Challenges in Managing Sustainable Business

This chapter sets out to give an exposé of how sustainability reporting has developed into a global reporting practice. It gives a theoretical background to why companies (should) engage in sustainability reporting. Three arguments for providing sustainability reporting are at focus i) gaining, maintaining and/or repairing legitimacy, ii) improving stakeholder relations and iii) decreasing information asymmetry. Although sustainability reporting today has become a global reporting practice, this practice has been criticised throughout the years. The chapter highlights different types of critique: critique against companies’ engagement in sustainability activities per se, critique against sustainability reporting being mere window-dressing (green-, blue- or even SDG-washing) and critique against the poor informational quality of sustainability reporting. This leads the way to a focus on how a new set of voluntary-sustainability standards has been developed to help companies to implement, manage and report on sustainability activities. Using the framework by Behnam and MacLean (2011), three types of voluntary-sustainability standards are discussed: principle-, reporting- and certification-based standards. Attempts to develop mandatory requirements are also at focus in this discussion. In the latter part of the chapter, a financial market perspective is put on sustainability reporting. This reveals how the scepticism among the actors on the financial markets has decreased as the global sustainable investment market has increased. The chapter ends with highlighting the EU Directive (2014/95/EU), which from financial year 2017 mandates the largest EU companies to provide sustainability information in their corporate reports. This raises the question, whether the Directive will be able to enhance the informational quality of sustainability reporting.

Integrated reporting (<IR>) is currently a hot topic for academic research because of the practical challenges businesses encounter when implementing it. Motivated by the results from the IIRC’s call for feedback on the International <IR> Framework (<IRF>) implementation, this chapter focuses on the challenges of integrated thinking and examines the extant academic literature to offer contributions for future research based on <IR> practice. We find that integrated thinking suffers from significant conceptual, theoretical and practical challenges, which obstruct the claimed benefits deriving from the adoption of <IR>. Therefore, this chapter contributes to rethinking the paradigm of integrated thinking as an internal managerial practice, and calls for pragmatic research investigating <IR> internal practices and integrated thinking. Within third-stage <IR> research, that provides a critical and performative assessment of <IR> in action, we advocate that researchers need to shift the focus from reporting to internal practices. Accordingly, we claim that managers need to abandon the compliance-driven logic underpinning external reporting to foster integrated thinking and unlock its potential in practice.

During the past 20 years, corporate social reporting has made a journey from being a niche reporting product by few green companies into the mainstream norm in corporate reporting, as more than 90% of all Swedish companies do report about sustainability by providing information on environmental, social and financial resources. Employees are often regarded as the companies’ most valuable resource. Nowadays, businesses tend to report about their human capital by including voluntary disclosures in corporate reports. Thus, the more recent problem stems in what to include and how to display it. To assist corporations, reporting frameworks from the Global Reporting Initiative (GRI) or International Integrated Reporting Council (IIRC) gained popularity. By specifically addressing that human capital is one of the core capitals, the IIRC inevitably bring the reporting of human capital on the corporate reporting agenda. The purpose of this paper is to provide insight on how Swedish state-owned enterprises make disclosures about human capital in their corporate reports. Furthermore, this study aims to identify patterns in disclosure and provide illustrating examples as well as with respect to the application of integrated reporting in comparison with traditional corporate reporting. This exploratory study uses a disclosure index based on the GRI framework to collect the data. The results show that the state-owned enterprises (SOEs) applying integrated reporting tend to disclose more about employees than enterprises that follow traditional corporate reporting.

