’s largest corporations. Because businesses often look to accountants for CSR reporting guidance, CPAs will be well served by familiarizing themselves with the current state of CSR reporting and upcoming changes to CSR reporting guidelines.
The Current State of CSR Reporting in the United States
The Global Reporting Initiative (GRI) publishes the most widely used CSR reporting guidelines and maintains a database of organizations that prepare CSR reports referencing those guidelines. According to “The Future of Corporate Sustainability Reporting” (Brian Ballou, Dan L. Heitger, and Charles E. Landes, Journal of Accountancy, December 2006, http://bit.ly/1YQjvHG), in October 2006, approximately 1,000 organizations from more than 60 countries were registered with the GRI as issuers of CSR reports using the GRI’s Reporting Guidelines. Of those, 100 were U.S. organizations.
As of April 2016, the number of organizations registered with the GRI had increased to 9,065, of which 909 were U.S. organizations. In addition, KPMG’s 2013 “Survey of Corporate Responsibility Reporting” (http://bit.ly/1VOc86f) reported on global trends in CSR using information from the 100 largest companies in 41 countries. The survey found that, among the 100 largest U.S. companies, 86% issue a CSR report, compared to 71% of the largest companies in the 41 countries studied. Based on the high rates of CSR reporting, KMPG’s publication suggests that CSR reporting “is now standard business practice worldwide.”
Although the United States is among the global leaders in percentage of firms issuing CSR reports, it lags behind the global average in obtaining external assurance for these reports. According to the 2013 KPMG survey, the majority (59%) of the largest companies in the 41 countries studied opted to enhance the credibility of their CSR disclosures by obtaining external assurance, compared to only 23% of the 100 largest U.S. companies. The statistics in the KPMG report suggest that CSR assurance for U.S. companies could be a growth area in which CPAs can make a significant contribution.
The G4 guidelines encourage organizations to focus on identifying and reporting on “material aspects” in order to make reports more focused and credible.
Upcoming Changes to CSR Reporting Guidelines
In an effort to improve reporting guidelines and help organizations produce the most useful reports for stakeholders, the GRI issued its fourth update on sustainability reporting, the G4 Reporting Guidelines, in May 2013. Designed to address stakeholder sentiment that reports included too much information on issues that were not material, the G4 guidelines encourage organizations to focus on identifying and reporting on “material aspects” in order to make reports more focused and credible. Because the majority of CSR reports are prepared according to the Reporting Guidelines, CPAs should be aware of changes resulting from the transition from the G3.1 to the G4 guidelines. The official transition date was December 31, 2015, and the G4 Reporting Guidelines must be used for all reports issued thereafter.
The most notable change is the report classification system. Under the G3.1 Reporting Guidelines, CSR reporters could choose to include any number of predefined disclosures related to the entity’s strategy and analysis; organizational profile; report parameters; governance, commitments, and engagements; management’s approach to addressing each category of sustainability (economic, environmental, and social); and economic, environmental, and social performance indicators. Organizations measured their level of disclosure against the GRI’s Application Level criteria and self-declared an application level (A, B, or C); in general, the more disclosures an organization included, the higher the self-declared application level. If any part of the CSR report was externally assured, organizations could add a “+” to their self-declared application level. A summary of the disclosures required to declare each application level under the G3.1 Reporting Guidelines is available from http://www.cpaj.com .
The G4 Reporting Guidelines eliminate the application levels and instead require organizations to declare whether reports are prepared “in accordance” with the guidelines. Organizations choose from a list of predefined disclosures similar to those in G3.1 (e.g., strategy and analysis, organizational profile, report parameters, governance). Unlike the G3.1 Reporting Guidelines, however, there is no specific number of performance indicators that an organization must report on in order to declare a particular level. Instead, to be in accordance, organizations must identify which aspects of sustainability are material to their operations and include disclosures on management’s approach and performance indicators only for those aspects. Aspects of sustainability include economic, environmental, and social issues such as economic performance, procurement practices, biodiversity, nondiscrimination, and customer privacy.
While the GRI recommends the use of external assurance, it is not a requirement.
