What do stakeholders in the construction industry look for in non-financial disclosure and what do they get?

Abstract

Purpose This study aims to verify whether non-financial disclosure in the construction industry (CI) responds to stakeholders’ information needs and explores the most frequent topics disclosed in terms of the environmental, social and governance (ESG) pillars. Design/methodology/approach This study uses a bag-of-words method and latent Dirichlet allocation to match stakeholders’ expectations with information disclosed by companies. This paper assesses the publicly available non-financial disclosure of the 46 European CI companies covered by the Refinitiv database with ESG scores. Findings This study provides two main findings. First, it shows the mismatch between stakeholders’ information needs and what they get in non-financial reporting. Despite non-financial information in CI disclosure, the information disclosed by many CI companies does not meet their users’ information needs. CI companies commonly focus on their sustainable products and health policy while omitting other topics of interest – the circular economy, unethical business behaviour, migrant policy and human trafficking. Second, this study indicates the defects of simple disclosure analysis based on keywords and highlights the importance of context in information analysis. Practical implications The proposed novel approach to text analysis offers several practical applications. It is a more effective tool for evaluating companies’ sustainability performance. It may be especially important to ESG rating providers. Additionally, the results may be of interest to companies wishing to improve their communication, and, in particular, to regulators and standard setters in two matters. The first is the need for more pressure to increase awareness among issuers to shift from disclosing large amounts of non-financial information to disclosing good quality non-financial information, which would be appropriate for meeting stakeholders’ expectations. The second is the necessity for deepening issuers’ understanding of the diverse stakeholders’ information needs, considering the substantial differences among industries and improving communication to meet them. Originality/value This study introduces text analysis that, apart from keywords, considers the context of these keywords’ appearances in a report’s narration. It allows a significantly improved understanding of the information disclosed and a more stable grounding for reasoning, leading to better and informed decisions. Moreover, this study verifies how the information disclosed matches stakeholders’ needs. Finally, it enriches the literature on sectoral analysis concerning non-financial disclosure.

Risk Information in Non-Financial Disclosure

“…Lately, a tool often used for topic modeling is an unsupervised Bayesian machine learning approach called latent Dirichlet allocation (LDA), introduced by Blei, Ng, and Jordan (Blei et al 2003). It is still recognized as a cutting-edge method (Jacobi et al 2016) that has recently become more frequently used in companies' financial and non-financial reporting studies (Hadro et al 2021;Dyer et al 2017;Brown et al 2020;Huang et al 2018). The authors of the method explain that LDA is a generative probabilistic model of a corpus.…”

“…For the second issue, looking at the NFD standard, we developed a list with topics that could appear in NFD. Using cross-checking between two researchers and looking at the ten most frequent words (Hadro et al 2021;Goloshchapova et al 2019), we labeled LDA topics with NFD ones. We identified risk topics, assuming that a topic belongs to risk topics if the root of word risk appears among the ten most frequent words.…”

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

“…While accountability is an important means to develop, manage, maintain and restore legitimacy (Birkey et al , 2016; Hyndman and McConville, 2018; Kim, 2019; Kuruppu et al , 2019), non-financial disclosures have been criticised to reflect impression management rather than genuine demonstration of accountability and commitment to sustainability (Adler et al , 2018; Akbar and Deegan, 2021; Cho et al , 2015a; Kuruppu et al , 2019; Melloni et al , 2017). Such concerns are echoed by papers included in this special issue, with Abhayawansa and Adams (2022) finding a lack of information on pandemic risk and a short-term focus on climate risk, and Hadro et al (2022) reporting a mismatch between information disclosed and information of interest to stakeholders. These two studies along with Dameri and Ferrando (2022) propose ways of disclosing value creation information, which could improve stakeholder satisfaction and corporate legitimacy.…”

“…The papers related to “accountability” and “legitimacy” echoes the predominant voice in the extant literature that there are differences between stakeholder expectations and disclosure content. The proposals made by the authors can help advance better reporting practices (Abhayawansa and Adams, 2022; Dameri and Ferrando, 2022; Hadro et al , 2022). 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.…”

“…Hadro et al (2022) compare stakeholders’ expectations with information disclosed by European companies in the construction industry. Their analysis shows a mismatch between stakeholders’ information needs and information disclosed in non-financial reports, where information of interest to stakeholders, such as on the topics of the circular economy, unethical business behaviour and human trafficking, have been omitted.…”