Financial analysts’ role as information intermediaries between management teams and investors is vital for the efficient allocation of resources on the stock market. The increased focus on sustainability information in corporate reports has affected financial analysts in their important work of interpreting, assessing and communicating value-added information to their clients, i.e. the investors. The challenges they face relate to the ambiguous nature of sustainability information and its difference from traditional financial information. How do analysts reach through this smokescreen? How do analysts make sense of sustainability information, and how do they give sense to this information when they provide investment advices to their investors? In this chapter, these challenges are addressed from a cognitive-frame perspective. We argue that the first part of 2000s was characterized by cognitive dissonance due to both a low social legitimacy and a low cognitive legitimacy, i.e. sustainability was not yet requested by the investors to be attended to and it was regarded too ambiguous to be relevant for being considered in a valuation context. In the latter part of 2010s, we argue that there is only a partial cognitive dissonance. At this time, sustainability information is beginning to be socially legitimate and requested by investors. However, the complexity of the situation remains. This type of information is still not considered as cognitive legitimate due to the ambiguous nature, which renders difficulties for the sense-making and sense-giving processes. The findings have implications not the least in the ongoing quest of developing frameworks, standards and legislation (e.g. the EU directive (2014/EU/95)), that opt for improving the relevance, credibility and comparability of sustainability information.

The aim of this chapter is to investigate change in financial firms relative to environmental, social and governance issues (ESG). An embryonic ‘behavioural theory of the financial firm’ (BTFF) is outlined to provide a conceptual framework to analyse ESG change issues in financial firms. This is used to explore how financial firms and others can understand processes of: learning, strategic design of the firm, mobilisation of resources, and reporting, relative to growing ESG concerns. It is also used to identify problems and barriers to change (historic, current, potential) in ESG areas and propose a coherent response. Climate change is used as a major ESG issue to discuss change. The chapter illustrates how ‘top teams’, advisory policy bodies, legislators, and regulators can use the BTFF to inform their actions and change proposals. This can support an integrated view of the financial firm and encourage a coherent pursuit of financial and ESG aims throughout the financial firm. Such actions should be adopted to improve firm decision-making, match the needs of stakeholders, improve reporting and hence improve legitimacy of the financial firm (DiMaggio and Powell 1991) with stakeholders (Guthrie and Parker 1990).

Sustainability assurance is a voluntary undertaking in most countries. As a result, there is no restriction on who can provide sustainability assurance services or the approach to assurance. This chapter explores the different types of sustainability assurance providers operating in the market. These assurance providers can be segregated into two broad categories comprising of accounting sustainability assurance providers and non-accounting sustainability assurance providers. The similarities and differences in approach to sustainability assurance undertaken by accounting and non-accounting sustainability assurance providers are discussed. The chapter also explores the differences in practitioners’ approach to conducting the sustainability assurance engagement. The discussion highlights the challenges faced by assurance providers and assurance seekers (i.e. sustainability reporters) in the market for this new form of assurance.

Assurance is becoming increasingly popular as a way to enhance the confidence of sustainability reports. But what does assurance of sustainability reports mean? To answer this question, the chapter treats assurance as a word with a regulatory and etymological history, which prescribes a specific and particular interpretation of the term assurance. It is observed that sustainability assurance inherits a specific theory with a particular form of evaluating and making authoritative statements on sustainability practice from (financial) auditing. The theory it draws on is agency theory, and the form of evaluation is the indirect evaluation of statements of compliance with standards instead of a direct assessment of sustainability performance or quality. The chapter suggests that this may be problematic since, although assurance may add credibility and confidence to sustainability reporting it does not challenge the perspectives taken by the company, which, it is argued, was the problem in the first place, as suggested by the Brundtland report. This theory of the practice is, however, not the only interpretation of the word audit. Drawing on alternative historical and etymological meanings of the word audit, the possibilities of other forms of sustainability audit are advanced.

This chapter explores engagement dialogue as a sustainable and responsible investment (SRI) strategy from a Nordic investor perspective. The Nordic model of engagement dialogue is grounded in the Nordic model of corporate governance and stakeholder capitalism. Based on a proprietary database from a professional SRI agent, this chapter conducts an in-depth analysis of engagement dialogue between Nordic institutional investors and MSCI World companies regarding environmental, social, and corruption risks. The main characteristics of the Nordic model of engagement dialogue are an incident-based approach, norm-based compliance, a small number of engagement cases, and long-term emphasis on risk reduction as opposed to short-term financial gains. The chapter notes that successful forms of engagement dialogue target global companies with higher levels of pre-engagement environmental, social and governance (ESG) performance, ESG transparency, and operating performance than a matched sample. Their performance remains superior to the matched sample in the post-engagement period. The chapter consequently extends previous literature on SRI strategies in the Anglo-Saxon model of activism based on shareholder resolutions, whereby companies are targeted owing to corporate governance risks and low financial performance.

