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Voluntary sustainability reporting practices in Germany: a study on reporting quality

Reiner Quickdarmstadt University of technology

Accounting and Auditingquick@bwl.tu-darmstadt.de

(Recebido em 30 de Maio de 2007; Aceite em 30 de Março de 2008)

Abstract

Sustainability reports are a modern concept of interdisciplinary reporting. they indicate the simultaneous integration of economic, environmental and social elements. this study evaluates the quality of German sustainability reports by using GRi guidelines as a benchmark for developing and applying a scoring model. this allows assessing whether sustainability reporting is a suitable instrument to achieve positive effects such as cost-reductions, risk reductions or competitive advantages. twenty-six reports from companies listed on the dAX30 and the MdAX were analysed. the reports scored well in their depiction of the respective companies but were of inadequate quality in relation to sustainability performance. the depiction of social and environ-mental aspects scored an average of approximately 40 per cent, which reveals no more than a mediocre understanding of the prevailing requirements. in comparison, the average degree of achievement with respect to economic dimension was only 13.83 per cent. A weak positive correlation was found between the financial strength of a company and the quality of sustainability reporting. Furthermore, there was a positive relationship between length and quality of the reports. the findings document a need for sustainability repor-ting standards as well as mandatory external audits of such reports.

Keywords: economic performance, environmental performance, GRi guideli-nes, interdisciplinary reporting, social performance, sustainability reports

Contabilidade e Gestão, n.º 5, 7 – 35

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1. IntRoductIon

Many business crises of the past few years and resultant stock market crashes have had profound consequences on accounting and auditing.1 the information needs of capital providers are not being met adequately by traditional reporting methods because financial statements primarily concern the past. Stakeholders are interested to obtain further informa-tion on the impact of corporate activities (o’dwyer et al., 2005). After various attempts in the areas of social and environmental reporting (e.g. the eco-Management and Audit Scheme of the eU), so-called sustaina-bility reports have emerged in an attempt to respond to demands for interdisciplinary reporting. they reflect a simultaneous integration of eco-nomic, environmental and social factors into corporate behaviour with the aim of sustaining resources for future generations (e.g., eppel 1999, p. 42). However, sustainability does not mean improving the environmental performance of a company at the cost of economic or social objectives. What is far more decisive is a linkage of all three issues (dyllick & Ho-ckerts 2002, p. 132), in which the prevailing goal conflicts, interdepen-dencies and synergies are used advantageously (Steven 2001, p. 29). With respect to the various dimensions, which need to be integrated, this approach is also referred to as the triple bottom line of sustainability.

Sustainability reporting can be explained by legitimacy theory (Gray et al., 1995). it assumes an implicit contract between companies and socie-ty (Mathews 1993). By reporting on economic, social and environmental issues a company can demonstrate that it fulfils its part of the contract and that its activities coincide with the value systems of society. this can prevent or mitigate future regulatory requirements that would constrain the strategic options of the company. thus, the company can maintain its status and reputation in society. instrumental stakeholder theory re-gards sustainability reporting as a means to address the demands of a company’s stakeholders (Solomon & Lewis 2002). Following agency theory, voluntary disclosures on economic, social and environmental is-sues can decrease the information asymmetry between management and stakeholders of a company and therefore reduce agency costs (ness & Mirza 1991). these disclosures can avoid future legislative actions against the company (Gray et al. 2001).2

For national and international companies, optional sustainability repor-ting constitutes a substantial challenge entailing opportunities and risks. the costs of sustainability reporting (Geiger 1993, pp. 149-151) and the general risk of exposing oneself to public criticism must be contrasted

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with possible advantages. these include cost-reduction (insurance pre-miums), risk reduction (image losses)3, competitive advantages (diffe-rentiation advantages with respect to competition, listing in sustainability indexes) and an improved company in terms of its organization resulting from formulation and publication of sustainability reports.4 the success-ful implementation of the objectives of sustainability reporting therefore primarily requires recognition of three central aspects: addressees, prin-ciples, and contents of sustainability reports.

the interest groups with respect to sustainability reports comprise a va-riety of possible internal and external stakeholders.5 Since the mid-nineties, more and more initiatives have been proposed to deal with sustainability. the Global Reporting Initiative (GRi) can be regarded as leading in the worldwide dissemination and standardisation of sustainability reporting. the 2002 GRi guidelines provided a very appropriate set of principles.6 Based on the GRi, an expanded model is presented below, with the grey areas representing fra-mework principles, which refer to broad aspects of reporting. the principles given in the white areas are supplementary qualitative attributes. the first column contains requirements in terms of the type of information presented. the second column comprises norms for ensuring a certain quality of sustai-nability reporting. the third column of qualitative requirements deals with the accessibility of sustainability reports.

