Corresponding author: Karen Maas ( maas@ese.eur.nl ) Academic editor: Chris D. Knoops
© 2020 Karen Maas, Peter Sampers.
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Citation:
Maas K, Sampers P (2020) The expected impacts of regulating non-financial reporting. Maandblad Voor Accountancy en Bedrijfseconomie 94(7/8): 265-274. https://doi.org/10.5117/mab.94.55973
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Traditional financial reporting is not sufficient anymore for the renewed need for information of stakeholders. In result, governments have created different policies to stimulate or to have seen a strong rise in this kind of reporting during the last decades. Stakeholders, including governments, have high expectations about the potential of the reporting process to lead to improved transparency and accountability as well as to internal change and performance improvement. In this article we have developed a theory of change, describing the logic of the path from reporting to performance improvement. Based on a literature study we have collected data that support or argue against this logic line. We conclude that there is limited evidence that we can expect that reporting automatically leads to improved performance. There is a clear need for more research into the impact of non-financial reporting on performance.
non-financial reporting, impact, CSR performance
With the increasing interest in sustainability, society holds organizations accountable by claiming that organizations have social, environmental and economic impacts on society (
Traditional financial reporting is not sufficient for this renewed need for information of stakeholders (
We use a so-called Theory of Change (ToC) to highlight the plausible pathways through which resources translate into outcomes (
What is the Theory of Change (ToC) behind non-financial reporting and what academic evidence is available for the various steps towards the expected performance improvement?
A visualization of the Theory of Change (ToC) of non-financial reporting describing how actions lead to effects is provided in Figure
The ToC is build upon expectations reflected in practical documents like policy documents supporting the EU directive (European Commssion 2015) and the EU Directive itself (
The structure of this article is as follows. In section two we describe the path from an increased demand of non-financial reporting to reporting. Following, in section three the pathway from reporting to performance improvement is described. Finally, conclusions are addressed in section four.
To live up to the expectations of stakeholders, corporations need to approach their activities in a more strategic way and rethink the social impact of their activities (
For decades, organizations have reported on their financial results and clear and robust guidelines exist for financial reporting. Nowadays, there is an increasing focus on non-financial reporting. For example, sustainability reporting is a listing requirement in South Africa (GRI 2011). In line with this, it is no surprise that in the last two decades non-financial reporting practices have made enormous progress (
The economic crisis of 2009 has underscored that the behavior and the main principles of society have to change (
There are several reasons why sustainability reporting has received much attention from organizations, governments and agencies. Organizations operate in a multi-dimensional world, in which both financial and non-financial issues are important. Transparency became the key to ‘doing well’ (
Non-financial reporting can be valuable for both internal use and external use. Internally it will help organizations to reconsider their management decisions and (sustainability) strategy. Externally, it helps organizations to meet the requirements of external stakeholders. Organizations can use a separate sustainability report in order to be transparent and accountable to their stakeholders.
Although non-financial reporting has received much attention, the quality of non-financial information reported is neither always informative nor sufficient from a user perspective. While accountability, transparency and legitimacy of the organization is becoming more important for both organizations and stakeholders, organizations do not always deliver the information stakeholders ask for. In many cases there is a gap between the information required by stakeholders and the information reported by organizations (
There are several non-financial reporting standards, such as the Global Reporting Initiative’s Guidelines, UN Global Compact, OECD Guidelines for multinational organizations, CDP Ratings, Sustainability Accounting Standards Boards (SASB), International Integrated Reporting Council (IIRC) framework on Integrated Reporting and the German-European Deutsche Vereinigung für Finanzanalyse und Asset Management / European Federation of Financial Analysts Societies standard (DVFA/EFFAS). These guidelines have improved the quality of sustainability reports significantly (
In the last decades, there were many regulatory changes concerning non-financial reporting. Non-financial reporting started as a voluntary activity, currently there is a shift from voluntary regulation to public policy and governmental regulation. Since the beginning of this century, a growing number of countries introduced or strengthened mandated CSR reporting (KPMG et al. 2016). For the European Union the adoption of Directive 2014/95/EU that requires reporting of non-financial and diversity information by certain large companies is clear example.
Although there is a trend towards mandatory non-financial reporting, the positive effects of non-financial reporting are hampered by the differences in interpretation and use of the existing guidelines. Moreover, a more proactive non-financial report such as an integrated report is still voluntary in almost all countries. While there is some knowledge about assumed reasons for and assumed reasons against voluntary or mandatory non-financial reporting, knowledge about the real effects and impacts of both types of reporting is limited. Mandatory reporting seems to be intended for organizations to better account for their impacts on public goods and externalities, while voluntary reporting may be more oriented towards organizational benefits. However, it is difficult to validate these assumptions, as the impact of voluntary and mandatory non-financial reporting is a relatively new research topic and only limited evidence exists.
There are many arguments for and against mandatory and voluntary non-financial reporting (see for an overview of reasons Table
Overview of the effects and impacts (both positive and negative) of non-financial reporting.
