InThe Europe and all ovean Union Directive 2014/95/EU (henceforward, the Directive) brought a new framework for the world, disclosure ofcorporate reporting of companies located in EU Member States, imposing on them non-financial information (NFI) disclosure requirements, from the year 2017 [1].

In Europe and all over the world, disclosure of NFI by companies has been mostly voluntary and has been presented in various formats, from information included in the Annual Report, more precisely in the Management Report, to information presented in separate reports, such as Sustainability Reports, and, more recently, Integrated Reports. The evolution of these reporting practices has been accompanied by the presentation of several designations for what the Directive call NFI disclosure, and the literature also refers to as NFI reporting ^[1][2]. As examples of those designations, thwe researchers ccan mention: Corporate Social Responsibility Reporting; Sustainability Reporting; Intellectual Capital Reporting; Value Reporting; Economic, Social and Governance Reporting; Social, Ethical and Environmental Reporting; and Integrated Reporting ^[2][3][4][3,4,5].

Directives are legal instruments that have the particularity that they are not binding in their entirety, but only as regards the result to be achieved. They thus leave the Member States free to choose the form and methods of transposition such as ‘copying out parts of the text of a directive in a new national regulation, transposing the text with minor or major terminology changes or other adjustments, opting for elaboration and/or formulation’ ^[5][54]. Member States were required to transpose the Directive 2014/95/EU into their own national laws by 6 December 2016, for the targeted entities to publish their first non-financial statement for the financial year starting on 1 January 2017 or during the calendar year 2017. Portugal missed the 2016 deadline, only transposing the Directive through the Decree-Law 89/2017, of 28 July 2017, but imposing its application to the financial year starting on 1 January 2017. When transposing the Directive to Portuguese company law, no specific requirements or modifications were made.

As stated by the Directive 2014/95/EU (henceforward, the Directive), large undertakings that are public-interest entities, headquartered in Member States, which exceed the criterion of the average number of 500 employees on their balance sheet dates, were required to publish a non-financial statement with information concerning the following matters: environmental, social, employees, respect for human rights, anti-corruption and bribery. Specifically, the non-financial statement must include: (i) a brief description of the business model; (ii) a description of the policies pursued in relation to the matters described above, including the due diligence processes implemented; (iii) the results of those policies; (iv) a description of the main risks to and adverse impacts made on the entity’s operations, and of how these have been managed; and (v) the non-financial key performance indicators relevant to the particular business.

The definition of the content of the non-financial statement is based on two principles: the materiality principle and the ‘comply or explain’ principle. According to the former, the information to be included in the non-financial statement should be selected to the extent necessary for an understanding of the development, performance, position and impact of the entity’s activity. The ‘comply or explain’ principle means that the information required should be disclosed, unless the entity does not pursue policies related to one or more of the matters described, in which case it should provide a clear and reasoned explanation for not doing so. The non-financial statement shall also, where appropriate, include references to, and additional explanations of, amounts reported in the annual financial statements.

No model or format was proposed by Portuguese law for the non-financial statement. In line with the provisions of the Directive, when an entity prepares a separate report corresponding to the same financial year and covering the information that the non-financial statement should contain, it is exempt from the obligation to prepare the non-financial statement. For this exemption to occur, the separate report: (i) must be published together with the Management Report; or (ii) be made publicly available on the entity’s website no later than six months after the balance sheet date, and reference to it must be made in the Management Report. This exemption is justified by the fact that most of the entities now required to report NFI had already been voluntarily disclosing it in stand-alone reports such as Sustainability Reports or Social Responsibility Reports.

The Directive established that the preparation of NFI may rely on national frameworks, European Union frameworks (e.g., Eco-Management and Audit Scheme) or international frameworks (e.g., United Nations Global Compact, International Organization for Standardization’s ISO 26000, Global Reporting Initiative), and entities should specify on which frameworks they have relied on. In Article 2 of the Directive, the Commission declared its commitment to prepare non-binding guidelines for NFI reporting. These guidelines were provided through the Communication 2017/C215/01 with the aim of helping entities to disclose material information consistently and coherently to ensure comparability across companies and sectors ^[6][55].

Regarding NFI assurance, the Directive only required the statutory auditor or audit firm to check whether the non-financial statement or the separate report has been provided. Member States were given the option to require the non-financial statement or the separate report be verified by an independent assurance services provider. In Portugal, the independent external assurance of NFI was not imposed, being an option for companies to carry it out.

Following the publication of the Directive, studies began to emerge analyzing the degree of preparedness of companies, in a given country, to meet the requirements of the Directive. In general, these studies assessed the extent to which information disclosed by companies, prior to the implementation of the Directive, already complied with its requirements. Some studies also tested the potential influence of chosen determinants on NFI disclosure levels.

These studies provided an ex ante evaluation of non-financial reporting practices deemed useful to understand the changes that would occur with the entry into force of the Directive. The evidence showed that large European companies revealed a high level of compliance with the Directive requirements before its implementation ^[7][56]. Nevertheless, there were countries where NFI disclosure levels were very low, such as Poland and Romania ^[8][9][10][57,58,59]. The company size, measured by total assets, turnover or number of employees, were highlighted as important determinants of non-financial disclosure ^{[9][11][12][13]}[58,60,61,62]. It was also found that companies belonging to environmentally sensitive industries tend to provide more information about social and environmental matters compared to companies belonging to other industries ^[7][9][11][56,58,60]. Finally, it was observed that companies had placed little emphasis on the disclosure of matters such as human rights, anti-corruption and diversity policies ^[10][12][14][59,61,63].