Figure 1: Reporting principles according to the GRi model (Based on Global Reporting initiative (GRi) 2002, p. 20)

Going concern

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Stakeholder orientation

Accuracy claritycompleteness

type of ivnformationQuality / Reliability

of informationAccessibility

of information

neutralityRelevance timeliness

comparability AvailabilitySustainability context

Accruals concept

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A successful implementation of the objectives of sustainability reporting also requires establishing generally applicable report contents. to establish fundamentally important report contents, various contributions on envi-ronmental and social reporting, as well as more current contributions on sustainability, can be used.7 due to the rapid development of sustainability reporting and lack of timeliness of most literature sources, an analysis of published reports can give an indication of possible sustainability report con-tent. Another way of determining such contents might be to consider rankings of sustainability reports by various organizations.8 the weights they use for their evaluation models indicate the relevance of different report contents.

the objective of this survey was to investigate to what extent printed9 vo-luntary sustainability reports by companies listed on the HdAX10 fulfil or ex-ceed the requirements already provided in the literature and practical guideli-nes.11 By doing this, the survey should also give information on the extent to which sustainability reporting is a suitable instrument to achieve the positive effects that have been discussed previously, or whether they are mere public relations instruments. in this context, conspicuous weaknesses in reporting practice ought to be revealed. in addition, it is analysed whether the quality of reporting is associated with other attributes, such as the index, where the reporting company is listed.

Such an analysis is necessary because comparable studies from the 1990s, dealing with the quality of environmental reports, revealed deficiencies. clau-sen & Fichtner (1996, pp. 63-80) as well as Steven et al. (1997, pp. 63-155) found such reports to be of a low quality. the findings concerning environmen-tal statements, according to the environmental Management and Audit Sche-me (eMAS) of the eU, are less negative: Freimann et al. (1996) concluded that many requirements were fulfilled, but companies tend to emphasize improve-ments while withholding weaknesses. in particular, companies were reserved when reporting on environmental objectives and environmental programmes. Furthermore, differences in the design of environmental statements, and thus a limited comparability of these statements, were identified. A study by Bec-horner and Freimann (1999) showed that German companies complied close-ly with the eU-eMAS regulation, but in comparison to companies from other member states, the quality of their reports was weaker regarding environmen-tal management issues. Wicenec (1998) had similar results. He observed a strict application of the eU regulation, insufficient statements on environmen-tal policy, and a lack of relevant figures (e.g. concerning the consumption of raw materials or noxious emissions). Lange et al. (1998; 2001, pp. 93-177) found that most environmental statements included all aspects required by eMAS but varied considerably concerning contents, form, and detail.

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Sustainability is a global rather than a national issue. the sustainable behaviour of countries with a strong economy has a high impact. As the world’s third strongest national economy with regard to its gross domestic product (World Bank, 2007), Germany holds a leading position in terms of its total economic output. With the highest gross domestic product and the largest number of inhabitants of any country in the european Union, it is the largest market in europe. Germany is second to the U.S. in global trading of goods and services (World trade organization 2007, pp. 11-12). in the era of globalization, this underlines the fact that sustainable perfor-mance of German companies is a global issue. in the German constitution, environmental protection is defined as a public objective. therefore, a high quality of German sustainability reports could be expected. if this is true, these reports can serve as a benchmark for companies from other coun-tries. Furthermore, nearly all companies included in the sample have fac-tories, subsidiaries, long-term equity investments, branches and/or shops in Portugal. thus, their sustainability performance is directly relevant to Portuguese stakeholders.

in summary, the findings of the analyses we conduct show an average degree of achievement of 40.6 per cent. the depiction of a company and its formal aspects achieved the highest score, whereas the overall quality of reporting practice with regard to economic performance was lowest. Repor-ting about social and environmental performance was of moderate quality. A positive correlation was found between the quality of sustainability reporting and the financial strength of a company.

the remainder of the paper is organized as follows: in the next section the model used to evaluate sustainability performance is described, and the third section defines the sample used for the analysis. the results are presented and discussed in the fourth section. Finally, the paper concludes with a discussion of the study’s implications.

2. MEthod

to analyse the quality of sustainability reports, a catalogue was constructed containing all necessary aspects of sustainability reporting. the GRi gui-delines were the main source since there are no legally binding rules.12 these guidelines need not be applied, but are supported widely by the reporting companies.13 Furthermore, many companies refer to them.14 in total, 105 criteria were identified, which define the quality of sustainability reporting.

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to handle numerous criteria, a scoring model was applied (see appen-dix for the complete model). it consists of two parts. the first captures general corporate information as well as formal and other aspects whi-ch are significant for an understanding and evaluation of sustainability performance. Within the first part, seven categories are formed: sta-tement by corporate management, corporate profile, corporate policy, formal aspects, stakeholder orientation, control structures and manage-ment systems, and aspects of clarity and comprehensibility. Within the first part, 45 criteria were analysed. While more important criteria were weighted fully, less significant aspects were given only a half-weighting. depending on whether the content aspects were treated explicitly, im-plicitly, or not at all; two points, one point, or no points were allocated respectively. Accordingly, the first part of the scoring system yielded a maximum potential of 80 points.

the second part of the model captures the sustainability performance of each company with respect to the economic, environmental, and social dimen-sion. From these three dimensions sub-groups were extracted (table 1).

