**5. Findings: is Blockchain suitable for CSR reporting**

In this section, we use the ten-step decision path [8] to determine the suitability of blockchain technology for CSR reporting.

#### **5.1 Do we need to have a shared common database for CSR reporting?**

Yes, we need to have a shared common database for CSR reporting. The main purpose of CSR reporting is to communicate the CSR performance to all the stakeholders of a company. Thus, there needs to be a common database that serves this purpose. According to a report by EY [2], 78 percent of investors use information from CSR reporting (in the form of ESG disclosure) to make investment decision which is a clear and strong indicator that investors need to have access to CSR reporting. In a similar manner, O'Rourke and Ringer [40] found that consumers also use information related to the sustainability of companies to make purchasing decisions. Bai and Sarkis and Khan et al. [41, 42] argued that as the global demand for sustainability increases, companies are increasingly searching for sustainable suppliers.

Another major benefit of having a common database is that it can reduce the inconsistency and ambiguity that can arise when there are multiple databases (which are likely to use multiple standards) for CSR reporting. Pucker [25] argued that, unlike financial reporting that follows strict and common standards governed by a third-party enforcer (i.e., the Securities and Exchange Commission), most large companies can choose at their discretion which CSR reporting standards to be used, which information to be reported and whether to have a third party verify their reports or not. Pucker [25] concluded that the key reason why CSR reporting does not lead to true progress is that CSR reports are "nonstandard, incomplete, imprecise, and misleading. As mentioned above, the adoption of GRI standards which are considered the

#### *CSR Reporting and Blockchain Technology DOI: http://dx.doi.org/10.5772/intechopen.105512*

most widely used sustainability reporting standards in the world by various corporations is a clear indicator that we need a common database for CSR reporting. In reality, there are other CSR reporting standards such as another two major CSR reporting standards from AccountAbility standards (AA1000 Series) and Global Compact's Communication on Progress (COP) from the United Nations as well as "hundreds of domestic CSR reporting guidelines, principles, regulations, and standards" [23]. Even though blockchain technology does not directly solve these issues (i.e., there could be multiple blockchain platforms for CSR reporting which will not address these issues), it can be designed properly to mitigate these issues.

#### **5.2 Are multiple parties involve in CSR reporting?**

Yes, there are multiple and "should be more" parties involved in CSR reporting. Several parties that are involved with the current CSR reporting are as follows. Companies are responsible for producing CSR reports. Various stakeholders such as consumers, investors, suppliers, and regulators are the users of CSR reports. Various international organizations such as the GRI, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) are responsible for developing standards for companies to use in producing CSR reports voluntary. Governments in various countries, such as Australia, China, South Africa, United States, and the European Union are responsible for regulating the CSR reporting of (some) companies. Various CSR reporting assurance services are responsible for ensuring the reliability and credibility of CSR reports made by companies based on certain standards. Various infomediaries such as CSRwire which is a news media focusing specifically on CSR related news and CSRHub which is an organization that provides data about ESG ratings for corporations around the world are responsible for collecting and dissimilating information about CSR activities and performance to all relevant stakeholders. Dubbink et al. [43] defined an infomediary as an informational intermediate organization that acts as a broker of information. The main role of an infomediary is to disseminate information to all involved parties as well as controlling, verifying, and translating information received from companies. Thus, it is evident that there are multiple parties involved in CSR reporting.

Furthermore, there should be more parties involved in CSR reporting which could occur by adopting blockchain technology in CSR reporting. One important party that can be involved with CSR reporting is "the crowd". According to the work of Ghezzi et al. [44] which provides a systematic review of crowdsourcing literature, a unified definition of crowdsourcing as proposed by Estellés-Arolas et al. [45] is that "crowdsourcing is a type of participative online activity in which an individual, an institution, a non-profit organization, or company proposes to a group of individuals of varying knowledge, heterogeneity and number, via a flexible open call" for undertaking some task voluntary. Crowdsourcing is a form of open innovation. Crowdsourcing leverages the power of the "crowd" to perform some tasks to achieve some common objectives. These objectives can range from information gathering, ideas generating, decision making via voting or producing some goods and services. One of the most evident examples of crowdsourcing is the Wikipedia website which relies on crowdsourcing to create an online encyclopedia that is generally considered as the "biggest" and "best" encyclopedia in the world.

