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Radu, O.M.; Dragomir, V.D.; Hao, N. Non-Financial Reporting under a Mandatory Regime. Encyclopedia. Available online: https://encyclopedia.pub/entry/52083 (accessed on 02 July 2024).
Radu OM, Dragomir VD, Hao N. Non-Financial Reporting under a Mandatory Regime. Encyclopedia. Available at: https://encyclopedia.pub/entry/52083. Accessed July 02, 2024.
Radu, Oana Marina, Voicu D. Dragomir, Ningshan Hao. "Non-Financial Reporting under a Mandatory Regime" Encyclopedia, https://encyclopedia.pub/entry/52083 (accessed July 02, 2024).
Radu, O.M., Dragomir, V.D., & Hao, N. (2023, November 27). Non-Financial Reporting under a Mandatory Regime. In Encyclopedia. https://encyclopedia.pub/entry/52083
Radu, Oana Marina, et al. "Non-Financial Reporting under a Mandatory Regime." Encyclopedia. Web. 27 November, 2023.
Non-Financial Reporting under a Mandatory Regime
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This entry is adapted from the peer-reviewed paper 10.3390/su152316265

Non-financial information (NFI) helps companies, investors, and other stakeholders in the decision-making process, so that the value of NFI increases over time.

sustainable development non-financial reporting sustainability reporting environmental, social, governance (ESG)

1. Introduction

It is crucial for companies to have the ability to identify threats in advance, as this may reduce bankruptcy risks. Kaczmarek et al. [1] proposed quantitative models in which prosperity is evaluated based on predefined selected financial indicators. These models are expected to evolve by including non-financial indicators and sustainability considerations [2]. The integration of sustainability issues into the operational activities of a company becomes key to its survival on the market. This is communicated in a structured manner and covers environmental, social, and governance (ESG) aspects, defined as non-financial information (NFI). In the past two decades, the online disclosure of NFI has become a generalized practice [3]. Knowledge and technical resources are needed to prepare a report that is reliable and useful to external constituents [4]. Moreover, the social fabric of each country includes cultural expectations and values that would shape social expectations about organizational behaviors [5].
Non-financial reporting topics contribute to understanding the overall organizational performance of a company, along with financial and operational matters. There is institutional pressure on businesses to comply with regulatory requirements and standards on ESG disclosures [6]. However, due to the lack of reporting frameworks and methodologies on this matter, the quality of NFI is often debated. Various stakeholders, including investors and regulators are concerned about the ability of NFI to accurately describe the “sustainability” of business strategies [7]. Moreover, companies have a responsibility to disclose NFI that is relevant, reliable, comparable, and useful to stakeholders while avoiding greenwashing [8].
For the past ten years, the European Union (EU) has committed to implementing mandatory sustainability reporting [9][10]. In its initial phase, it was called “non-financial reporting” and was mandated through the Non-Financial Reporting Directive 2014/95/EU (abbreviated NFRD). This directive was adopted in 2014 and entered into force in 2017. The reporting requirements outlined in the NFRD pertain to disclosing non-financial information for large public-interest entities. Companies can use various frameworks, and assurance by an auditor was not required. However, the NFRD lacked reference to applicable reporting standards, so that some of the target companies resorted to the Global Reporting Initiative (GRI) standards [10]. Recognizing this gap, the European Union deemed it necessary to expand sustainability reporting requirements through the new Corporate Sustainability Reporting Directive 2022/2464 (abbreviated CSRD), effective from 5 January 2023. The CSRD widens the scope of reporting obligations, encompassing a more diverse set of companies, while also streamlining the reporting process through standardization. This EU initiative represents a key step in the harmonization of sustainability reporting in the post-2024 period. 

