How can reporting improve sustainability practices?
The study Mandatory CSR and Sustainability Reporting: Economic Analysis and Literature Review by Hans B. Christensen, Luzi Hail, and Christian Leuz investigate the potential economic effects of mandatory sustainability disclosure for firms.
They highlight that:
- Mandatory sustainability reporting can address investor complaints about the lack of verifiable and comparable information by enhancing the transparency and comparability of corporate disclosures.
- It can also influence capital markets by reducing information asymmetry, which may lead to lower cost of capital and improved stock liquidity.
- Firms may alter their behaviour in response to mandatory CSR reporting, potentially leading to more sustainable practices and better management of environmental and social risks.
- Mandatory disclosure regimes can have unintended consequences, such as firms abandoning certain business activities to avoid controversial CSR issues or exiting markets altogether.
- The study highlights the need for clear guidelines, materiality thresholds, and robust assurance mechanisms to ensure compliance and prevent boilerplate disclosures.
These conclusions may not fully reflect the costs and benefits of specific CSR activities or standards, as predicting the economic consequences of a CSR reporting mandate involves significant uncertainty.
The authors, however, identify several areas for future research, including measuring the effects of CSR reporting on firm behaviour, the role of financial intermediaries in processing CSR information, and the impact of different reporting standards on market and sustainability outcomes.