US companies get little direction from the federal government about what they should tell investors, or the general public, about their CSR activities—their impact on the environment, for instance, or their worker-safety records. Most CSR reporting is voluntary, and the medium and contents of those reports is therefore up to the discretion of the companies themselves, which makes comparing one company’s CSR practices to another’s very difficult. Chicago Booth’s Hans B. Christensen says that standardizing CSR reporting could have benefits for investors, companies, and society—but creating and enforcing reporting standards would involve surmounting significant obstacles, including defining what CSR information is required and creating a regulatory authority with the expertise to evaluate the information companies provide.
Hans B. Christensen: So what we are doing in this report is we are analyzing what the economic consequences would be if the United States were to mandate reporting standards for CSR activities for all firms here in the US, or at least a large proportion of firms in the US.
So CSR stands for corporate social responsibility, and there’s not an agreed upon definition. In fact, that’s one of the challenges a regulator would face, that: What is it? So what should be regulated? What should we require firms to report?
Currently, there is no requirement for companies to disclose CSR information, at least not, only for certain, specific issues in certain industries. But there’s not a mandate, so at the moment, companies are doing it on a voluntary basis, and that means that most firms disclose something. But some firms, it might just be one page on their website that talks broadly about they care about society more broadly, whereas other firms will have stand-alone CSR reports where they give information, very detailed in terms of metrics, and explain their policies and what they do. And then there’s other firms that report it as part of their normal financial reporting. So they will, in their annual report, have information on, it could be employee safety, or how they view gender equality, or their impact on the environment.
So one of the advantages that you could imagine of a reporting mandate would be that firms presumably will report something that’s more similar, so comparability would go up. That could lower the cost of investors’ or any stakeholders’ cost of assessing how well the firm’s performing. Other advantages would be to firms themselves, because, at the moment, firms are presumably in doubt what to report, and it’s somewhat costly to go and survey all their own stakeholders, say, what do you want of information?
So you could imagine that, if you mandated it, a regulator could do that surveying, or figure that out, right. And then all firms could just use the same reporting standards. We don’t have to, every firm doesn’t have to invest in figuring out what information to disclose.
There’s of course also disadvantages to a reporting mandate. So one problem you could imagine is that if firms don’t really want to report on something, but they are forced to do it, they may just use boilerplate language, for example, which is not going to be useful to investors or anyone else. In fact, it may just confuse them, or give the wrong impression of the company. It would not be easy to implement a reporting mandate. You would need a lot of infrastructure that is not currently there. And we would need, one of the challenges would be just to define, what is CSR information? If we don’t clearly define what it is, then it would be very hard for any standard setters to define what it is that companies have to disclose. So narrowing it down, or defining what do we mean by CSR, so what are the standards that we’re going to regulate, or require disclosures for, would be a challenge.
Another challenge would be to figure out who is the relevant user group? Should we limit it to just investors, or, should it be more broadly society in general? And that would, of course, depend on what policy makers want to accomplish. So that’s two big challenges. Then, if you overcome them, and you come up with the standards, then another challenge would be to enforce them.
So currently, the enforcement of reporting standards, financial reporting standards, is done by the SEC, the Securities and Exchange Commission. But they are an organization consisting of a lot of lawyers, and some accountants, and similar professional groups, which may not be experts in CSR information. They may be good at financial disclosures, but it could require a very different skill set.
You could of course also rely on private enforcement, so have, as we do at the moment, as well, with auditors. But the current audit firms consist of a lot of CPAs, right, which are also not experts in these CSR issues. So that would likely, if everybody had to get an audit, that would require a lot more people, basically, in that industry, right. It’ll be a massive investment for society to implement this in an effective way.
So the question is whether it’s actually possible, and so there’s a lot of pressure. A lot of investors are pushing for more information, so there’s definitely sort of a will. But there are also many companies that are pushing back. The SEC themselves have been skeptical on whether it’s their job, basically, to regulate these kind of issues. But more and more investors care about this. So people saving for their retirement require that the money that they invest for retirement is not going into the tobacco industry, or is not used to exploit child labor in other parts of the world, right? So a lot of the pressure comes from investors, basically like regular people, retail investors, and also institutional investors that, they want a return, but they also want to invest in something that they believe in.
One of the benefits of a disclosure reporting mandate and a set of mandatory reporting standards would be that it takes pressure off, potentially off, firms to figure out what it is they have to disclose, right, and narrowing it down. Of course, what it then does, it just puts that pressure on the regulator, that would then have to define what is it that needs to be disclosed. And that regulator would likely come under pressure from all sorts of different interest groups that have different things they care about. Some may care about the environment, others may have other ethical concerns, you know, that they will pressure a regulator to create reporting standards for, that they can then use to push firms to change behavior in a certain way. And it’s not clear that they would be to investors’ benefit, necessarily.
It’s also not clear it would be in society’s general interest, depending on what issues it is, of course. So there are lots of questions that still need answers, and we’re not going to have those answers in the near future.
Hans B. Christensen, Luzi Hail, and Christian Leuz, “Adoption of CSR and Sustainability Reporting Standards: Economic Analysis and Review,” Working paper, July 2019.
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