Reports prepared in accordance with the G4 Guidelines are then classified as either “core” or “comprehensive.” A core report must include disclosures on at least one of the GRI’s predetermined performance indicators for each identified material sustainability aspect. A comprehensive report must include disclosures on all of the GRI’s predetermined performance indicators for each identified material sustainability aspect. Examples of performance indicators for potential material aspects of sustainability include the ratio of the standard entry-level wage by gender compared to the local minimum wage, the proportion of spending on local suppliers at significant locations, the percentage and total volume of water recycled and reused, and the percentage of suppliers screened using labor practices criteria.
Unlike the “plus” system from the G3.1 Reporting Guidelines, there is no separate indicator for CSR reports that are externally assured under the G4 Reporting Guidelines; however, if a sustainability report is externally assured, a reference to the external assurance statement should be included in the CSR report. While the GRI recommends the use of external assurance, it is not a requirement.
Of the 534 GRI reports published by U.S. organizations in 2014, 110 referenced the G4 guidelines. In 2015, 188 of the 561 GRI reports published by U.S. organizations referenced the G4 guidelines.
Other CSR Reporting Guidance
Although the changes to the GRI Reporting Guidelines are the focus of this article, there are two other leading sources CPAs should also be aware of. First, the International Integrated Reporting Council (IIRC) is a global not-for-profit organization whose mission is to establish integrated reporting of financial and CSR data. The IIRC’s International Integrated Reporting Framework (http://bit.ly/1SnOH0x) provides guiding principles and content elements to help organizations create an integrated report that communicates how they create value in the short, medium, and long term within the context of their external environment. In addition, the Sustainability Accounting Standards Board (SASB)—which is not affiliated with the Financial Accounting Standards Board or Governmental Accounting Standards Board—is an American non-profit organization that publishes industry-specific Sustainability Accounting Standards that prescribe what CSR disclosures organizations should include in their mandatory financial SEC filings, such as Forms 10-K or 8-K. Exhibit 1 outlines the differences between these organizations and the GRI.
Comparison of Sustainability Reporting Guidelines
The United States is among the global leaders in CSR reporting but still lags significantly behind European countries, whose companies have historically led the way.
The GRI, IIRC, and SASB should be considered complementary, as organizations may choose to follow the guidance of one, two, or all three. For example, an organization could produce an integrated Form 10-K using the IIRC’s International Integrated Reporting Framework that includes disclosures as prescribed by industry-specific Sustainability Accounting Standards and references the GRI G4 Reporting Guidelines. While the majority of CSR reports use the GRI Reporting Guidelines, few organizations in the United States prepare integrated reports, and to date, only one entity has begun following SASB’s standards.
What the United States Can Learn from European CSR Reporting
As mentioned above, the United States is among the global leaders in CSR reporting but still lags significantly behind European countries, whose companies have historically led the way. In 2015, European organizations registered 1,924 CSR reports with the GRI’s database, compared to only 561 from the United States. Furthermore, the European Union’s Directive 2014/95/EU on “Disclosure of Non-Financial and Diversity Information by Certain Large Undertakings and Groups” (http://bit.ly/1VxM4fn) will require European companies with more than 500 employees to report on their CSR performance following appropriate guidelines, such as the GRI Reporting Guidelines, beginning with 2017 information.
Because European reporting leads the way, U.S. organizations seeking to improve their CSR reports by implementing the GRI G4 Reporting Guidelines or the IIRC’s International Integrated Reporting Framework can refer to European reports for guidance; 376 of Europe’s 1,876 GRI reports published in 2014 and 803 of 1,924 reports published in 2015 referenced the G4 Reporting Guidelines. In terms of integrated reporting, the IR Reporters database (http://examples.integratedreporting.org) lists 81 European organizations that prepare integrated reports, compared to only nine in the United States. Exhibit 2 shows several examples of U.S and European reports, along with which sets of guidelines they followed.
Comparison of U.S. and European Reporting
CPAs and CSR Reporting
CSR reporting is quickly becoming a standard business practice. As trusted advisors with a strong reputation for being assurance providers, CPAs are in a unique position to help their clients implement or improve their CSR reporting. To do so, CPAs should be aware of upcoming changes to the GRI Reporting Guidelines and become familiar with other guidance provided by the IIRC and the SASB. Because European organizations are among the most advanced in the world in terms of CSR reporting, U.S. CPAs seeking to improve CSR reporting should refer to European examples of GRI G4 and IIRC reports.