Currently, banks lack proper understanding and incentives to manage climate-related financial risks and translate them into credit decisions. In this chapter, I will discuss how this scene gradually could change within the banking industry, mainly driven by regulators and rating agencies and potentially sudden market revaluations of climate-related risks. The chapter illustrates how banks, by using well-established methods, further developed by rating agencies could integrate climate factors into the credit decisions and become concerned consumers of corporate climate information. But the banking sector could face challenges in order to properly recognize and integrate climate-related risks in their risk management practices. Three such challenges are highlighted. Firstly, banks face practical difficulties when combining approaches to understand climate-related risks and translate them into quantitative measures of financial risks. Secondly, the current lack of relevant corporate climate information will create a challenge for banks to get relevant data for their models. Finally, a broader risk concept, which includes sustainability aspects could challenge traditional financial logics and create strong resistance on a psychological level. The chapter concludes that changes in banks’ day-to-day credit risk management and disclosure practices, as a response to regulatory demands to better include climate-related factors, could gradually change the risk concept, as perceived by the banking industry.

Sustainable business is underpinned by sustainable and resilient infrastructure defined as infrastructure that integrates environmental, social and governance (ESG) aspects into a project’s planning, building, and operating while ensuring resilience in the face of climate change or shocks. Currently, trillions of dollars of infrastructure investment are needed to meet our needs globally. Governments, constrained by debt and deficits, do not have the necessary means to meet this global infrastructure gap. Large institutional investors are increasingly filling this void. As they do so, these investors are beginning to take environmental, social, and governance issues into account in their infrastructure portfolios. This chapter explores the shift toward greater consideration of ESG in infrastructure investment. It looks at the drivers of these phenomena and some of its implications. It examines new financial instruments emerging in the sector such as Green Bonds and Community Benefit Public Private Partnerships. But integrating ESG in infrastructure investment is not without its challenges. Given that these large institutional investors have a fiduciary duty to serve their beneficiaries in both the short and long term, incorporating sustainability in infrastructure investment raises tensions between the need for profitable financial returns and the need to contribute to a healthy and sustainable planet. These challenges are explored in greater depth at the close of the chapter.

Why do certain organizational actors decide that fighting corruption should now become a policy priority? This chapter problematizes engagement in fighting corruption, in terms of why businesses, governments, international organizations and NGOs choose to make anti-corruption a priority and how they go about fighting corruption, including their degree of genuine engagement. In describing the emergence of what I call ‘anti-corruptionism’, this paper argues that we need to look more closely at the interests and agendas of those actors in the anti-corruption industry, including the kinds of corruption they are fighting. Two major anti-corruptionist discourses are described: the one emphasizes the progress in fighting corruption through laws, conventions, campaigns, and transparency; the other discourse is a more pessimistic scenario emphasizing the continued persistence of corruption, as revealed by the Panama and Paradise Papers and almost daily corruption scandals at the highest corporate and government levels; this second, cynical discourse highlights the failure of the anti-corruption industry to actually reduce corruption. The implications of these two parallel discourses are that we need to be more explicit about the definition of corruption, and the kind of corruption we are fighting. We need to assess the engagement of anti-corruption actors, and we need to reconsider the move toward ‘transparency’ and ‘reporting’ as the magic bullet. Problematizing who cares about anti-corruption and why they care can not only help put anti-corruption in its proper sociopolitical context. It can also lead the way toward more effective anti-corruption programs.

Only one in five instances of fraud is detected by internal and external audits and IT controls. Instances of corruption are most probably even less visible. How come, and what to do about it? This article treats deviances as a social and psychological problem. Rationalizations both from the fraudsters’ and the bystanders’ side will be discussed as important factors that obstruct the prevention of deviances. These rationalizations are interpreted as a kind of perverted modern virtues, something that might explain their persuasive power.