Economic dimensionSocial

dimensionEnvironmental

dimension

• Customers• Authorities• Neighbouring commu-nity• Shareholders• Creditors• Employees• Suppliers• Other general economic aspects

• Working conditions• Health / Work safety• Diversity• Engagement in develo-ping countries• ther internal social perfor-mance• External social perfor-mance

• Environmental input performance• Environmental output performance• Other environmental performance

table 1: Sub-groups used in the evaluation of sustainability performance

Within each of the three dimensions, 20 different criteria were evaluated, so that within the second part of the evaluation scheme, a total of 60 criteria were taken into consideration. All criteria were weighted equally. each crite-rion was given up to four points: zero points = no coverage or insufficient co-verage, one point = rudimental coverage, two points = systematic coverage, three points = intensive coverage, and four points = integrated coverage (see also SustainAbility & UneP 2002, p. 41). in allocating the number of points to each criterion, subjective decisions were unavoidable.

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the 20 criteria per dimension provide a maximum score of 80 for each of the three dimensions. Accordingly, 240 points are attainable within the second part. in the first and second parts of the evaluation model, a total of 320 points were awarded.

3. SAMPlE

the focus of the study was on companies listed on the HdAX, which repre-sents the 110 largest companies in Germany. the publications provided by these companies were checked for the existence of three aspects. First, the titles of the publications were considered in terms of either a direct or indirect connection with sustainability. those companies which had no sustainability linkage in the title of their publications had to fulfil two other requirements to be taken into account. the first was the discussion of three different content categories, both from the first part of the scoring model and from the dimen-sions of economic, social and environmental performance from the second part. Second, in the observed publications, at least 20 criteria from the first and second part of the evaluation model had to be mentioned explicitly.

of the 110 HdAX companies, 37 had publications available. of these 37, 16 fulfilled the first condition and a further 10 fulfilled both the second and third aspect, so that ultimately, the reports of 26 different companies could be analysed. 18 were from the dAX30 and 8 from the MdAX. From the tecdAX segment, not one report could be considered as a sustainability report in the sense used for this study. in general, such reports were to be investigated, which depicted sustainability performance for 2002. due to the fact that some sustainability report publications were integrated with financial reporting, and that not all companies publish sustainability reports on an annual basis, the reports refer to different time frames. this is indicated in table 2.

table 2: Reporting timeframes.

2000 2001 2001/2002 2002 2002/2003

•Bayer •Hochtief •VW

•Allianz •Metro •Puma • chering

•BASF •RWE

•Adidas •Henkel•Beiersdorf •Hypovereinsbank•BMW •Infineon•Celanese •K+S•Daimler-Chrysler •Lufthansa•Degussa •MAN•Dt. Bank •Merck•Dt. Telekom •Siemens

• Heidelberg

3 4 2 16 1

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A total of 26 reports seems to be small, but in terms of market capitalisation these reporting companies constitute 65 per cent of the HdAX.15 if one considers the Prime All Share, the index of all com-panies listed on the German stock exchange for the segment Prime Standard, the situation become even clearer. of the 394 different com-panies listed in the Prime All Share, the 26 companies that publish sustainability reports still have a weight of almost 64 per cent in terms of market capitalization.

content analysis of the sustainability reports was undertaken for each of the 26 companies.

4. EMPIRIcAl RESultS

4.1 depiction of a company and Formal Aspects

With respect to the requirements of the first part of the evaluation model, the publications scored quite well. in particular, the criterion “statement by management” as well as the depiction of “corporate profile” and “corporate policy” was in most respects handled exemplary. this could be attributed to the fact that this part of the model is dealing with traditional components of financial reporting. the average level of achievement here was between 82 per cent and 88 per cent. However, there are greater problems with respect to the criteria “stakeholder orientation,” “control structures and management systems,” as well as “clarity and comprehensibility”. in this respect, many companies achieved lower results.

With regard to the depiction of a stakeholder orientation, the reports of Heidelberg Druckmaschinen AG and Bayer AG are notable positive exam-ples of reporting practice. With an average degree of achievement of only about 49 per cent, the depiction of the criterion “formal aspects and expla-nations of sustainability reporting” contrasted strongly with the previously mentioned results. An explicit discussion of principles of sustainability re-porting could be found in only two reports; in a third it can be derived. this is surprising because within the guidelines from the GRI, a discussion of general reporting principles plays an important role. in addition, only 3 of 26 companies used an external auditor to verify their reports. obviously, a large majority of companies underestimated the significance of general reporting principles and the impact of external audits on credibility. the lat-ter was recently stressed by the Fee (Fédération des experts comptables européens (Fee) 2004, p. 6).

