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32 INTERNAL AUDITING JANUARY / FEBRUARY 2022 CORPORATE RESPONSIBILITY

C orporate social responsibility (CSR) — despite its sometimes complex meaning — is a con- cept that has been around for decades. Many companies over

the years have paid significant attention to CSR and its associated issues. These issues range from corporate profitability and eco- nomic stability to corporate decision-making and behavior (ethical and moral) and often include ecological and environmental sus- tainability. CSR, as a result, is correlated with the environmental, social, and governance (ESG) aspects of an organization. Fortu- nately, many public and private companies are being evaluated on their ESG practices by various third-party providers, which gives practitioners and academics a proxy for a firm’s CSR performance. This study gives a brief overview of those

ratings, their scales, and their method- ologies. In addition, this article identifies some of the CSR characteristics, practices, and policies exhibited by some of the most sustainable corporations in the world. There are many financial implications

for firms that use CSR practices. Organi- zations can benefit from understanding

these implications, as it could serve as mo- tivation to review their own CSR policies. Moreover, management accountants and internal auditors can learn from the financial practices of socially responsible organiza- tions and develop appropriate strategies in their own financial management operations. They can even go beyond their initial area of expertise and create more sustainable models in other areas of their organization. This study then concludes with recom-

mendations for accounting and auditing practitioners interested in implementing and maintaining a sustainable — and ethical — corporate environment.

Prior studies Although socially responsible corporations have been around since the early 1930s, the inherent ambiguity of CSR makes defining it a complex task. Four general areas, according to Sheehy (2015), contribute to the complexity. 1 The first area is business, where it is questionable whether a particular organization’s policies and actions — and hence, the organization itself — can legit- imately claim to be socially responsible. The second is the attempt at defining it, which often fails to address the core issue: identifying the nature of the phenomenon. The third area centers on political parties

CORPORATE SOCIAL RESPONSIBILITY: INSIGHT USING AN ESG RATING

JAMES W. SUNDAY

J A M E S W. S U N D AY, C M A , is an assistant professor of finance at King’s College in Wilkes-Bar re, Pennsylvania. He has over 10 years of experience in corporate accounting and finance.

E S G , r e f e r r i n g t o a c o m p a n y ’ s C S R - l i k e e n v i r o n m e n t a l , s o c i a l , a n d g o v e r n a n c e p r a c t i c e s , i s

b e c o m i n g a n i n c r e a s i n g l y p o p u l a r w a y f o r i n v e s t o r s t o e v a l u a t e c o m p a n i e s .

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attempting to define CSR. According to Sheehy (2015), someone’s political philoso- phies ultimately influence them. In turn, this causes them to define and use CSR to advance particular political agendas for corporate and economic policy. Lastly, the fourth area arises from the

struggle governments face in defining CSR to make it acceptable to businesses while still driving behavioral change. Akin to political parties, governments often have their own agendas, which often conflict with those of academics and businesses. This dynamic only further complicates the definition of CSR. Although these issues muddle all that

CSR entails, there have been attempts at providing a conceptual framework to guide businesses towards being more socially responsible. Carroll (1979) developed his corporate social performance (CSP) con- ceptual model in the late 1970s in an explicit attempt at defining certain obligations any given business has to society. The first aspect of this model contained

a four-part framework, which included the economic, legal, ethical, and discretionary responsibilities that society expected from businesses. The second aspect of this model concerned the range of social issues (e.g., consumerism, environment, and discrim- ination) that management needed to address. And lastly, there was a social responsiveness continuum, where businesses needed to choose a response philosophy. According to Carroll (1979), this model could help managers conceptualize the key issues in social performance, systematize thinking about social issues, and improve planning and diagnosis in the social performance realm.2

In the years following the development of the conceptual model, CSR’s definition expanded further with more empirical research. The concept eventually gave way to alternative theories and themes, such as stakeholder theory, business ethics theory, and corporate citizenship. Many of these theories embraced the CSR mindset and, according to Carroll, were compatible with it. As the expansion of CSR grew throughout

the 1990s, there was a survey done of 50 academic leaders to determine what topics management researchers thought were

important social issues in the management field. Topics ranked highly included busi- ness ethics; international, social issues; CSP; business and government/public policy; and environmental issues.3 Many years later, in an overt attempt at resolving the various definitional disputes of CSR, Dahlsrud, through a content analysis of existing definitions, developed the five dimensions of CSR: environmental, social, economic, stakeholder, and voluntariness.4