2. Company-Level Factors of Non-Financial Reporting Quality under a Mandatory Regime

Non-financial information (NFI) helps companies, investors, and other stakeholders in the decision-making process, so that the value of NFI increases over time. Some businesses may be considered more attractive investment opportunities if the market and stakeholders assess a strong commitment to sustainability [11]. The NFI is disclosed through corporate annual reports, social media, discussions at various events, and other corporate communications. In this sense, NFI represents the basis of non-financial reporting (NFR), which determines sustainable changes within the companies. However, the relationship between NFR and sustainable change within and beyond the organization is fraught with difficulties [12]. Furthermore, the advertised “sustainable change” is meaningless if it does not materialize into beneficial impacts on society and the natural environment [12].
The non-financial statement (or the integrated report) offers a comprehensive picture of organizational performance [4]. This supports the stakeholders’ evaluation of a company’s commitment to sustainable practices [13]. The quality of non-financial reporting refers to “a calculation of scores that can serve as an indication of the level of information quality when aggregated” [14]. Non-financial reports must address environmental, social, employee, human rights, and anti-corruption aspects, including business models, policies, outcomes, risks, and key performance indicators [15]. Managers can create a picture of a more attractive company for investors from the perspective of financing costs. Furthermore, through sustainability reporting, corporate transparency increases proportionally to investors’ trust [16]. Thus, non-financial disclosures can improve investor confidence, strengthen communication with stakeholders, and reduce information asymmetry [17]. In many research articles, the focus has been on integrated reporting, which is mandatory in Australia, South Africa, and other African countries [18], just as the NFRD and CSRD in the European Union.
Before CSRD, there was a lack of standardization regarding non-financial information [19]. This has been one of the most significant challenges in the process of external assurance of non-financial statements [11][20]. In some cases, companies would report long narratives that are not relevant to stakeholders. To overcome these challenges, companies should disclose their NFI in a more structured format (for example, by applying the Global Reporting Initiative—GRI Standards) and obtain external assurance for their reports. Auditing firms have adapted their services to provide limited assurance in a variety of fields that are outside the scope of the statutory financial audit [21]. For an EU sample, Krasodomska et al. [22] found that larger companies tend to assure their sustainability reports more often, while those operating in environmentally sensitive industries are more reluctant in this regard. The CSRD imposes mandatory limited assurance on sustainability reports, starting with 2024.
In the European Union, NFI is disclosed under a mandatory regime. Before 2024, sustainability reporting standards such as the GRI Standards have helped companies fulfill their obligations, with respect to environmental, social, and governance (ESG) factors [17]. If the ESG reporting framework is too extensive and complex, it can trigger confusion among stakeholders [7]. Furthermore, it may become difficult for managers in charge of NFR to cope with the increased pressures from various groups of stakeholders. Aluchna et al. [23] observed that companies tend to disclose only favorable information about their environmental or social performance, highlighting an excessively good public image and potential greenwashing. For this reason, the CSRD introduced the concept of “double materiality” to balance positive and negative sustainability disclosures [24].
Various characteristics of the firm can influence the decision-making process within an organization. Company size, industry, and profitability, as well as corporate governance structures (e.g., board size, board diversity) and the external economic and legal environment may have a significant impact on NFR. These relationships have been systematically explored in several literature reviews and meta-analyses. An important finding is that the quality of overall ESG management is a positive factor of the quality of non-financial reporting [25]. From another perspective, companies in environmentally sensitive industries tend to issue higher-quality external reports [26]. However, the focus on integrated reporting and various other frameworks (such as the GRI Standards) is marginally relevant to the effects of mandatory non-financial reporting under the NFRD in the European Union.
Among company-level factors, corporate governance was explored most prominently in relation to sustainability reporting [18]. Corporate governance indicators include board independence, director expertise, board diversity, and frequency of board meetings. More specifically, sustainable board governance is operationalized through gender diversity, expertise, and sustainability-related executive compensation, and was found to positively influence corporate social responsibility [27]. Similarly, the existence of the sustainability committee is a positive factor of sustainability reporting and performance [28]. Furthermore, the level of risk disclosure included in sustainability reports is positively influenced by the independence and size of the board [29]. 