Non-financial reporting can lead to: | Reference | Effect / Impact |
---|---|---|
Ability to manage reputational and organizational risks |
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+ |
Clear image of organization with information on future value of organization | Adams 2014 | + |
Compliance |
|
- |
CSR performance |
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+ |
|
- | |
|
- | |
Decision making without new mindset of manager | Adams 2014 | - |
High costs |
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- |
Increased awareness in organization about their role in society and value creation for stakeholders |
|
+ |
Innovation |
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+ |
Long-term vision |
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+ |
Operating/financial performance |
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+ |
Successful decision making |
|
+ |
Relation between financial and non-financial information (good for management) |
|
+ |
Uncertain chance of success | Adams 2014 | - |
Comparability |
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+ |
Maas et al. 2014, |
- | |
Confusion concerning ESG indicators |
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- |
Corporate branding |
|
+ |
Disconnection between strategy, risks and opportunities, operations, and financial performance |
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- |
Financial market reaction |
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+ |
|
- | |
Improved competitive position |
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+ |
Improved firm reputation | Maas 2009; |
+ |
Incomplete and selective information |
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- |
Increased credibility |
|
+ |
Increased stakeholder engagement, dialogue and/or satisfaction | Maas 2009; |
+ |
Increased transparency |
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+ |
Lack of materiality |
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- |
Lack of validity or based upon data that is most easily collected, rather than most important |
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- |
Reporting pitfalls like reporting hypocrisy, idealistic reporting and ‘ticking the box’ |
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- |
The essence of non-financial reporting goes beyond reporting. In general, we can argue that reporting increases transparency (e.g.
Non-financial reporting is about creating benefits for the organization and its stakeholders by relating the reported information to business strategy. In result it is more a matter of management than reporting (
It is also argued that sustainability reporting can create more benefits for organizations, such as an increased stakeholder engagement (
Despite the growing interest in non-financial reporting, a report is only a means and not an end in itself. What matters most, are the consequences of these reports and the question whether the intended goals that are associated with non-financial reporting are achieved. Non-financial reporting will only be effective when the information provided is useful for internal and external stakeholders. In order to be useful non-financial information should meet qualitative characteristics that are similar to those of financial information. It needs to be relevant and faithfully (complete, neutral and free from errors) represent what it purports to represent (
Metrics used in current sustainability reporting standards often lack validity or are based upon data that are most easily collected, rather than most important (
An underlying reason for this is the lack of comparability between sustainability reports. Increasingly, stakeholders are asking for comparable information. However, many organizations publish their non-financial information voluntarily or in accordance with requirements that offer wide discretion to management with respect to the content and form of the information provided. Different standards exist providing guidelines on how to report (1) outputs (e.g. GRI), (2) processes (e.g. Greenhouse Gas Protocol), and (3) impacts (e.g. true value reporting). The existence and use of these different standards, goes at the cost of a lack of comparability between sustainability reports (
One critical criterion to improve sustainability performance is to organize and use stakeholder feedback. Once the content of the report is clear, internal and/or external stakeholders can give advice, suggestions and criticism to the organization based on the report. Organizations can use this feedback in their decision-making and management processes. It is argued that it is valuable when a non-financial report considers not only sustainability performance outcomes, but information about the process towards these outcomes as well (
In addition to the belief that stakeholder feedback is very important to inform organizations with respect to desirable changes it also provides an incentive to change. According to Deloitte and MVO Nederland (2015), external pressure from stakeholders is important because it works better than internal pressure.
Regulation is often seen as an adequate tool for improving corporate sustainability practices (
In this study we analyzed the Theory of Change (ToC) behind non-financial reporting as well as the evidence base for its assumed effectiveness. The results show that the potential benefits of mandatory non-financial reporting strongly depend on context, the implementation and the organization. In Table
The principal aim of the European commission and the national implementation of the directive on non-financial reporting in the end is to limit negative externalities from organizations’ actions, either within the Netherlands or through their supply chains abroad, and to improve organizations’ performance on non-financial issues, using the internal and external feedback loops. This research shows that the ToC to achieve performance improvement by reporting is complex. Given the complexity and need to gather more evidence, being clear and explicit about the long-term ambition of enforcing non-financial reporting is needed.
In the last decennia we have seen an increase of reporting on non-financial information. However, there is still a large group of laggards that do not yet report on non-financial information. Although reporting is evolving towards a more integrated approach, many organizations still struggle to adopt such an integrated approach. Organizations could benefit from more guidance to how to report in an integrative way and about what to report. Existing research shows positive and negative effects on the impacts of non-financial disclosure. It is clear that more practical information and research on the actual impacts of reporting is needed. The expectation that reporting will automatically lead to improved performance is not as straightforward as it might seem. Future research might focus on the impact of reporting on performance improvements and the indirect effects on external stakeholders.
Prof. dr. K.E.H. Maas, Professor of Accounting & Sustainability, Department of Accounting and Finance, Open University, Heerlen, and Impact Centre Erasmus, Erasmus University Rotterdam.
Prof. dr. P.A.M. Sampers, Professor of Financial Accounting, Department of Accounting and Finance, Open University, Heerlen, and Department of Accounting & Information Management, Maastricht University, Maastricht.
The authors acknowledge the commission of PBL Netherlands Environmental Agency. Thanks also to Marjelle Vermeulen for her contribution to this literature review.
With non-financial reporting we refer to all different types of non-financial, environmental and/or sustainability reporting or disclosure, such as a separate sustainability report, a combined annual and sustainability report or the most recent trend in non-financial reporting, an Integrated Report (IR). Consequently, we will use both the terms non-financial reporting and sustainability reporting.
Examples of violating matters are environmental and social violations, such as the violations of human rights, or violations of voluntary target setting (e.g. CO2 reduction in a specific year).
Materiality refers to the importance and the usefulness of a report. Material issues are those issues that substantively impact, or have the potential to substantively impact the company’s strategy and its ability to create value over the short, medium and long term.