Altogether, he found 37 different definitions of CSR, originating from 27 authors from 1980 –2003. Organizations that exhibited CSR-like

qualities as outlined in these prior studies tended to behave differently. Their decisions, as compared to organizations that did not exhibit CSR tendencies, resulted in different outcomes — especially in finance and accounting. Orlitzky et al. conducted a meta-analysis

of 52 studies over 30 years to better un- derstand the relationship between CSP and corporate financial performance (CFP) and found a positive association between the two. Specifically, they suggested that cor- porate virtue in the form of social respon- sibility — and, to a lesser extent, environ- mental responsibility — was rewarding in more ways than one and would likely lead to enhanced financial performance. However, the results also suggested CSP and CFP operationalizations moderated the positive association. That is to say, “CSP appears to be more highly correlated with accounting- based measures of CFP than with market- based indicators, and CSP reputation indexes are more highly correlated with CFP than with other indicators of CSP.” 5 However, because the study showed a positive associ- ation between CSP and CFP, managers were more open to implementing socially respon- sible practices within their organizations. There have been more recent studies that

have investigated the role of CSR on financial misconduct. In one such study, Kim et al. examined whether socially responsible firms behaved differently from other firms in regard to their financial reporting. They conducted their research on a CSR score based on CSP information from Kinder et al. 2006 (KLD), whose ESG ratings were among the oldest and most influential and, by far, the most widely analyzed by aca-

33CORPORATE RESPONSIBILITY JANUARY / FEBRUARY 2022 INTERNAL AUDITING

BECAUSE THE STUDY SHOWED A POSITIVE ASSOCIATION BETWEEN CSP AND CFP, MANAGERS WERE MORE OPEN TO IMPLEMENTING SOCIALLY RESPONSIBLE PRACTICES WITHIN THEIR ORGANIZATIONS.

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demics.6 Specifically, the authors analyzed categories such as community, diversity, employee relations, and the environment to discern whether CSR firms delivered more transparent financial information to investors than non-CSR firms. The results of their study suggested that overall, CSR firms tended to be more conservative in their accounting and operating decisions. As a result, they were less likely to manage earnings through discretionary accruals, manipulate operating activities, and be the subject of SEC investigations as evidenced

by Accounting and Auditing Enforcement Releases (AAER’s) against top executives.7

In another study, Lanis and Richardson (2018) used a sample of 5,007 firm-year observations over the 2003–2009 period to examine the impact of outside directors on the association between CSR perfor- mance and tax aggressiveness. In addition to discovering that the presence of outside directors magnified the negative association between CSR performance and tax aggres- siveness, the study also provided evidence stating firms with better CSR performance were less likely to engage in tax aggressive-

34 INTERNAL AUDITING JANUARY / FEBRUARY 2022 CORPORATE RESPONSIBILITY

EXHIBIT 1 Overview of Third Party ESG Report and Ratings Service Providers

Source: Huber, B.M. and Comstock, M. “ESG reports and ratings: What they are, why they matter,” Harvard Law School (July 27, 2017). Available at: https://corp- gov.law.harvard.edu/2017/07/27/esg-reports-and-ratings-what-they-are-why-they-matter.

Provider Name Brief Overview Rating Scale Methodology

Bloomberg ESG Data Service

Collects ESG data for over 10,000 publicly-listed companies globally where it is integrated into Bloomberg Equities and Intelli- gence Services

Out of 100 Evaluates companies on an annual basis, collecting public ESG information disclosed by companies through CSR or sustainability reports, annual reports and websites, and other public sources, as well as through com- pany direct contact

Corporate Knights Global 100

A Toronto-based company, pub- lishes an annual index of the Glob- al 100 most sustainable corpora- tions in the world in their Corporate Knights Magazine

Out of 100 Based on publicly disclosed data and is re- leased annually in January; all industries and geographies are considered and a number of key performance indicators are analyzed

DowJones Sustain- ability Index (DJSI)

The first global index to track sus- tainability-driven public compa- nies based on RobecoSAM’s ESG analysis; broken down into DJSI World (tracking the world’s lead- ing companies), DJSI Regions and DJSI Country

