KPIs Reporting and Financial Performance in the Transition to Mandatory Disclosure: The Case of Italy

Abstract

European companies of public interest requested to comply with the Directive 2014/95/EU on Non-Financial Information (NFI) are allowed to fulfil the regulatory obligation following the Global Reporting Initiative (GRI) guidelines, which constitute at present the most widely spread framework for sustainability reporting. Given such prevalence, this paper examines the level of disclosure on Key Performance Indicators (KPIs) and its relationship with financial performance over the period 2016–2018 for Italian-listed companies adopting GRI guidelines to convey NFI under the Decree 254/2016. The research applies content analysis of the annual and sustainability reports to measure the disclosure index on KPIs, and Data Envelopment Analysis (DEA) to estimate the financial performance. A Tobit-regression model explores the nexus between financial performance and companies’ disclosure. Findings show a decrease in the disclosure levels in the early adoption of mandatory NFI and a significant association with the financial performance of the sampled companies. The study, assuming a comprehensive view of the financial indicators, improves our knowledge of the relationship between sustainability disclosure and financial performance and adds to the literature on the evolution of NFI in the transition from voluntary to mandatory regime.

Assessing the Effects of Directive 2014/95/EU on Nonfinancial Information Reporting: Evidence from Italian and Spanish Listed Companies

“…This reduction might be regarded as the need to report only information considered material according to the Decree, leading to the identification of a factor of razionalisation in the new regulation that supports more effective communication with stakeholders Tarquinio et al 2020). This interpretation is consistent with previous research, according to which a lower quantity of information is not associated with a decrease in quality (Crawford and Williams 2010;Loprevite et al 2020). Furthermore, considering the provision of mandatory assurance of NFI, the reduced amount of NFI might suggest a prudent approach to disclosure that induces companies to review the content of their NFI reports Tarquinio et al 2020).…”

“…In Italy, we detected a progressive reduction in disclosure levels that involved the three indicator categories, especially the economic category. The same trend was found in previous studies that analysed the dynamics in the use of GRI indicators before and after the entry into force of the Italian Decree (Loprevite et al 2020;Tarquinio et al 2020). This reduction might be regarded as the need to report only information considered material according to the Decree, leading to the identification of a factor of razionalisation in the new regulation that supports more effective communication with stakeholders Tarquinio et al 2020).…”

“…Studies on the impact generated by legislative changes in Spain are less numerous than studies related to the Italian case. Most of the Spanish studies aimed to explore the mandatory reporting of NFI by analysing the reporting behaviour of Spanish companies With reference to the Italian case, most of the studies compared NFI before and after the decree, showing, on the one hand, an increase in the quality of disclosure (Leopizzi et al 2019;Mion and Loza Adaui 2019;Caputo et al 2020;Nicolò et al 2021) and, on the other hand, a general reduction in the number of sustainability indicators disclosed by Italian companies (Loprevite et al 2020;Tarquinio et al 2020). On the contrary, Korca et al (2021) found a significant increase in the quantity but not in the quality of NFI.…”

Non-financial key performance indicators: what determines the differences in the quality and quantity of the disclosures?

“…Non-financial KPIs were found to be used in corporate reporting (Arvidsson, 2011), and what is more, to directly affect the company's social performance and indirectly its bottom line (Lisi, 2018). Similarly, Loprevite et al (2020) identified a positive association between the level of disclosure on KPIs and financial performance. Bradley and Botchway (2018) focused on the use of KPIs in the coffee industry and found a considerable variance in the KPIs disclosed, which led them to the conclusion about the discretionary nature of nonfinancial reporting.…”

Creating a Comprehensive Method for the Evaluation of a Company

“…A number of studies and discussions have focused on the potential benefits of such business behaviour compared to the costs of achieving sustainable goals. The most frequently mentioned benefit is the growth of a company's sustainable performance, due to which the company's financial health strengthens [7]. Da Costa and Boente [8] agree with this conclusion, stating that the aim of companies is to include all the basic dimensions of sustainable development and to integrate this concept into corporate governance, precisely in order to increase performance.…”