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Figure 2 illustrates the average degree of achievement of the dAX30 and MdAX companies, in alphabetical order, for all seven categories of the first part of the evaluation model.

Figure 2: degree of achievement within the first part of the evaluation model

With a total average degree of achievement of 71 per cent, the companies nonetheless achieved positive results. conspicuously, the average degree of achievement of the dAX30 companies (at 75 per cent) is clearly higher than the degree of achievement of the MdAX companies (at only approximately 61 per cent).

4.2 depiction of Sustainability Performance

4.2.1 Economic Performance

While the companies achieved an average number of points regarding their economic sustainability performance with respect to their custo-mers and staff, this was not the case for the remaining six aspects of economic sustainability performance. For these categories the sustai-nability reports frequently achieved only approximately 10 per cent of the maximum number of points, and in some cases even less. this is surprising considering that parts of the report contents that were re-quested were already available in the company, for example corporate taxes and subsidies. in this regard, reporting on economic performance with respect to the government would have been easy. Likewise, infor-mation with respect to economic performance in relation to providers of debt capital could be derived from financial statements without signifi-

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cant effort. in this context, it is also worth mentioning that in 3 of the 8 categories approximately 75 per cent of all companies received no points at all for their reporting.

consequently, the overall quality of reporting practice within this part is in need of improvement. the overall degree of achievement is only 13.8 per cent (Figure 3). overall, the dAX30 companies were able to convey a better impres-sion in their reporting of economic performance than those listed in the MdAX.

Figure 3: degree of achievement for the dimension „economic performance“

the MdAX companies take the last three places. However, the results of the reports of the MdAX companies K+S AG and Heidelberger Druckmaschi-nen AG are remarkable. Although these two companies are taking the third last and second last place in respect to their size, their reports take fifth and second place with respect to the depiction of economic sustainability performance.

the fact that amongst the higher quality reports there are also smal-ler MdAX companies suggests that the poor result cannot be attributed purely to a high cost of data collection. For the interpretation of these re-sults, it must be taken into account that financial statements report on economic aspects, too. But deficiencies concerning the economic part of sustainability reports are not balanced completely, because financial statements do not include all relevant elements (e.g. the influence of the company on the economic situation of the region or compliance with competition law).

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4.2.2 Social Performance

Regarding social sustainability performance, it was striking that the de-piction of performance with respect to external groups yielded a degree of achievement of 46 per cent. this is 12 percentage points higher than the results with respect to internal groups. Furthermore, it was remarkable that relatively straightforward criteria, such as the number of employees, staff fluctuation and also further education opportunities, were given more intensi-ve treatment than criteria such as salaries or the provision of voluntary social services – for example a canteen or child care facility.

Figure 4: degree of achievement in the category “social performance”

the results demonstrate that for the depiction of social performance the companies create a better impression than they did with the previously dis-cussed economic performance. there was an average degree of achieve-ment of about 38 per cent (Figure 4) for all considered companies; however, the results can be regarded as quite unsatisfactory. Much less than half of the maximum quality was provided.

this statement applies equally to a separate observation of the avera-ge degree of achievement within the stock market segments dAX30 and MdAX. While larger companies listed in the dAX30 did better than the overall stock market segment in achieving approximately 42 per cent of the attainable points, MdAX companies, with only about 29 per cent, earned considerably fewer points. the lower average evaluation of MdAX companies can be attri-buted to particularly poor results of the three MdAX companies Beiersdorf AG,

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Celanese AG and Puma AG. the K+S AG demonstrated that MdAX companies were able to achieve considerably better results with a degree of achievement of 61.25 per cent, the third best evaluation within the social dimension.

4.2.3 Environmental Performance

even if (as one might expect due to long-term experiences with environmen-tal reports) reporting on environmental performance is of a higher quality than reporting on economic and social performance, there are still weaknesses. Potential improvements for reporting can be found primarily in the subject area of land usage. only 11 of 26 reports provided any discussion on the degree and consequences of using land or sealing natural ground. there are also some conspicuous aspects of reporting about data on environmental output. thus, in view of the frequency with which certain issues were addressed, one must assume that not all companies are aware of the requirements of repor-ting about environmental performance. non-reporting on certain issues is only appropriate if such issues do not exist for a particular company. For example, three companies do not report about waste. Yet it is not credible that they create no waste or do so in such insignificant quantities that there is really no need to discuss the issue in their reports. it is equally unlikely that 50 per cent of companies will produce no greenhouse gases. even service compa-nies with no large production facilities heat their premises. Furthermore, even those employees who travel to work by car or undertake business travel exert an impact on the environment. on average, the 26 publications received only approximately 40 per cent of all potential points.

