Mandating Company ESG Reporting Won’t Enhance Transparency, Finds Research
The EU’s Directive 2014/95/EU requires large companies to disclose non-financial information related to environmental, social, and governance (ESG) matters in their annual reports.
However, a recent study from Nyenrode Business University found that simply mandating reporting won’t guarantee enhanced transparency. In fact, the Directive’s flexibility and weak enforcement make it less effective, and more costly, for companies that are not motivated to share detailed information.
600 largest European firms studied
The research, which studied the 600 largest European firms, found that companies that voluntarily started reporting these non-financial matters before the directive was enforced did not face additional costs and were more likely to give helpful information.
However, companies that did not report these matters before they were required to by the directive were more likely to provide generic, poor-quality information, leading to more confusion and higher costs – which ultimately resulted in a drop in the company’s value.
Lack of enforcement is the biggest current barrier
Dr. Michael Erkens, a researcher on the study and Professor of Corporate Reporting at Nyenrode Business University, said: “Our results suggest that the flexibility embedded in and lack of enforcement of the Directive renders it ineffective in promoting non-financial transparency among firms with weak incentives to disclose meaningful information.”
Dr. Ries Breijer, also a researcher on the study and Assistant Professor of Corporate Reporting at Nyenrode, adds: “This underscores the need for a mandate with stringent reporting requirements, such as the Corporate Sustainability Reporting Directive (CSRD), and strict enforcement.”
To read the full publication, which is available as open access, please visit the full article: ‘Mandatory versus voluntary non-financial reporting: reporting practices and economic consequences’ on Taylor & Francis Online.
