Regulating non-financial reporting: evidence from European firms’ environmental, social and governance disclosures and earnings risk

Abstract

Purpose Motivated by the enactment of non-financial reporting regulations by the European Parliament, this paper aims to investigate the impact of European Union (EU) directive 2014/95/EU on the quantity of environmental, social and governance (ESG) disclosures by the S&P Europe 350 index firms. This study also investigates whether the implementation of the non-financial information (NFI) reporting regulations influences the association between ESG disclosures and firms’ earnings risk. Design/methodology/approach To measure the impact of mandatory regulations on the quantity of ESG disclosures, this study estimates the average treatment effects using a propensity weighted sample. Then this study uses the difference-in-differences method to estimate the differences in the association between ESG disclosures and earning risk before and after implementation of the EU directive. Findings The results show a significant positive impact of the EU directive on the quantity of ESG disclosures for the sample European public-interest entities, which indicates that the mandatory NFI reporting requirements could boost the availability of increasingly demanded ESG related information. The enhanced association between the ESG disclosures and firms’ earnings risk during the post-directive period reveals that mandating NFI reporting also increases the quality of ESG disclosures. Originality/value Using the legitimacy and decision-usefulness theories, this study provides novel evidence concerning the impact of the EU directive on the quantity and quality of ESG disclosures.

Sustainability, non-financial, integrated, and value reporting (extended external reporting): a conceptual framework and an agenda for future research

“…The need to secure “legitimacy” also affects “accountability”. Stakeholder demand, pressure and scrutiny are primary influences of non-financial reporting practices (Adler et al , 2017; Clune and O’Dwyer, 2020; Thorne et al , 2014), and government oversight and regulatory requirements are means to influence disclosure quality (Arif et al , 2022; Kansal et al , 2022; Qian et al , 2022). The need to secure “legitimacy” also affects “proactivity”, as studies have reported stakeholder pressure shapes sustainability systems and practices (Abdalla and A.K, 2015; Johnstone and Hallberg, 2020; Vilchez et al , 2017).…”

“…Studies related to “determinants and consequences” and “external verification” contribute insights on the relatively new developments of mandatory requirements and the field of integrated reporting. For determinants, the papers contribute insights on the potential use of mandatory disclosure requirements to stimulate more meaningful disclosure (Arif et al , 2022; Kansal et al , 2022), the influence of corporate governance characteristics on EER in the contexts of a developing country and in Europe (Girella et al , 2022; Le et al , 2022), and possible impacts the IIRF will have future disclosure practices (Bridges et al , 2022). For consequences and external verification, the papers concentrate on capital market consequences and provide further insights on the value of integrated reports and non-financial assurance (Grassmann et al , 2022; Hsiao et al , 2022b; Rossignoli et al , 2022).…”

“…The study provides evidence in support of mandating ESG reporting, as the findings show the EU Directive is effective in increasing the quantity of information disclosed. Further, Arif et al (2022) inferred that the EU Directive increases disclosure quality as firms’ earnings risk is relatively lower post-directive compared to pre-directive.…”

“…4.1 Influence of regulations and corporate governance on disclosure practices Kansal et al (2022) and Arif et al (2022) investigate the influence mandatory disclosure requirements have on organisations' practices. In the context of India, Kansal et al (2022) interviewed regulators and public sector organisations to explore their perspectives on mandatory CSR reporting requirements.…”

“…Kansal et al (2022) emphasise the need for dialogue between regulators and reporters to reduce expectation gaps and move towards more meaningful disclosure. Arif et al (2022) examine the context of Europe, assessing the impact Directive 2014/95/EU has on firms' ESG disclosure quantity and the association between ESG disclosure and earnings risk. The study provides evidence in support of mandating ESG reporting, as the findings show the EU Directive is effective in increasing the quantity of information disclosed.…”