Figure 5: degree of achievement for the category „environmental achievement“

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While the quality of the reports published by the dAX30 was somewhat better, with a degree of achievement of 42 per cent, the MdAX companies performed considerably worse, scoring only 34 per cent of all possible points. Accordingly, the last three places were also taken by MdAX companies. How-ever, in this case as well, the sustainability report of the MdAX company, Heidelberger Druckmaschinen AG, proved that even smaller companies can produce high grade sustainability reports.

4.3 overall Results

50 per cent of the analysed sustainability reports refer to the GRi guidelines. As shown by Figure 6, the most obvious result of the empirical study is an average degree of achievement of 40.6 per cent, which is not satisfactory.

Figure 6: overall degree of achievement

this situation indicates a large gap between what a company regards as worth reporting, and the requirements in the literature and various practical guidelines on good sustainability reporting. the results of comparable studies confirm this observation. Loew et al. (2005) found an average achievement of 46.4 per cent for German sustainability reports, whereas daub et al. (2004) revealed a performance of Swiss companies of only 35.6 per cent. Samsinger & Schiessl (2004) evaluated the quality of Austrian reports and showed an average performance of 63.75 per cent. However, the latter study included only ten reports. the results of international comparative studies are similar. An analysis of sustainability reports of 1,600 companies from 16 countries, initiated by KPMG (Kolk et al. 2005), revealed an achievement of 36 per cent

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for German companies. in this study German companies were ranked fifth. A rating by AccountAbility and csrnetwork (2004) which included the 100 world wide top-selling companies revealed an average result of 24 per cent with a range from 1 per cent to 67 per cent. Standard&Poors et al. (2004) report that within the top 50 companies, out of 351 submitted reports, 42 achieved a performance of more than 50 per cent. Frost et al. (2005) found an overall level of disclosure of 18 per cent for Australian companies.

overall, the sustainability report of BASF was assessed as the best one in this study. this report also had the highest degree of achievement concerning envi-ronmental performance. one explanation for this result could be that stakehol-ders might perceive chemical companies like BASF as having a very large impact on sustainability. the Wirtschaftsprüferkammer (German chamber of auditors) awarded the German Sustainability Reporting Award to BASF for the best sustai-nability report for the year 2003 and thus had comparable findings.16

Figure 7 presents the overall results for the observed sustainability reports differentiated between the four areas. it is readily apparent that the majo-rity of publications have one thing in common: the largest share of points is earned through depicting the company and its formal aspects in the first part of the evaluation. this fact is not particularly surprising, because the demands from the first part, in contrast to the second part, were much lower. the observation that the number of points gained in the first part comprised fewer than 40 per cent of the total points in only 7 cases indicates a strong imbalance between the points earned in the two parts.

Figure 7: division of success in terms of the empirical study results

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Part 1 Economic Social Environmental

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Figure 7 also gives an impression of the sources of success within the second part of the evaluation. in this respect, it is obvious that the depiction of economic performance in all sustainability reports contri-butes the lowest share towards the overall results. the shares of the environmental and social performance in the overall results are surpri-sing. the usual practice of environmental reporting, and the fact that traditional personnel and social reports generally concentrate on staff and not non-staff individuals, suggests that the share of depiction of environmental performance to the overall results is considerably greater in most cases than the share of social performance. However, this was only the case in 14 of 26 publications, and suggests that companies have a similar understanding of both the social and environmental di-mensions of sustainability.

4.4 correlation Analysis

one question that should be addressed is whether or not points greater or less than average occur due to a particular reason or in a purely random manner. the supposition has been expressed frequently that the quality of reports could be lower for financially weaker firms than financially stronger ones because of the costs associated with the reporting. Size was used as an indicator for evaluating financial strength of a company. the indicators for size itself were membership of a particular stock market segment, and market capitalization.

Because of the ordinal scaling of the variable “membership of a particular stock market segment”, Spearman’s rank correlation coefficient was used to measure the variable’s correlation with report quality. A rank correlation co-efficient of 0.33 was obtained. the larger dAX30 companies were allocated a higher rank number, so this positive correlation means that the degree of achievement as a measure of report quality rises with the increasing size of the reporting company. However, with a value of 0.33, the correlation is weak.

Based on the metric scale of the attribute market capitalisation, the cor-relation coefficient was calculated according to Bravais and Pearson. With a value of 0.27, a similar result was obtained to that in the previous calcula-tion. Accordingly, it appears appropriate to assume there is a weak positive correlation between the quality of sustainability reporting and the financial strength of a company. Sustainability reporting is costly and for financially strong companies it could be easier to cover cost for a higher report quality. However, it could also be assumed that a high report quality contributes to financial success.

