While sustainability reporting is on the increase following the introduction of mandatory disclosure requirements, engaging in sustainability reporting doesn’t shield firms from criticism – in fact, it can have the opposite effect, according to a new study by Radboud University.
The study, Government Orchestration at Play: The Influence of Disclosure Regulation on Stakeholder Accusations and the Role of CSR, which was published in the Journal of Management Studies, explored how the introduction of mandatory sustainability reporting has led to greater transparency, in turn making it easier for investors, NGOs, journalists and other stakeholders to identify shortcomings in environmental performance.
“Stakeholders have raised more critiques, because these new rules have made it easier to compare companies”, commented Julia Bartosch, assistant professor of organisational change at Radboud University. “In the past, companies could reduce criticism by highlighting relatively generic efforts in sustainability when regulation was lacking altogether. We found that with the more equal playing field the regulation provides, companies that provide more details on their sustainability activities actually raise expectations on responsible business conduct and, accordingly, scrutiny.
“Business have to catch up with such expectations in order to avoid scrutiny and thus to close the gap between their conduct and raised expectations.”
About the study
The research team analysed data from more than 1,500 companies worldwide between 2007 and 2018 to examine whether mandatory disclosure had strengthened external oversight.
“What we found was that companies that were required to disclose information about their environmental, social and governance activities received significantly more public accusations about irresponsible business conduct,” Bartosch added. “The transparency has made it easier for investors, NGO’s, journalists and other stakeholders to point out failures and shortcomings by these companies. The regulation worked as intended to activate oversight.”
Reporting obligations
While recent proposals have sought to reduce reporting obligations for some businesses, amid concerns that extensive disclosure creates unnecessary administrative burdens, the researchers argue that voluntary reporting frameworks are unlikely to reduce the level of criticism companies can expect.
“With this research, we show that less precise and more voluntary regulation that became more or less standard across many countries is simply not better for business, because such lax regulation does not protect against stakeholder complaints,” said Bartosch.
“Stricter regulations could have been a way to better distinguish between companies that truly invest in the sustainability of their business operations and those that merely ‘pretend’ to do so. That opportunity has now been missed.” Read more here.
