Introduction
In 2017, it was 30 years since the Brundtland Report entitled ‘Our common future’ (UNWCED 1987) was published with the objective of drawing attention to the global need for sustainable development. Thus, the idea was that this wake-up call would trigger companies to speed up its transformation of becoming more sustainable organisations. As we will see later in this chapter, this transformation process has been fragmented. During these decades, many meritorious initiatives at both national and international level have seen the light and resulted in a faster adaption towards a sustainable development.
The European Commission (2013) argues that a central way of demonstrating how companies perform in the sustainability arena is to engage in sustainability reporting, i.e. disclose sustainability information in corporate reports (annual reports, standalone sustainability reports and/or integrated reports ). Today, most companies include a more or less pronounced focus on sustainability when they communicate with their stakeholders through corporate reports (Bondy et al. 2012; KPMG 2015). There is a vigorous practice development among companies when it comes to sustainability reporting. This chapter will highlight some challenges with this reporting practice —not the least the importance to enhance the informational quality of sustainability reporting by providing value relevant, credible and comparable information on sustainability performance .
In this process, structures and guidelines can help companies to implement, manage and report sustainability activities. Until now, voluntary efforts have primarily provided this assistance. This appears to be changing. From the financial year 2017, the new EU Directive (2014/95/EU) mandating larger entities to provide sustainability reports is in force (see section ‘Enhancing Sustainability Reporting Through the New EU Directive (2014/95/EU)’). There are also forthcoming national and international regulations concerning, e.g. inclusion of sustainable perspectives on investment valuations, emissions, disclosure rules, tax transparency , compliance and anti-corruption . All this imposes pressure on companies to provide structured and relevant information on these issues in their sustainability reporting .
The increasing trend to engage in sustainability reporting has attracted interest from research society (see Cho et al. 2015; Dienes et al. 2016; Hahn and Kühnen 2013; Parker 2005; Patten 2013). Research has primarily been focused on different perspectives on the adoption process of such practices (Adams and NcNicholas 2007; Bebbington et al. 2009; Prado-Lorenzo et al. 2009) and on determinants influencing different aspects on sustainability reporting (see Dienes et al. 2016; Hahn and Kühnen 2013). The value relevance of sustainability information has also attracted research attention (see Cahan et al. 2016; Dhaliwal et al. 2012), as well as, the puzzle of how the relationship between sustainability reporting, social performance and financial performance looks (see Behnam and MacLean 2011; Martínez-Ferrero and Frias-Aceituno 2015).
A Theoretical Background to Why Companies (Should) Engage in Sustainability Reporting
Reviewing the literature and the debate reveals that the arguments for providing sustainability reporting primarily have been for the sake of (i) gaining, maintaining and/or repairing legitimacy , (ii) improving stakeholder relations or (iii) decreasing information asymmetry . To some extent, these arguments and their underlying theories (legitimacy, stakeholder and information asymmetry ) are viewed as both interrelated and include overlapping perspectives (see Gray et al. 1995b, 1996). In order to add to an enhanced understanding of how sustainability reporting has developed and what challenges this reporting practice faces, these arguments will here be further elaborated in a theoretical perspective.
The underlying idea of legitimacy theory is that it is vital for a company to be granted legitimacy in the form of a social contract or a social licence to operate (Dowling and Pfeffer 1975; Deegan 2002). Hooghiemstra (2000) argues that this implies that a company’s success or even its survival in business society is dependent on the extent that the company are considered to operate within the norms of society (Brown and Deegan 1998). Thus, legitimacy theory suggests that no company has an inherent right to exist. Instead, every business operation is subject to the acceptance granted by society. Drawing on the ideas originating from Dowling and Pfeffer (1975), Hahn and Kühnen (2013) argue that this legitimacy is potentially threatened if society perceives that a company is not operating and conducting business in an acceptable manner. Legitimacy theory is often used to support the idea that sustainability reporting is a means for a company to gain, maintain or repair legitimacy (see de Villiers and Staden 2006; O’Donovan 2002). So, in order to understand not only why companies engage in sustainability reporting but also how they report on their sustainability activities, it is important to acknowledge that this practice is considered an important means aimed at securing legitimacy.
To be perceived as legitimate in society and accordingly receive the so fundamental social licence to operate is dependent on the perceptions that stakeholders have of the company and of its operations. According to stakeholder theory, a company needs to take into account not only the perspectives and expectations of its various stakeholders as of today but also to be aware of shifts in these perspectives and expectations (Freeman 1984). The moral view of stakeholder theory proposes that those who are impacted by or impact a company’s operations also have the right to be informed and to demand certain levels of performance (see Freeman 1984; Mitchell et al. 1997). This means that for a company to keep track of shifted perspectives and expectations, the management team must continuously analyse who its stakeholders are. The stakeholder salience framework (Mitchell et al 1997) offers a structured approach to identify the most prominent stakeholders by characterising them according to the attributes: legitimacy , power and urgency. Over the years, companies are found to provide accountability to their stakeholders (Mori Junior et al. 2014) by voluntarily report about their engagement in sustainability activities. Although it is not a typical two-way communication, sustainability reporting is often put forward as a dialogue between a company and its stakeholders (Edgley et al. 2010; Gray et al. 1995a). Considering the accentuated focus on stakeholder engagement and dialogue in the Global Reporting Initiative (GRI) G4 Guidelines, the dialogue perspective will probably be even more prominent...