Out of 100 Represents the top 10% of the largest 2500 companies across 60 industries in the S&P Global BMI (Broad Market Index); scores are derived from RobecoSAM’s annual Corpo- rate Sustainability Assessment (CSA) where- by 2,500 publicly traded companies are in- vited to participate in the CSA for possible inclusion in the DJSI World

MSCI ESG Research One of the largest independent providers of ESG ratings; as part of the MSCI Group, they provide ESG ratings for over 6,000 global com- panies and more than 400,000 equity and fixed income securities

AAA-CCC scale Looks at ESG key issues, divided into pillars and themes; data is collected from govern- ment databases, company disclosures, macro data at segment or geographical lev- el from academic, government, and NGO databases

RepRisk Provides ESG reports for more than 84,000 private and public compa- nies in 34 sectors globally. RepRisk also provides ESG reports for over 14,000 NGOs, 10,000 governmen- tal bodies, and 20,000 projects

AAA to D (being the worst) Screens relevant data from over 80,000 me- dia and stakeholder sources every day, which is then funneled to ensure its relevance

Thompson Reuters ESG Research Data

Provides ESG data on over 6,000 public companies after acquiring Asset4, the first agency to provide raw ESG data to investors

Percentile rank scores (avail- able as both percentages and letter grades from A+ to D-). Two scores available: 1) Thomson Reuters ESG Score and 2) Thomson Reuters ESG Controversy Score

Covers 6,000 public companies across more than 400 different ESG metrics; of these 400 ESG metrics, Thomson Reuters selects the most relevant data points and groups them into 10 categories

ness. This forced organizations to consider the link between CSR, tax aggressiveness, and reputational capital.8

Additionally, Bae et al. relied on SEC AAER’s to construct a sample of financial misconduct to determine how a firm’s rep- utation and performance interplayed when faced with a reputational crisis caused by financial wrongdoing. Using KLD data for CSR performance, they found that in the short term, firms with good CSR perfor- mance suffered fewer market penalties upon the revelation of financial wrongdoing. They also found that increasing CSR engage- ment after the wrongdoing could be an effective remedy, especially when it came to increasing the firm’s likelihood of survival. That is to say, the misbehaving firms’ post- misconduct CSR efforts were negatively associated with delisting probabilities and positively associated with stock returns. These conclusions were not only important in understanding the role of CSR in a rep- utational crisis but also added insight into the role CSR played in an organization’s financial performance.

ESG ratings CSR, because of its complex nature and continual definitional disputes that persist even today,, has become a difficult concept for outsiders to quantify within organiza- tions. However, one criterion that has been useful for investors has been a company’s ESG rating. ESG, referring to a company’s CSR-like

environmental, social, and governance prac- tices, is becoming an increasingly popular way for investors to evaluate companies. In addition to investors, researchers and prac- titioners have also come to rely on ESG ratings as a way to assess a firm’s level of sustainability and overall CSR performance.9

In a 2012 empirical study published in The Guardian, the authors compared a matched sample of 180 U.S.-based companies, 90 of which were classified as high-sustainability and another 90 as low-sustainability. The high-sustainability organizations had char- acteristics similar to those in prior studies assessing a firm’s CSR status — specifically, those with a governance structure that ex- plicitly accounted for environmental, social, and financial performance. Much like prior

studies that focused on outcomes of those exhibiting CSR, the results of this study revealed that a company’s sustainability practices make a difference. Companies that manage their ESG performance attract and keep more employees and have more loyal customers, which ultimately leads to better financial performance and more value for their shareholders.10

The demand for transparency in how companies use different forms of capital and how their activities affect society has resulted in a proliferation of ESG reports and associated ESG data and ratings. Many organizations are also trying to develop a more rigorous and systemic reporting system for ESG information.11 These reports, com- piled by various third-party providers, deliver a valuable source of information not only to investors, but also to asset man- agers, financial institutions, and other stake- holders. With these reports, they were able to assess a company’s ESG performance compared to their peers and over time. See Exhibit 1 for an overview of some well- known third-party ESG report service pro- viders as documented in a 2017 Harvard Law School forum on corporate governance.