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A relationship between the quality of reporting and the number of pages in the published reports can also be expected. indeed, the differences in the length of the various reports were substantial in some cases. While the BASF AG had the longest report with 167 pages, that of Celanese AG was just 8 pages. Furthermore, the longest report also achieved the highest number of points and the shortest report the second worst score. Because of the metric scaling, the Bravais/Pearson correlation could once again be used. A correlation coefficient of 0.51 was derived, implying that there was a positive relationship between length and quality of the reports.17

Also, there is a weak positive relationship between the degree of achie-vement as a measure of sustainability report quality and the listing of com-panies in so-called sustainability indexes. this can be quantified by a rank correlation coefficient of 0.33. one could assume that the requirements for being listed in these indexes ensure that the reports of companies listed there will vary substantially from other companies. nevertheless, the as-sumption that the listing in such an index inevitably corresponds to a good result in the context of this empirical study and vice-versa does not apply. For example, companies such as Infineon Technologies AG and K+S AG scoring high within our survey are not listed in such indexes, while companies as Allianz AG, Bayerische Hypo- und Vereinsbank or MAn AG are listed despi-te their lower scores. the emerging discrepancies can; however, also lie in the fact that organisations which produce such indexes allow additional un- published information to affect their valuations.

5. SuMMARy And concluSIon

to summarise, with few exceptions, the depiction of a company and the for-mal aspects of sustainability reporting is conducted at a very high level, with an average degree of achievement over 70 per cent. on the other hand, the de-piction of sustainability performance remains a problem for many companies. While the depiction of social and environmental aspects generally achieved an average score of approximately 40 per cent and thus revealed no more than a mediocre understanding of the prevailing requirements, the average degree of achievement with respect to the economic dimension is very low – at less than 15 per cent. Such a low quality can be explained by a lack of experience with regard to the economic dimension of sustainability reporting, whereas social and environmental aspects have been addressed for years (Frost et al. 2005, p. 94). Furthermore, financial statements include economic aspects, too. thus, addressing the economic performance within sustainability reports could be perceived as less important by reporting companies.

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due to the large number of evaluated criteria a degree of achievement close to 100 per cent cannot be expected. nevertheless, even the report of the “class best” is clearly in need of improvement. As a consequence of the partially very poor results, it seems reasonable to conjecture that at least some of the companies do not really take the concept of sustainability seriously, and their reports constitute no more than public relations instru-ments. thus, reporting companies seem to neglect stakeholders’ demands. therefore, instrumental stakeholder theory and agency theory are less sui-table to explain the current reporting behaviour. Legitimacy theory is more adequate.18 companies voluntarily publish sustainability reports to prevent mandatory requirements.

on average, dAX30 companies achieved higher scores than MdAX com-panies. Further analyses revealed a positive correlation between companies’ size and the quality of sustainability reports. this is not surprising, because most prior research on voluntary disclosure had comparable findings (e.g. Singhvi & desai 1971, Buzby 1975, chow & Wong-Boren 1987, cowan et al. 1987, Belkaoui & Karpik 1989, Patten 1992, Lang & Lundholm 1993, Meek et al. 1995, owusu-Ansah 1998, Williams 1999, Belkaoui-Riahi 2001, Ho & Wong 2001, Watson et al. 2002, eng & Mak 2003, collet & Hrasky 2005). the reasons for this are higher expectations of shareholders, a greater public attention, and cost of reporting.

Some inherent limitations of the study must be considered when inter-preting the results. the study deals with a “snapshot” of an early stage in the development of the instrument of “sustainability reporting”. there-fore, the stability of the results over time is not ensured, and the findings should not be generalized to other years. Furthermore, the study is limited to an analysis of sustainability reporting of large German companies that are listed on the stock exchange. the validity of the results applies only to this segment and cannot be generalised beyond it. the basic evaluation model also contains numerous simplifications to facilitate ease of use. Accordingly, in the first part of the scoring system for example, the eva-luation criteria are only subdivided into two groups: important and less important. However, stakeholders’ perceptions are likely to be more com-plex. in addition, we must keep in mind that no legally binding standards for sustainability reports exist in Germany. Such reports are published voluntarily. the relevance of deviations from the GRi guidelines is less significant in comparison to a non-compliance with legal standards. in addition, the evaluation is not free of subjective influences. Finally, it has to be acknowledged that the quality of sustainability reporting was inves-tigated – not the sustainability performance itself.

25

From the recently developed sustainability indexes and the growing inte-rest of investors in such investments, it is evident that the environmental and social consciousness of society is growing and that sustainable behaviour by companies will facilitate acquisition of capital in the future. consequently, it seems that sustainability reporting will assume an even greater level of significance in the future.