A major challenge for fighting corruption is our narrow conceptions about corruption and the lack of alternative, creative theorizations about both corruption and anti-corruption (Breit et al. in Ephemera: Theory and Politics in Organization 15: 319–336, 2015). This chapter responds to this challenge by discussing organizational corruption and anti-corruption in an alternative way. It reviews three different definitions of corruption and argues that corruption should be seen as the degeneration of a legitimate value. With this view of corruption, this chapter develops an anti-corruption framework by inverting Ashforth and Anand’s (Research in Organizational Behavior 25: 1–52, 2003) work on the normalization of corruption in organizations. The components of the framework are de-rationalization (producing alternative discourse and going beneath discourse), de-institutionalization (manipulating organizational memory and highlighting counterfactual corruption events) and de-socialization (excluding the personal and excluding the social). In the latter part, the chapter argues that one could relate to anti-corruption measures in any of four ways: anxiety, superego, courage and justice. It suggests that a balanced mix of these four subject positions is useful for fighting corruption.

The relationship between tax and sustainability is not an easy one. Separately, both topics are in general well understood and given due attention in most corporations. Nevertheless, tax specialists do not readily combine those two topics with regard to public tax governance, let alone the tax governance of corporations. One thing that is troubling the relationship between tax and sustainability is transparency. For tax experts, at first sight, tax and sustainability meet in environmental taxation. On further reflection, the requirement of sustainability can be applied to tax legislation and the tax system as whole—which both demand good tax governance. However, the concept of good tax governance does also regard taxpayers. Taxation is a fundament for a well-functioning society and sustainable development. Therefore, it will be argued that paying corporate taxes can be seen as part of corporate responsibility to contribute the sustainable development of society. Corporate scandals and news on corporate aggressive tax planning practices have increased demands for corporate accountability. The question is whether corporations’ tax planning policies are really sustainable if they minimise the amount of tax they pay. This chapter will look into this question by exploring corporate taxation in the context of corporate social responsibility (CSR). It will be argued that without greater transparency it is impossible to evaluate whether corporations are truly sustainable, nor is it possible to hold corporations accountable for their tax behaviour. This chapter will deal with the calls for increased tax transparency. Public transparency with regard to corporate tax is in many countries a rather new phenomenon. It will be argued that corporate tax transparency is a key to good tax governance. Yet, it also entails various challenges. A first step is the question as to relationship between tax and sustainability; sustainable tax governance will first be dealt from a governmental perspective which requires the state to pay due attention to the quality of tax legislation. Following, it will be discussed how to relate multinational tax planning practices to sustainability. It will be analysed whether paying taxes could be seen as a company’s obligation towards society. Here, CSR is used as a proxy for sustainability. A notion of good tax governance as a response to demand of sustainable and responsible tax planning will be proposed. Furthermore, this chapter relates such good tax governance to transparency, which is considered as a necessary if challenging prerequisite for a sustainable tax planning.

CSR and taxpaying are currently a hot topic for academic research. The issue is about securing a sustainable business environment in terms of corporate taxation. A sustainable tax system must be seen from both a collective view and an individual view. The chapter focuses on the individual view. The chapter emphasizes the need for a legal rule-based taxation. The legal order based on the rule of tax law is the only system that in practical terms is able to secure very important functional outcomes. A great problem is that the rule of tax law is the facilitator of tax avoidance and aggressive tax planning. However, CSR and tax morale are important in terms of taxpayer behavior. The most important lesson the social science research provides should be that the willingness to pay taxes is a function of complicated processes and that there is no single explanation as to why an individual or a corporation choose to pay their taxes or to engage or not engage in tax planning or tax avoidance. Research also indicates that the social norm is not very clear in terms of the view on tax avoidance. Ethical norms cannot be described as very clear, either. A very problematic issue is that neither “tax avoidance” nor “fair share” is defined in a way that enables a benchmarking. Evidence implies that a corporate tax strategy is about cost/benefit where “reputational risk” sometimes plays a role. An opportunity is to enhance the use of soft law: the published corporate tax strategies and tax policies. A very brief analysis of a few published tax strategies imply that there is a great potential in that respect. At present, they do not seem to work well as normative instruments. The best way of securing a sustainable corporate taxation is international cooperation on the legislative level and the development of legal concepts against tax avoidance (General Anti Avoidance Rules).