Evidence from the Corporate Knights global 100 ESG rating Corporate Knights is a specialized media and investment research firm based in Toronto that provides an annual ranking of corporate sustainability performance. Submissions from companies are not required as all rankings are based on publicly disclosed data (e.g., financial filings, sus- tainability reports, etc.). To be eligible, the company must be publicly listed and total more than $1 billion in gross revenue. All industries and geographies are automatically considered. They then are screened for industry or egregious practices. On January 25, 2021, Corporate Knights released its 17th annual ranking after a rigorous assess- ment of 8,080 companies. In devising their annual ranking, Cor-

porate Knights followed a philosophical perspective containing a set of variables that organizations were required to adhere to. These variables included relevance, transparency, objectivity, public data, com- parability, engagement, and stakeholders.

35CORPORATE RESPONSIBILITY JANUARY / FEBRUARY 2022 INTERNAL AUDITING

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MANY ORGANIZATIONS ARE ALSO TRYING TO DEVELOP A MORE RIGOROUS AND SYSTEMIC REPORTING SYSTEM FOR ESG INFORMATION.

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36 INTERNAL AUDITING JANUARY / FEBRUARY 2022 CORPORATE RESPONSIBILITY

EXHIBIT 2 Corporate Knights 2021 Global 100 Ranking Methodology

Source: “The 2021 Global 100: Overview of Corporate Knights rating methodology,” Corporate Knights. Available at: https://www.corporateknights.com/wp-content/uploads/2021/01/2021-Global-100-Methodology.pdf.

Key Performance Indicator Group Key Performance Indicators

Environmental Metrics

Energy Productivity

GHG Productivity

Water Productivity

Waste Productivity

VOC Productivity

NOx Productivity

SOx Productivity

Particulate Matter Productivity

Clean Revenue

Clean Investment

Social Metrics

Injuries

Fatalities

Employee Turnover

Paid Sick Leave

CEO-Average Employee Pay

Governance Metrics

Sustainability Pay Link

Non-males in Executive Management

Non-males on Boards

Racial Diversity Among Executives

Racial Diversity on Board of Directors

Supplier Sustainability Score

Economic Metrics

Percentage Tax Paid

Pension Fund Quality

Sanctions Deductions

Companies are only scored on key performance indicators (KPIs) that are deemed “priority KPIs” for their re- spective Corporate Knights Industry Group + the twelve universal KPIs. The twelve universal KPIs are percent- age tax paid, pension fund quality, supplier score, non-males in executive management, non-males on boards, racial diversity among executives, racial diversity on board of directors, paid sick leave, sustainability pay link, sanctions deductions, clean revenue, and clean investment.

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The ranking process involved several steps. All publicly listed companies with gross revenues of $1 billion were screened for sustainability disclosure practices, financial health, product categories, and behavior and financial sanctions. Although companies who failed any of the above screens could still be included in the ranking through screen overrides, all companies selected were scored on 24 key performance indi- cators (KPIs). See Exhibit 2 for a breakdown of all KPIs measured for 2021. Although these companies represented

many different sectors and regions of the world, they each showed a greater com- mitment to CSR than many of their peers. In addition to scoring well on the KPIs established by Corporate Knights, many of these companies had their own set of criteria on which they measured success in CSR performance. Referring again to Dahlsrud’s (2008) five

dimensions of CSR, companies with good CSR practices typically embody all or some of the following dimensions: environmental, social, economic, stakeholder, voluntariness. The environmental dimension refers to the natural environment and may involve a company being a steward for the environ- ment. The social dimension refers to the relationship between business and society and may involve a company integrating social concerns into their business opera- tions. The economic dimension refers to socio-economic or financial aspects and includes looking at CSR in terms of a

business opera- tion. The stake- holder dimension refers to stake- holders or stake- holder groups and details how orga- nizations interact with their stake- holders (i.e., their

employees, suppliers, customers, and com- munities). Finally, the voluntariness dimen- sion refers to actions not prescribed by law and may involve a company’s ethical values beyond its legal obligations. These five dimensions can be important

in understanding an organization’s com- mitment to CSR. For a better perspective on how the most sustainable companies in

the world implement CSR practices into their operations, one can look for these dimensions. Exhibit 3 provides a breakdown by dimension(s) of CSR practices within some of the companies listed in the Corporate Knights Global 100 ranking for 2021.