However, all this contrasts with the predominantly mediocre quality of currently published sustainability reports. if this standard does not rise, and indeed, the study from SustainAbility and UneP refers to the formation of a plateau (SustainAbility & UneP 2002, p. 31), companies run the risk of losing public confidence in their reporting or not even earning it in the first place. the provision of verified and comparable reports is a key issue to solve. With a view to the overall societal significance of the sustain-ability concept, it can be expected that in future, there will be a stronger conformity of sustainability reporting to a set of norms, which can derive from national authorities or international standard setters. Finally, a signi-ficant increase in the demand for external auditing and consulting can be expected in the context of the planning, implementation and publication of sustainability reports.

external audits of sustainability reports would increase trust in the reports as well as their quality. in Anglo-Saxon and Scandinavian countries such audits are widespread.19 in contrast, they do not prevail in Germany. this is surprising, because there is a specific auditing standard with regard to sus-tainability reports (idW PS 821).

one question is whether the market should decide on the existence and the quality of sustainability reports. From the findings of this study, it is concluded that either the market does not perceive sustainability reports as being relevant, or the market does not function. if the latter is true, the detected deficiencies in quality and the low demand for related assurance services will raise the question of whether sustainability reports and ex-ternal audits of them should become mandatory. Answering this question is an important task for future research. in this context, research could deal with addressees’ perceptions of sustainability reports. Furthermore, the relationship between the quality of sustainability reports and cost of capital, and thus the relevance of agency theory, could be examined. other avenues for future research are aspects of auditing sustainabili-ty reports (e.g. qualification of the auditor, adequate auditing methods, addressees’ expectations) or testing whether such audits really improve reporting quality.

26

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1 Philipp Holzmann, Kirch-Media, Comroad, MobilCom, WorldCom, Enron, Ahold and Parmalat are prime examples.

2 other theoretical explanations include deep green ecological theory and communitarian-based theory (Parker 2005), institutional theory (covaleski et al., 1996) and neo-institutional theory (Aerts et al., 2003).

3 on the associated and significant consequences, see cramer (2002, p. 102).4 the given arguments are not free of overlap. concerning motives for sustainability reports, see Patten

(1992), Hooghiemstra (2000), Raiborn and Joyner (2004) und Rikhardsson and Holm (2005).5 Vos (2003, p. 141) equates sustainability management in part with stakeholder management. Simi-

lar sentiments are expressed in donaldson and Preston (1995, pp. 83-87). the so-called “Salience Model” has proven to be suitable for determining strategically relevant stakeholders. See Mitchell et al. (1997, p. 854).

6 For a discussion see Hedberg and Malmborg (2003, pp. 155-157). in 2006, a new version of these guidelines was published.

7 For an overview, see Ranganathan (1999, pp. 490-495).8 For an overview, see Ganse et al. (1997, pp. 171-177) and Reichard (1996, pp. 183-184). See also

OEKOM (2003) and WPK (2002, p. 4).9 Sustainability information from the internet or material that is accessible elsewhere are not taken

into account in this present study. A comprehensive analysis of reports published via the internet was performed by Rikhardsson et al. (2002).

10 HdAX is the successor to dAX100, and arose on March 24, 2003 as a result of a restructuring of the German stock exchange. the new index is a combination of the dAX30, MdAX and tecdAX and thus integrates the 110 most important inter-industry companies according to the Prime Standard (Gruppe deutsche Börse 2006, p. 7).

11 GRi Sustainability Guidelines and iSo 14031 have been given the most consideration. For a discus-sion on the tendencies revealed by such procedures, see Morhardt et al. (2002, p. 215).

12 the GRi guidelines were also used by Frost et al. (2005) as an indicator of the content and scope of sustainability reporting.

13 A survey by the certified General Accountants Association of canada (2005) found that 75 per cent of all companies support the GRi and its guidelines.

14 According to a study by the centre for Australian ethical Research et al. (2004), 35 per cent of the analysed sustainability reports refer to the GRI guidelines, whereas it was 40 per cent in Kolk et al. (2005) and even 92 per cent in Standard&Poors et al. (2004).

15 As at november 1, 2003.16 this award was founded in 1998. the decision is made by an interdisciplinary commission (eco-

31

auditors, experts for communication, auditors, representatives of business and formerly awarded companies). the Wirtschaftsprüferkammer intends to support the development and implementation of reporting standards and to foster comparability and verifiability of sustainability report. As a con-sequence, reliability of reports and reporting companies should be increased.

17 However, the consultancy SustainAbility came to quite different results in their 2002 study of 100 sustainability reports. their final report stated that in the two years since an earlier study, the com-prehensiveness of reports has risen by 45 per cent to an average of 86 pages, without the actual quality of the reports rising. this phenomenon described by SustainAbility as the “carpet bombing syndrome” (SustainAbility & UneP 2002, p. 31).

18 this confirms findings by Hedberg and Malmborg (2003). From interviews with Swedish companies they have found that companies mainly seek organizational legitimacy.

19 in a study by centre for Australian ethical Research et al. (2004) 27.5 per cent of all reports were audited, Kolk et al. (2005) revealed that 30 per cent were audited and Standard&Poors et al. (2004) even 81 per cent.

