Corporate Environmental Reporting (CER) and Socially Responsible investing

Feedback to class regarding case studies Pakistan steel mills case 2

Corporate Environmental Reporting (CER) In recent year environmental issues have attracted many sectors of the society. CER is initiated by the organisations like Coalition for Environmentally Responsible Economies (CERES). It provided the first principles for companies wishing to discharge accountability to the environment. Further supported by European Federation of Accountants and Global Reporting Initiative. 3

Corporate Environmental Reporting (CER) Earlier studies such as (Deegan and Rankin 1996) suggested that groups of users demand environmental performance information in the annual reports. However, even now many companies are not providing the required information/reporting. In the following slides, some of the incentives for the CER has been listed: 4

Corporate Environmental Reporting (CER) Incentives for CER: Solomon and Lewis (2002) suggests that such incentives loosely can be arranged into 4 categories namely, markets, social, political and accountability incentives 5

Corporate Environmental Reporting (CER) Incentives for CER (Cont’d): Solomon and Solomon (2004) summarises such incentives into the following categories: – To improve the Cos’ image – To market the company/products – Peer pressure from companies in the same industry – To comply with regulations – Pressure from consumers/customers – To attract investment – As an acceptance of change in the society’s ethics – To acknowledge social responsibility – As a result of the company’s ethics – As a form of political lobbying – To meet the demand for environmental information Examples of retail industry in the UK 6

Corporate Environmental Reporting (CER) Incentives for CER (Cont’d): Examples of retail industry in the UK tesco_and_society_2013_ipad.pdf tesco_cr_review_2012 (1).pdf 7

Corporate Environmental Reporting (CER) Disincentives for CER Reporting: Growth in the CER is still far behind the satisfaction of the users’ requirements. Studies by different researchers have identified the different disincentives for CER reporting by the companies, which have been summarised in the following lines (Grey et al 1993, Solomon and Lewis 2002). Reluctance to supporting sensitive information General lack of awareness if environmental issues There is no legal obligation for the companies in some countries to do so Possible damages to the companies reputation Avoiding information to the competitors Cost of disclosure Inability to gather information etc. 8

Corporate Environmental Reporting (CER) Users of CER Reporting: United Nations Environmental Programme (UNEP), has identified the following user groups: – Employees, legislators and regulators, local communities, investors, suppliers, customers and consumers, industry associations, environment groups, science and education, and the media. Solomon (2000) survey shows that legislators and regulators, employees, local communities, and ethical investors are considered to be the main recipients of the CER. 9

Corporate Environmental Reporting (CER) Qualitative characteristics of CER: Solomon and Solomon (2002) have summarised the qualitative characteristics of the CE reporting as the following; – A true and fair value, understandability, relevance, faithful representation, reliability, freedom from errors, consistency, valid description, substance over form, neutrality, completeness, corresponding information from the previous period, confirmation of information, timeliness, comparability, materiality, predictive value, prudence. Among these factors the most important identified are understandability, relevance, reliability, faithful representation, freedom from errors and a true and fair value are being counted as the most important. 10

Corporate Environmental Reporting (CER) Contents of an environmental report: Solomon and Solomon (2002) have summarised the contents of an environmental report as; – Environmental] statement by the company chairman – Environmental statement policy – Environmental strategy statement – Environmental management system – Management responsibilities for the environment – Environmental audit – Independently verified environmental disclosure – Legal environmental compliance – R&D and environment – Product life cycle design – Product packaging – Product impact etc A survey shows that 49% of the top 100 companies are producing a separate CER report (Solomon and Solomon 2002) 11

Socially Responsible Investment (SRI) Socially Responsible Investment (SRI): Terminology and definitions: – SRI; “social investing, social responsible investing, socially aware investing, ethical investing, value based investing,,,,all describe the same concept. These terms tend to be used interchangeably within the investment industry to describe an approach to investing that integrates personal values and societal concerns into the investing decision making”. (Steve Scheuth) – SRI combines investors’ financial objectives with their commitment to social concerns such as justice, economic development, peace or healthy environment” (UK Social Investment Forum) 12

Socially Responsible Investment (SRI) Socially Responsible Investment (SRI): Of recently, the institutional investors (IIs) are playing an important role in progressing CSR and have an important role in promoting more responsible business behaviour. As discussed earlier too, that IIs have major stakes in the companies (such as the pension funds etc), and they are very influential and can exert their influence on the companies looking for investment. Therefore by adopting socially responsible stand these IIs can contribute towards the CSR activities of the companies. Similarly experiences have shown that companies which do not take interest in the social, ethical environmental issues (SEE) have suffered financially in the past few years due to their irresponsible behaviour. 13

Socially Responsible Investment (SRI) Socially Responsible Investment (SRI): Therefore institutional investors who have got the majority of the shares in the UK corporation are working on this strategy, thus compelling the companies to adopt more and responsible attitude. 14

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Socially Responsible Investment (SRI) Some Recent Statistics on Socially Responsible Investment (SRI): In 2001, £4 billion was invested in ethical funds. A market research suggests that 77% of British public would like to invest their pension funds in a socially responsible way. SRI Strategies: 1.Screening (into positive and negative list) 2.Best in Sector Approach 16

Socially Responsible Investment (SRI) The Financial Performance of SRI Funds While the previous slides have stated that stakeholders like SRI however, it is also a fact that they want it without a compromise on their returns. DS!!! 17

Socially Responsible Investment (SRI) References: Corporate Governance and Accountability (2002), by Jill Solomon and Aris Solomon. John Wiley and Sons Ltd, Sussex; chapters 09 and 10, selected topics 18