Recommendations Management accountants and internal audi- tors serve a unique role in helping organi- zations follow CSR, namely by implementing and maintaining a sustainable, corporate, and ethical environment. In Dahlsrud’s (2008) study, he identifies the environment as one of the five dimensions of CSR, and as Exhibit 3 reveals, many of the most sus- tainable organizations consider this an im- portant element of society. Financial pro- fessionals can take an in-depth look at these organizations and learn how they formulate and maintain their environmental policies. In addition, they can help an organization comply with legal standards in regards to the reporting of environmental liabilities within the Sarbanes–Oxley Act of 2002. Although many legal standards are vol- untary, there are many aspects of environ- mental accounting, such as environmental audits, that are encouraged by government agencies such as the EPA.12

Moreover, with voluntariness being another dimension of CSR identified by Dahlsrud, organizations that implement a robust environmental accounting system will further cement social responsibility as part of their reputation. This will allow them to take a more proactive approach in incorporating environmental accounting into their overall business strategy. Management accountants and internal

auditors should anticipate ways to add value to the organization. In addition, if they want to be known for having a broad under- standing of the organization, they need to see beyond their area of expertise and develop business acumen that fits the orga- nization’s needs. Accountants and auditors can add value

to their organization in more ways than just financial. One of such ways is to establish a relationship between sustainable practices, corporate strategies, and prof- itability. They can accomplish this by using a balanced scorecard. A balanced scorecard

37CORPORATE RESPONSIBILITY JANUARY / FEBRUARY 2022 INTERNAL AUDITING

ORGANIZATIONS THAT IMPLEMENT A ROBUST

ENVIRONMENTAL ACCOUNTING SYSTEM

WILL FURTHER CEMENT SOCIAL RESPONSIBILITY

AS PART OF THEIR REPUTATION.

can help overcome certain barriers assoc- iated with incorporating sustainable or socially responsible activities into finan- cial strategy — namely, the inability to measure these effects on shareholder value, the inability to document the effects on financial performance, and the lack of a

standard decision-making framework that considers environmental factors. A balanced scorecard also provides a framework for integrating qualitative measures into cor- porate operations and explicitly links sus- tainability with corporate goals, objectives, and strategies.13 Through the balanced

38 INTERNAL AUDITING JANUARY / FEBRUARY 2022 CORPORATE RESPONSIBILITY

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EXHIBIT 3 CSR Practices of the Most Sustainable Companies in the World as Identified by the Corporate Knights in 2021

Company Name Country CSR Dimension(s) CSR Practice

Orsted A/S Denmark Environmental; Social

Orsted’s entire business is focused on addressing climate and to create a world that runs entirely on green energy. They also conduct an assessment each year to determine which key so- cietal challenges are relevant to their business and how they can improve them.

Chr. Hansen Holding A/S

Denmark Environmental; Social

Chr. Hansen has four operational focus areas: environment and climate, workplace responsibility, business integrity and responsible sourcing with 2022 targets defined for each area. Chr. Hansen continues to strengthen internal processes and define new initiatives for ensuring a strong social, environ- mental and responsible operational foundation.

Neste Oyj Finland Environmental; Stakeholder

The world’s largest producer of renewable diesel and renew- able jet fuel refined from waste and residues, Neste Oyj partic- ipates in the development of their industry together with rele- vant associations and NGOs and actively engage in open dia- logue with all their stakeholders.

Cisco Systems Inc United States Voluntariness

Cicso Systems Inc positively impacted 469 million people, as reported by their nonprofit grantees since FY 2016. In addi- tion, they set CSR goals, implement plans, and measure per- formance through an annual CSR materiality assessment.

Autodesk Inc United States Environmental,

Social, Voluntariness

Autodesk Inc. donates software to nonprofits, startups, and entrepreneurs who are using design for environmental or so- cial good. Eligible organizations receive Autodesk software and technology for 3D design, engineering, visualization, and simulation.

Novozymes A/S Denmark Environmental

Novozymes actively promotes the development and increased use of renewable energy. Their solutions enable the develop- ment of low-carbon fuels in transportation, which represents a significant share of the global energy mix and related GHG emissions. Additional, in partnership with industry organiza- tions, Novozymes focuses on maintaining direct dialogue with influencers and policy makers to advocate for the use of re- newable fuels.

ING Groep NV Netherlands Social, Economic

Together with partners, ING started the Think Forward Initia- tive: to gain a deeper understanding of the behavior behind fi- nancial decision-making and then harness those insights to help people make financial decisions that are better for them, and ultimately better for society.