32

APPEndIx

Scoring model

Part 1: depiction of enterprise and formal aspectsnamed

explicitlyimplicit/derivable

notnamed

weightingabsolute

pointscore

%Statement by corporate management

Foreword and commitment/meaning of ne 1 0

Addressing current developments and tendencies 1 0

identifying relevant economic issues with respect to ne 1 0

identifying relevant ecological topics with respect to ne 1 0

identifying relevant social topics with respect to ne 1 0

Problems/challenges in implementing ne 0,5 0

Successes/failures in the context of ne 0,5 0

Future of ne from the perspective of corporate management 0,5 0

corporate profile 0 0,00%

name/legal form 0,5 0

Business areas/products/services 1 0

Markets served 1 0

number of employees 1 0

turnover/balance sheet total/market capitalisation/other ratios

1 0

depiction of production locations 1 0

depiction of organisational structure 1 0

index listings/awards/memberships in organisations 0,5 0

corporate policy 0 0,00%

Mission statement 1 0

depiction of values 1 0

Behavioural principles/corporate guidelines 1 0

Sustainability objectives and strategies 1 0

Voluntary commitments 1 0

Formal aspects and explanations of sustainability report 0 0,00%

temporal report limitations 1 0

Report limitations with respect to content 1 0

Reference to previous/subsequent reports 0,5 0

taking into account GonHB 1 0

Guideline orientation 0,5 0

Verification/auditing certificate 1 0

33

Part 1: depiction of enterprise and formal aspectsnamed

explicitlyimplicit/derivable

notnamed

weightingabsolute

pointscore

%

Stakeholder orientation 0 0,00%

nature of stakeholder identification 1 0

Results of stakeholder identification 1 0

nature of stakeholder integration 1 0

Stakeholder questionnaire attached to report 1 0

contact information 0,5 0

indication/opportunity to order to other reports 0,5 0

control structures and management systems 0 0,00%

corporate governance 1 0

Methods/procedures for obtaining data 1 0

depiction of economic management systems 1 0

depiction of ecological management systems 1 0

depiction of social management systems 1 0

depiction of risk management 1 0

Suggestion procedures/idea management 0,5 0

Aspects of clarity and comprehensibility 0 0,00%

table of contents 1 0

Summary of contents 1 0

index 1 0

Glossary 1 0

Use of graphics/photos/tables/figures blank pages 1 0

0 0,00%

Results part 1 (depiction of enterprise and formal aspects) 0 0,00%

34

Part 2: depiction of sustainability performancepoints/abs %

Economic performance

customers

turnover 0

Market shares 0

Patents/period of validity 0

Maintaining laws of competition/”compliance” 0

Statetaxation payments 0

Subsidies/tax breaks 0

community/specified regions influence of enterprise on economic situation 0

equity provider

Relationship of debt finance to equity finance 0

ownership structure 0

equity price development 0

emission policy 0

creditor

interest payments 0

Fulfilment of contract 0

Rating/creditworthiness depiction 0

employees

Salaries/wages (in relation to qualifications) 0

Relationship of fixed to variable wage/salary components 0

Social security to workforce 0

Suppliers expenditures on products and services 0

other aspectsdependencies 0

external effects 0

Social performance 0 0,00%

internal

Quality of job

employees (grouped according to qualifications etc.) 0

Fluctuations/turnaround time within workforce 0

opportunities for further education 0

Potential career developments/improved earnings 0

Available of flexible working-time models 0

company information policy with respect to employees 0

Social security for workforce 0

Job security/employee health

Work accidents 0

days lost due illness 0

integration of minority groups/ diversity

Proportion of minority groups in workforce (grouped accor-ding to qualifications etc.

0

Maintaining legal or other obligatory quotas 0

Measures aimed at integration 0

trade with 3. world

Human rights/work conditions/child labour 0

employee interests/ codetermi-nation

cooperation with trade unions/An codetermination 0

implementing employee survey 0

external

Public financial commitment 0

Public personal commitment 0

Promotion of new human resources 0

taking into account social aspects of redundancy/production location

0

Product security/responsibility 0

35

Part 2: depiction of sustainability performance points/abs %

Ecological performance 0 0,00%

input

energy consumption 0

Water consumption 0

Materials consumption 0

Land usage 0

input-related life cycle observation of significant products 0

output

emission of gases impacting on climate 0

emission of gases which destroy ozone 0

emission of gases toxic to humans 0

emission of other gases impacting on environment 0

Production of waste 0

Production of dangerous substances 0

Production of sewage 0

creation of noise 0

creation of smells 0

creation of dust 0

output-related life cycle observation of significant products 0

other aspects

environmental demands made of suppliers 0

environmental-specific training of employees 0

investments in the environment 0

Maintaining a ecological regulations/compliance/sanctions 0

0 0,00%

Results of part 2: depiction of sustainability performance 0 (of 240) 0,00%

Results of part 1: depiction of enterprise and formal aspects 0 (of 80) 0,00%

overall results: parts 1 and 2 0 (of 320) 0,00%

36