Australian companies are reporting better social and environment performance but many gains are generated by revising past outcomes, particularly when a chief executive’s own remuneration is tied to the results, a new study has found.
The study, “CSR Restatements: Mischief or Mistake?”, examined 674 instances of corporate social responsibility (CSR) reporting from the Top 500 ASX-listed companies between 2004 and 2020.
The researchers found about 17% of a CEO’s bonus pay was linked to sustainability targets alone, potentially lifting payouts by around $200,000 if targets were met. All up, 33.5% of all restatements of CSR outcomes were for one or more CSR goals that were tied to bonuses.
Only about 15% of revisions of past outcomes were to correct an error, compared with 69% resulting from measurement changes. After back-dated revisions, the following year showed an average 28.3% improvement of the metric being assessed, a gain that rose further to 36% when a CEO’s bonus was linked to the outcome.
“Our results show that CSR contracting is associated with a greater number of CSR restatements, particularly when social performance measures are contained within CEO compensation contracts,” the paper, published in the Journal of Management Accounting Research, found.
“Overall, our results suggest that compensation provides an incentive to manipulate CSR performance through restatements.”
The authors, associate professor Helen Spiropoulos from the University of Technology Sydney and Rebecca Bachmann from Macquarie University, said CSR reporting was already perceived as “greenwashing” – the selective disclosure of positive environmental or social performance and the withholding of negative information.
One motivation for the study was that CSR reporting remained “largely unregulated across the globe”. Separate research has identified that 37% of CSR reports from Global Fortune 250 firms included revisions with a bias towards overstatement, the authors noted.
“CSR reporting is [also] an important issue given its increasing occurrence and pressure to conduct business in a way that minimises any negative social and environmental impacts,” the paper said.
The authors hope the findings will be considered by the International Sustainability Standards Board. The body plans to draft sustainability reporting standards but has yet to consider issues surrounding metrics and measurement, it said.
“Currently, there is significant discretion in how [environmental, social and governance] performance is measured and reported, and one way to show improved performance in the current year, is to adjust or restate last year’s score to reflect worse performance relative to this year,” Spiropoulos said in a statement.
Bachman said: “Auditors who will be required to audit environmental performance disclosures under forthcoming sustainability assurance standards should also investigate the legitimacy of restatements.”
“The irony is striking – what was intended to be a mechanism to drive positive environmental and social change may instead act as an incentive to manipulate sustainability performance.”