Banco do Brasil SA Brazil Environmental,

Social, Stakeholder

Banco de Brasil’s socio-environmental risk management structure follows policies and processes approved by Senior Management. Their goal is to identify, classify, evaluate, mon- itor, mitigate and control socio-environmental risks resulting from impacts on the well-being of our stakeholders; as well as environmental risks relating to the possibility of adverse ef- fects caused by the company.

scorecard framework, accountants and auditors can take the lead within their orga- nizations by developing an approach that will work best with a company’s strategic goals, corporate culture, and socially re- sponsible actions, all of which are important to their stakeholders. The balanced scorecard is a performance

management tool, and although many aspects of it that are difficult to comprehend and take time to learn, most should be emphasized over the course of an under- graduate accounting and auditing curricu- lum. Accounting and auditing programs in general, however, should also place a heavy emphasis on an ethical education that helps future financial professionals understand the value of organizational CSR practices. Because accountants and auditors can play an important, strategic role in helping their organizations become more sustainable, the role of education in establishing an ethical framework for these individuals cannot be understated. While those with an ethical framework

may find it ideal to work in an organization that adheres to CSR practices, things are not always as they seem. Therefore, it is vastly important for a student’s education to encompass several approaches to pro- fessional ethics; for it to analyze and evaluate ethical decisions; and for it to apply ethical reasoning to real-life scenarios. This frame- work will guide them in the implementation and maintenance of a corporate, ethical environment in their firm, and thus mini- mize the misconduct and unethical practices that all too often plague organizations that are not practicing CSR. n

N OT E S 1 Sheehy, B., Defining CSR: Problems and solutions,

Journal of Business Ethics 131 (2015): 625–648. 2 Carroll, A., A three-dimensional conceptual model

of corporate performance, Academy of Management Review 4, no. 4 (1979): 497–505.

3 Carroll, A., Corporate social responsibility: Evolution of a definitional construct, Business and Societ y 38, no. 268 (1999).

4 Dahlsrud, A., How corporate social responsibility is defined: An analysis of 37 definitions, Corporate Social Responsibility and Environmental Management 15, no. 1 (2008): 1–13.

5 Orlitzky, M., Schmidth, F. L., and Rynes, S. L., Corporate social and financial performance: A meta- analysis, O r g a n i z a t i o n S tu d i e s 24, no. 3 (2003): 403–441.

6 Chatterji, A.K., Levin, D. I., and Toffel, M. W., How well do social ratings actually measure corporate social responsibility?, Journal of Economics & Man- agement Strategy 18, no. 1 (2009): 125–169.

7 Kim, Y., Park, M. S., and Wier, B., Is earnings quality associated with corporate social responsibility?, The Accounting Review 87, no. 3 (2012): 761–796.

8 Lanis, R., and Richardson, G., Outside directors, corporate social responsibility performance, and corporate tax aggressiveness: An empirical analysis, Journal of Accounting , Auditing & Finance 33, no. 2 (2018): 228–251.

9 Hubel, B. and Scholz, H., Integrating sustainability risks in asset management: the role of ESG exposures and ESG ratings, Journal of Asset Management 21 (2020): 52–69.; Skousen, C., and Sun, L., Do employee dimension ratings reflect employee per- formance? Evidence from MSCI’s ESG database, Applied Economic Letters 26, no. 14 (2019): 1182– 1185.

10Eccles, R., Ioannou, I., and Serafeim, G., Is sustainability now the key to corporate success? Companies that adopted environmental, social and governance policies in the 1990s have outperformed those that didn’t, T h e G u a r d i a n (Jan 6, 2012). Available at: https://www.theguardian.com/sustain- able-business/sustainability-key-corporate-success.

11 Kotsantonis, S., and Serafeim, G., Four things no one will tell you about ESG data, Journal of Applied Corporate Finance 31, no. 2 (2019): 50–58.

12Creel, T., Environmental reporting practices of the largest U.S. companies, Management Accounting Quarterly 12, no. 1 (2010): 13–19.

13Butler, J., Henderson, S.C., and Raiborn, C., Sus- tainability and the balanced scorecard: Integrating green measures into business reporting, Management Accounting Quarterly 12, no. 2 (2011): 1–10.

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