Several advantages can be realized when crowdsourcing powered by blockchain technology is used to perform some existing CSR reporting activities. Unlike traditional crowdsourcing, in which all data related to crowdsourcing activities are

recorded and verified by a centralized entity, blockchain crowdsourcing will record and verify crowdsourcing activities through a decentralized blockchain network without relying on a centralized entity. Blockchain crowdsourcing can be a powerful platform that uses the power of the crowd to gather valuable information that can enhance CSR reporting. Blockchain crowdsourcing can be used to collect information about CSR performance from direct observers. People who experience socially acceptable or unacceptable activities firsthand can report evidence of these activities (e.g., taking a photo or recording a video of evidence) to the blockchain crowdsourcing platform for verification. The verification process is done in a decentralized manner by various anonymous individuals. This can significantly enhance the reliability of the verification outcome and reduce the chance that the verification process will be interfered with and manipulated by someone who has the "power" to do so.

#### **5.3 Are these multiple parties have trust issues?**

Yes, these multiple parties have trust issues. First, companies that create CSR reports have incentives to use these reports for business benefits. For example, companies might use CSR reports to gain access to financial resources or increase customer satisfaction [46–49]. Diouf and Boiral [27] found that companies tend to produce CSR reports that use GRI principles only when these principles lead to favourable information. Mahoney et al. [50] found evidence of greenwashing in standalone CSR reports in which companies exaggerate their social and environmental performance in order to be viewed as a "good corporate citizen."Boiral [51] found that 90 percent of significant negative events were not reported even when companies follow GRI principles. Michelon et al. and Hopwood [22, 52] found that companies use CSR reports for legitimacy or symbolic purposes which is an attempt to create a legitimate "brand image" that can reduce external pressure on other socially undesirable activities. Pérez [53] found that CSR reporting can be used to enhance corporate reputation. Thus, it is evident that companies do have a conflict of interests with other stakeholders when CSR reporting is being considered.

Second, there could be a conflict of interests among agents in each party. It is possible that agents in each party (such as managers or employees) might commit fraud in CSR reporting for their own personal benefits. Managers or employees in a company that produces CSR reports might receive benefits from committing fraud in CSR reporting which include career advancement, higher compensation, building a personal reputation and avoiding penalties from personal misconducts. Managers or employees in an organization that develops reporting standards might be influenced by some companies or some political parties since any entity that has the power to define CSR or CSR's agenda will have the power to shape the global business landscape for the benefits of this entity [18]. It could be argued that the presence of various CSR reporting standards globally and especially locally is a result of some influential individuals' attempt to shape CSR or CSR's agenda in their own desirable ways [23]. Managers or employees in an organization that provides CSR reporting assurance services might be bribed to produce favuorable assurance reports for some companies. Managers or employees in an infomediary might be rewarded financially for providing favuorable CSR information for some companies. Finally, government officers might be corrupted and neglect their duties for personal benefits.

According to Karpoff [54], corporate fraud should be viewed as an umbrella that includes all kinds of corporate misconduct which can include falsifying (intentionally reporting falsified information), misreporting (intentionally delaying reporting),

#### *CSR Reporting and Blockchain Technology DOI: http://dx.doi.org/10.5772/intechopen.105512*

misrepresentation (intentionally making false statements based on facts), and others. Corporate fraud can have several damaging effects on the fraud firms as well as on society. According to Reurink [55] who examines financial fraud, which is one kind of corporate fraud, the negative effects of corporate fraud are the deterioration of shareholders' wealth, destroying corporate reputation, reduction in sales and revenue, higher borrowing costs and other negative externalities on employees, suppliers, creditors, non-fraud firms, governments and society. To understand why misconduct occurred, it is common to use the fraud triangle framework (see [56] and references therein). Based on the fraud triangle framework, there are three factors that incentivize people to commit fraud which are i) pressure for committing fraud (economic or emotional incentives), ii) opportunity for committing fraud successfully and undetectably and iii) rational for committing fraud (i.e., how one justifies to oneself why committing fraud is acceptable).

