ESG reporting: “Transparency promotes sustainability”

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Professor Thorsten Sellhorn is Director of the Institute for Accounting, Auditing and Analysis at LMU. In the interview reproduced below, he explains how information about the ecological and societal consequences of economic activity can influence how people act.

US President Donald Trump has loudly trumpeted his intent to extract as much oil as possible. You conduct research into how transparency can be achieved about aspects of economic activity that are harmful to the climate. Isn’t your research a bit behind the times?

Thorsten Sellhorn: I beg to differ. True, some people in the USA and elsewhere want to deny the fact of climate change. But the problems we seek to help solve from the perspective of accounting are not going away.

A similar thing happened in the 1960s, when the tobacco lobby tried to suppress knowledge about the fact that smoking causes cancer. Today, the fossil lobby is doing the same kind of thing.

Is the sea change on the issue of sustainability purely a US phenomenon?

It is regrettable that, in Europe, we see a certain tendency to equate sustainability with red tape – and with competitive disadvantages resulting from bureaucracy. That is partly because EU rules prescribe a raft of data that large, publicly traded companies are required to disclose in their sustainability reports.

I see this as a genuinely impressive feat on the part of the corporate lobby, which again and again succeeds in getting unsubstantiated cost estimates for these reporting duties splashed across the press. To my knowledge, however, the estimates themselves are utterly unfounded in empirical facts. On the other hand, we do not yet know enough about the extent to which these transparency regulations genuinely promote sustainability or lead to better decisions.

Trans-regional project on transparency

But you are studying them at a Collaborative Research Center.

Yes, we are, in trans-regional project TRR 266. Back in 2018, when we applied to the German Research Foundation (DFG) for the first four of what will hopefully be twelve years in total, interest in the project was tremendous. We were the first TRR in the field of business administration. We still are. And it is not for no reason that we have a question mark after our biggest research question: Can transparency help?

And can it?

Environmental economists say that climate change is really a gigantic market failure. Why? Because companies cause greenhouse gas emissions that are heating up our planet, causing damage that runs into many trillions of euros. But the companies themselves don’t have to foot the bill. At least, they didn’t until recently, and certainly not to the full extent of the damage. What we are left with, then, are what are known as external costs. And when that happens, you have to regulate.

So, the regulator – the government – now has three options: First, prohibit emissions. Second, make emissions more expensive. Or, third, demand transparency about emissions. It is often said that transparency rules are the bluntest sword in the political arsenal – the Plan C you go to when there is a lack of political will for Plans A and B. If those more effective approaches are infeasible, all you have left is transparency as the third-best option, one on which people can hopefully agree.

But let’s not forget that transparency is also the sine qua non if you want to get anything done at all. If you don’t know how companies are polluting, you lack the data that is needed for any form of regulation.

For whom is this transparency intended?

Ideally, transparency will bring things to light in all kinds of areas, and this will then alter people’s decisions. If I want to drive a low-carbon car, for example, it is useful if the car maker creates transparency about its car’s carbon footprint compared to that of other manufacturers. As a customer, I can then factor the carbon footprint into my purchase decision, alongside such issues as price and horsepower. But if the CO2 data is lacking, I as a customer find myself in the dark.

In the same way, banks, investors and funds can think about whether they want to complement their financial assessment of a company with also examining its ESG performance, i.e. its alignment with environmental, social and governance considerations.

Transparency at the LMU canteen

This Collaborative Research Center has a large number of individual projects. Is there any one of them that gave you a real eureka effect?

One of them was a study we launched here at the LMU canteen to find out whether it makes a difference to people’s decisions if we give them information on a product’s carbon footprint, and whether it is important how we present that information.

How did you tackle the study?

For every dish on the menu, we added information on CO₂ emissions per 100 grams of food: first, in terms of grams of CO₂ equivalents; second, in terms of the cost (in cents) to the environment; and, third, expressed as a percentage of the carbon budget a person has available for daily meals if they want to live in accordance with the provisions of the Paris treaty. Traffic light colors were also added as a visual signal.

What did you find particularly surprising in this project?

First, I was surprised that the additional information had any impact at all on people’s behavior. Meat consumption declined by about 10% at peak times.

My expectation was that students would already be very aware of their lifestyle’s carbon footprint, and that this information would therefore be nothing really new for them. For a student to look at the menu and say, “Oh, this schnitzel is responsible for far more CO₂ than I would have thought, so I will skip it today” – I wouldn’t have expected that.

I was also surprised that the costs expressed in euros had the most powerful impact on the students. We had expected that to happen with the budget percentage visualization, because the amounts in euros tend to be on the low side for most dishes.

Companies’ sustainability reports freely accessible

Another project you were involved in launching is the Sustainability Reporting Navigator. What is that about?

That is an open science platform on which we make companies’ sustainability reports freely accessible: to the scientific community, but also to a broad public audience. In Europe, you still have to do a lot of digging to find sustainability and annual reports – on company websites, for example.

We made it our job to collect these reports, post them online on a website and make it possible to search them, even with an AI tool. In this way, one or more corporate reports can be researched, and people can ask questions such as: What is your carbon footprint? How high is the gender pay gap? What working conditions apply? What about employee satisfaction? And so on, at any given firm. The AI then extracts this information from the sources and also cites where it found them. This creates transparency and ensures that anyone who is interested can look up these aspects and get an idea of this or that company and how sustainably they operate. On our website, we regularly publish new insights from analyzing these data.

Professor Thorsten Sellhorn is Director of the Institute of Accounting, Auditing and Analysis at LMU. He is Principal Investigator in the German Research Foundation’s (DFG) trans-regional project TRR 266 Accounting for Transparency. He is currently also the speaker of LMU Munich within the TRR 266.

For more on the topic, see:

Sustainability Reporting Navigator

TransRegio-Projekt: Accounting for Transparency