References

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  2. Valaskova, K.; Gajdosikova, D.; Belas, J. Bankruptcy Prediction in the Post-Pandemic Period: A Case Study of Visegrad Group Countries. Oeconomia Copernic. 2023, 14, 253–293.
  3. Sarea, A.M. Web-Based Financial Reporting Disclosure: Evidence from Selected Banks in the Kingdom of Saudi Arabia (KSA). J. Cent. Bank. Theory Pract. 2020, 9, 183–197.
  4. Venturelli, A.; Fasan, M.; Pizzi, S. Guest Editorial. Rethinking Non-Financial Reporting in Europe: Challenges and Opportunities in Revising Directive 2014/95/EU. J. Appl. Account. Res. 2022, 23, 1–7.
  5. Zanellato, G.; Tiron-Tudor, A. How Cultural Dimensions Are Shaping Social Expectations: The Case of European State-Owned Enterprises’ Nonfinancial Reporting. J. Appl. Account. Res. 2022, 23, 99–121.
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  7. Aureli, S.; Salvatori, F.; Magnaghi, E. A Country-Comparative Analysis of the Transposition of the EU Non-Financial Directive: An Institutional Approach. Account. Econ. Law Conviv. 2020, 10, 20180047.
  8. Kurpierz, J.R.; Smith, K. The Greenwashing Triangle: Adapting Tools from Fraud to Improve CSR Reporting. Sustain. Account. Manag. Policy J. 2020, 11, 1075–1093.
  9. Doni, F.; Bianchi Martini, S.; Corvino, A.; Mazzoni, M. Voluntary versus Mandatory Non-Financial Disclosure: EU Directive 95/2014 and Sustainability Reporting Practices Based on Empirical Evidence from Italy. Meditari Account. Res. 2020, 28, 781–802.
  10. Veltri, S. The Mandatory Non-Financial Disclosure in the European Union. In Mandatory Non-Financial Risk-Related Disclosure; Springer International Publishing: Cham, Switzerland, 2020; pp. 31–55. ISBN 978-3-030-47920-6.
  11. Krištofík, P.; Lament, M.; Musa, H. The Reporting of Non-Financial Information and the Rationale for Its Standardisation. EM Ekon. Manag. 2016, 19, 157–175.
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  13. Zarzycka, E.; Krasodomska, J. Non-Financial Key Performance Indicators: What Determines the Differences in the Quality and Quantity of the Disclosures? J. Appl. Account. Res. 2022, 23, 139–162.
  14. Schröder, P. Mandatory Non-Financial Reporting in the Banking Industry: Assessing Reporting Quality and Determinants. Cogent Bus. Manag. 2022, 9, 2073628.
  15. Fiandrino, S.; Gromis Di Trana, M.; Tonelli, A.; Lucchese, A. The Multi-Faceted Dimensions for the Disclosure Quality of Non-Financial Information in Revising Directive 2014/95/EU. J. Appl. Account. Res. 2022, 23, 274–300.
  16. Caputo, F.; Leopizzi, R.; Pizzi, S.; Milone, V. The Non-Financial Reporting Harmonization in Europe: Evolutionary Pathways Related to the Transposition of the Directive 95/2014/EU within the Italian Context. Sustainability 2019, 12, 92.
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  21. Krasodomska, J.; Simnett, R.; Street, D.L. Extended External Reporting Assurance: Current Practices and Challenges. J. Int. Financ. Manag. Account. 2021, 32, 104–142.
  22. Krasodomska, J.; Zarzycka, E.; Zieniuk, P. Voluntary Sustainability Reporting Assurance in the European Union before the Advent of the Corporate Sustainability Reporting Directive: The Country and Firm-level Impact of Sustainable Development Goals. Sustain. Dev. 2023, sd.2744.
  23. Aluchna, M.; Roszkowska-Menkes, M.; Kamiński, B. From Talk to Action: The Effects of the Non-Financial Reporting Directive on ESG Performance. Meditari Account. Res. 2022, 31, 1–25.
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Subjects: Business, Finance
Contributors MDPI registered users' name will be linked to their SciProfiles pages. To register with us, please refer to https://encyclopedia.pub/register :
Oana Marina Radu
,
Voicu D. Dragomir
,
Ningshan Hao
View Times: 287
Revisions: 2 times (View History)
Update Date: 27 Nov 2023
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