Kurpierz and Smith [57] developed the greenwashing triangle by expanding on the fraud triangle. The three factors that incentivize people to commit greenwashing are i) pressure for being environmentally friendly, ii) greenwashing opportunity in the context of CSR reporting and communication, and iii) rational why greenwashing is acceptable. According to a report by KPMG [58], there has been increasing pressure for corporates to strive for a higher CSR performance. There are both personal and organizational benefits to achieving a higher CSR performance. Personal benefits include higher executive compensation and career advancement of employees who are responsible for the associated CSR performance. Organizational benefits include better financing conditions, higher stock prices due to investors' preference towards sustainable investing, and improved corporate reputation. As CSR reporting is still in its infancy, has multiple reporting standards, and is produced voluntarily, these factors increase greenwashing opportunity as they allow people who produces CSR reports to exercise their own discretion, may be dishonestly, for their own benefits [23, 57]. Finally, there are two misconceptions that provide rationale for people to think that greenwashing is acceptable. These misconceptions are 1) thinking that greenwashing is similar to advertising and 2) thinking that the financial benefit of greenwashing outweighs its cost. In sum, these strongly suggests that multiple parties who are involved in CSR reporting have trust issues.

#### **5.4 Is it possible and desirable to avoid a trusted third party in CSR reporting?**

Several parties including international organizations that develop reporting standards, companies that provide CSR reporting assurance services, CSR infomediaries and governments are multiple trusted third parties that help resolve trust issues for CSR reporting. The companies that produce CSR reports can also be viewed as a trusted third party as these companies are supposed to truthfully collect CSR performance information on behalf of all stakeholders. We think that it is not possible and it is not desirable to completely avoid all these trusted third parties. However, we think that it is possible and desirable to use blockchain technology as a platform that integrates all traditional trusted third parties, transforming their functions, and reducing their drawbacks for advancing CSR reporting.

A major drawback of a centralized intermediary is that the data that it records and verifies is being done by a few identifiable agents which can be manipulated. It is undeniable that having a favourable information in a CSR report can have large financial consequences for some corporations and all individuals involved. Therefore, the pressure to commit fraud in this case can be large. Blockchain technology, on the other hand, relies on decentralized and anonymous agents to record and verify all activities in the blockchain network which makes it significantly more difficult for an agent to commit fraud. A concept in the blockchain technology literature called decentralized autonomous organization (DAO) is relevant for this purpose. According to Wang et al. [59], decentralized autonomous organization is defined as an "organization that can run on its own without any central authority or management". This organization is run based on rules (i.e., codes and smart contracts) and a consensus group decisionmaking mechanism operated under a tamper-proof blockchain technology.

Blockchain technology does not have to be used to completely remove all intermediaries and all their functions. On the other hand, and especially in this context, we think blockchain technology can be used to replace and transform some functions of existing intermediaries in order to achieve maximum benefits. Governments, the international organizations that develop CSR reporting standards, major CSR infomediaries, major CSR assurance companies and large organizations (or some combinations of them) could work together to initiate and develop a blockchain platform for CSR reporting. Companies will submit their individual CSR activities to the blockchain network along with proof-of-evidence associated with each activity which will be recorded and verified by decentralized and anonymous agents. Existing CSR assurance companies can incorporate blockchain technology into their existing services by playing a leading role in initiating and managing these decentralized and anonymous agents. Other stakeholders or "the crowd" who experience socially acceptable or unacceptable activities of any companies firsthand can be encouraged to participate and report these activities to the blockchain network along with proof-of-evidence (e.g., taking a photo, recording a video of evidence, or any method that employees in a CSR assurance companies use) to be verified as discussed above. Blockchain crowdsourcing can be used to help advance our development in defining CSR and developing CSR reporting standards by gathering consensus (via voting mechanism) regarding what are constituted as harms (or good deeds), which harms (or good deeds) should be addressed, who should be responsible for addressing each harm (or each good deed), and who should be allowed to define CSR. Various international organizations that develop CSR reporting standards or governments can play a leading role in using blockchain crowdsourcing to gather consensus to advance CSR reporting. CSR information of any company can be accessed by all stakeholders by interacting with the blockchain network with low or zero transaction fees. Finally, the CSR information of any company can be disseminated objectively using smart contracts designed by existing major infomediaries. These smart contracts will make automatic announcements to relevant stakeholders when some conditions are met (such as a significantly negative CSR event has occurred).
