Firms using new reporting method to 'greenwash' performance
New research suggests that some firms manipulate the content and tone of their company reports despite an initiative to make them more concise and balanced.
The study, led by Dr Gaia Melloni at the University of East Anglia (UEA), examined a sample of firms involved in a pilot programme to produce integrated reports. These combine usually separate financial and sustainability - environmental, social and governance - details of a company's performance.
An integrated report should communicate "concisely" about how a firm's strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of sustainable value. At the same time, it needs to be "complete and balanced", broadly including all relevant information, both positive and negative.
However the study's findings, published in the Journal of Accounting & Public Policy, show that in the presence of a firm's weak financial performance, the integrated report tends to be significantly longer, less readable and concise, and more optimistic - and so less balanced - suggesting attempts to "greenwash" the true performance picture.
The researchers also found that firms with worse social performance provide reports that are "foggier" and disclose less information on their environmental, social and governance issues.
Dr Melloni, a lecturer in accounting at UEA's Norwich Business School, said: "Our evidence implies that early adopters of integrated reporting manipulate the content and tone of their reports as an impression management strategy. The lower the performance, the poorer the disclosure.
"The results also suggest that such strategies depend not only on the level of firms' performance but also on the type of performance, for example financial versus sustainability.
"One of the main challenges when you are studying communications on sustainability is whether companies are reporting what they are actually doing. The big issue here is that companies are using integrated reporting to greenwash, to make up for very poor actions on their environmental and social impact."
The findings follow a growing consensus that increasing the amount of corporate information disclosed does not necessarily imply better disclosure. In particular, investors and financial analysts have denounced a perceived 'information overload' from financial disclosures without an increase in corresponding quality and usefulness for users.
As part of efforts to bring the length of financial reporting disclosures under control and to increase their quality, the International Integrated Reporting Council introduced the first framework for integrated reporting in December 2013, representing the latest attempt to connect a firm's financial and sustainability performance in one company report.
This emerging approach represents a shift from existing reporting practices, which generally involve the production of financial statements in accordance with financial accounting standards and a separate, mostly voluntary, stand-alone sustainability report, encompassing the social, human, environmental, and other dimensions of a firm's operations.
It has been suggested that having separate reports makes the relationship between the different dimensions of performance difficult to understand, and that integrated reports will ultimately help in reducing the reporting burden for many organisations.
Some countries, for example South Africa, have made such reports mandatory, while current EU legislation on annual financial statements addresses the disclosure of non-financial information and raises the debate on the role of integrated reporting in supporting companies to comply.
Dr Melloni and colleagues Dr Ariela Caglio from Bocconi University, Italy, and Dr Paolo Perego of Erasmus University Rotterdam, The Netherlands, focused on 148 integrated reports issued by 74 firms. They examined conciseness and completeness/balance in the reports, which covered industries including oil and gas, utilities, financial and consumer goods, healthcare, and technology and telecommunication. They looked at the quality of communication and the relationship between what was reported and performance.
Dr Melloni said producing good quality reports had implications for firms' reputations: "Companies cannot only report the positives if they want to be credible. Integrated reporting allows firms to talk about the future, something traditional reports don't particularly like. If they include less positive details but set out what actions are going to be taken to address those, shareholders will want to know that.
"If there is a consistent message and firms are seen to be taking action, it can improve their reputation and make them more appealing, for example to staff, as a potential employer and to investors."
Because integrated reporting is at an early stage, Dr Melloni said firms may not fully understand it and might need time to improve their reporting in this way.
"From a user perspective, for example shareholders, they should be sceptical about basing decisions on these reports at the moment," said Dr Melloni. "From a company perspective, they should put more effort into including reliable performance information, both financial and non-financial.
"While the results so far are not very encouraging, we are not suggesting that integrated reporting is wrong, it has very strong potential. However, companies need to plan and if they want their report quality to be good, they need to be concise and balanced."