Challenge to a voluntary preserve

Is legislation needed, to force companies to report on their social and environmental performance? The idea is anathema to business organisations, which say corporate social responsibility should remain the voluntary preserve of companies, free from government diktat.
But campaign groups and trade unions are stepping up pressure for mandatory reporting, arguing that only a minority of companies publish social statements and that common reporting standards would ensure greater transparency.
Today the debate moves to the European parliament, where MEPs will vote on a call by Labour's Richard Howitt for new rules requiring annual social and environmental reports alongside financial accounts, as part of a revision of European Union company law.
Mr Howitt says praise is due for companies that have taken voluntary action to honour their social and environmental responsibilities. "However, there are countless examples which show that the voluntary approach in itself is inadequate and needs to be reinforced by complementary legislative measures," he adds.
He says reporting rules could be based on the guidelines of the Global Reporting Initiative, which cover how companies handle issues ranging from child labour and workforce discrimination to pollution and customer data protection.
Some of Mr Howitt's ideas have found an echo in the European Commission, which is to adopt a CSR action plan in July. This will be based on the 300 or so responses to its green paper, published last year by Anna Diamantopoulou, EU social affairs commissioner, following a request from the Stockholm summit of EU leaders.
Ms Diamantopoulou believes the Commission can facilitate the CSR debate in Europe and is keen to incorporate social responsibility principles into EU policymaking. However, her officials say binding legislation is not yet on the cards. "CSR is a voluntary exercise for business and it's becoming more common across Europe," said one.
While environmental reporting is more firmly established than social reporting, both are increasing, a survey published by KPMG confirmed yesterday.
The survey of the top 100 companies in 19 countries puts Japan first for CSR reporting, followed by the UK, the US, the Netherlands, Finland and Germany.
Business organisations argue that voluntary pressure from stakeholders, governments and investors is enough to force the pace. Unice, the European employers' federation, says EU standards for social reporting and auditing would "run the risk of turning voluntary initiatives into a pro forma exercise, kill creativity and impose significant cost without bringing any of the desired results".
The US Council for International Business, in its response to the green paper, says CSR works only if relevant to a company's circumstances. "A one-size-fits-all reporting standard is not appropriate."
However, campaigners for mandatory reporting say this argument leaves CSR at the whim of companies, when their social obligations should be at the heart of their activities.
Next month a group of campaigning organisations, including Amnesty International, Friends of the Earth and Save the Children, will launch a drive in the UK for compulsory reporting.
"At the moment, companies can put what they want into their reports and exclude what they don't want," says Deborah Doane, head of corporate accountability at the New Economics Foundation, the radical think-tank chairing the campaign. "Our prime focus is changing UK company law - but this should happen across EU member states."
Indeed, regulation in this area is already appearing in parts of Europe. French law now requires companies to take into account, in their annual reports, the "social and environmental consequences" of their activity. In the UK, pension funds have to comment on social, environmental and ethical issues in their annual investment statements.
Simon Zadek, chief executive of AccountAbility, a UK-based institute specialising in social and ethical accounting, believes the Commission wants first to see how well the voluntary approach to reporting works. "They'll say: 'Let's give that a couple of years and see how many companies move. If there's not enough movement, let's revisit regulation.'" He believes Mr Howitt's campaign has shown what may happen further down the road. "The pressure will assist voluntary take-up [of reporting]."
Overemphasising corporate disclosure may, however, miss the point. Will people read companies' social reports? What difference will they make? Disclosure alone does not necessarily mean more ethical or honest behaviour by companies.
To increase the credibility of social reports, they need to be independently verified. "Reporting without verification is like blood without haemoglobin," says John Elkington, chair of the Sustainability consultancy.
External verification is, like social reporting, fairly new territory and has been adopted by only a few large European companies, according to the KPMG survey. To assist its uptake, AccountAbility will next month publish AA1000S, a guide to independent assurance of social and environmental reports. Its purpose is to complement the GRI and enable credible, common standards to take hold across the world.
The case for independent scrutiny of CSR reports has been boosted by a recent California Supreme Court ruling, as Elliot Schrage, former senior vice- president of global affairs at Gap, explained in the FT earlier this week. The court ruled that Nike's claims about the benefits of its corporate code of conduct amounted to little more than advertising or public relations.
Mr Zadek says the ruling, which could still be overturned on appeal, may have shifted the balance between Europe's softly-softly approach to CSR and the US's compliance-based approach.
"It could be the US that forces international compliance [on reporting] more quickly than Europe, in the same way that the Federal Sentencing Guidelines did on business ethics," he says.
Today's European parliament vote, whatever the outcome, is another warning shot for Europe's companies. Martin Le Jeune, who advises companies as head of corporate responsibility at Fishburn Hedges, the corporate communications group, says CSR is in danger of being confused with compliance.
"CSR should mean doing more than companies are required to do by legislation," he says. "If more and more businesses are persuaded that CSR is what they're required to do, the lowest common denominator will rule."