The first NFI disclosures, following the implementation of the Directive, were made by European companies for the fiscal year of 2017. Henceforward, researchers have started to study how the companies were responding to the new corporate reporting obligation. So far, the existing empirical evidence comes from listed companies in six countries: Spain ^[15][29], Poland ^[16][32], Italy ^{[17][18][19][20][21][22][23][24]}[30,33,34,35,36,37,38,39], Germany ^[17][30], Romania ^[25][31] and Hungary ^[26][40].

The results of these studies highlight three topics related to the effects of the Directive. The first topic concerns the choices made by companies, in 2017, regarding the presentation format and the framework for preparing NFI. As for the presentation format, there is evidence that some companies abandoned the presentation of NFI in separate reports in 2017 ^[15][19][29,34], but it cannot be said that there is a trend toward the adoption of a specific format, as some studies found most companies presented the NFI in the Management Report ^[18][33], while others showed a preference for separate reports ^[15][20][29,35]. Regarding the framework used for preparing the NFI, most companies used the GRI Standards ^[18][20][33,35]. It should be noted that there is no evidence on the type of assurance adopted by companies for NFI in the context of the Directive.

The second topic analyzed by these studies was the impact of the Directive on the quality of the NFI disclosed. Overall, the results showed an increase in the quality of the NFI disclosed in 2017 compared to 2016 ^[17][25][26][30,31,40] or to 2015 ^[18][33]. The highest levels of disclosure were found for information related to the business model ^[18][33] or environmental matters ^[26][40]. However, there are some categories of information, such as the outcome of policies and human rights matters, still not disclosed by some companies ^[25][26][31,40]. Carungu et al. ^[19][34] observed no significant improvements in the content and structure of non-financial reports in 2017 for companies that already published NFI in 2016, suggesting that the positive effect of the mandatory regime is driven by companies reporting NFI for the first time in 2017. For the specific case of non-financial key performance indicators, Raucci and Tarquinio ^[23][38] found an overall reduction in its number when comparing the years 2012 and 2017, and Loprevite et al. ^[22][37] and Tarquinio et al. ^[24][39] reached similar results when studying the period from 2016 to 2018. These findings may be interpreted as a selective behavior of companies focusing on more relevant indicators, or, on the contrary, they could be the expression of a certain caution, whereby companies disclose the minimum quantity of information that allows them to comply with the requirements of the law.

Finally, the third topic concerns the factors that may have generated differences between companies regarding the impact of the Directive on the quality of the NFI disclosed. One of the factors identified was the business sector in which the company operates, with the Oil and Gas sector being the one disclosing more information related to environmental issues ^[15][29]. Another factor that influenced the quality of the NFI disclosed was the presentation format, with the highest rates of disclosure of NFI corresponding to companies that provided this information in sustainability reports ^[15][29] or in integrated reports ^[18][33]. Finally, the expertise and skills that companies had in voluntary sustainability reporting prior to the adoption of the Directive, also had a positive effect on the quality of NFI disclosed in 2017 ^[17][18][20][30,33,35].

From the studies reviewed, thwe researchers ccan conclude that evidence on the effects of the Directive’s requirements on the quality of NFI and on the reporting practices of European companies is still scarce, covering only a few countries and giving an incomplete picture of the reporting practices adopted in each of them. More specifically, none of the studies analyzed the type of assurance adopted for NFI and the effects of the Directive on the quality of the NFI disclosed are still only known in Italy, Germany, Romania and Hungary.

ThWe researchers eexplain the practices adopted by companies and the changes in the quality of NFI disclosed following the implementation of the Directive, based on the Institutional Theory isomorphisms. Although the first studies in this field did not provide an explanatory theory of the effects of the Directive, more recent studies considered Institutional Theory isomorphisms as an appropriate theoretical approach to explain the choices made by companies when switching from a voluntary to a mandatory reporting regime ^[19][21][26][34,36,40].

Institutional Theory establishes that organizational structures, processes and practices are created and adopted as a result of institutional pressures, such as regulations, norms, routines and social values, which influence its behaviors and formal structures, emerging as an alternative to the view that the organizational actions are solely attributed to rational management decisions ^[27][28][29][64,65,66]. Institutional isomorphism is a constraining process that forces an organization to resemble others facing the same institutional pressures, leading to a homogenization of the organization’s behavior and structure. According to DiMaggio and Powell ^[27][64], institutional isomorphism can be created by three types of pressures: coercive, mimetic and normative.

Coercive isomorphism results from formal and informal pressures exerted on organizations by other organizations on which they are dependent and by cultural expectations in the society in which organizations operate ^[27][64]. With the implementation of the Directive, companies that did not prepare NFI are required to do so, bringing them closer in terms of reporting practices to companies that have already done so on a voluntary basis.

Mimetic isomorphism arises when the environment creates symbolic uncertainty, and then companies model themselves on other organizations in their field, which they perceive to be more legitimate or successful ^[27][28][64,65]. The Directive is flexible concerning the presentation format, the framework for preparation and the level of assurance to be adopted by companies. This flexibility creates uncertainty in companies about the options to be taken, giving room for imitation of what are considered the best practices.

Normative isomorphism stems primarily from professionalization, which is the collective struggle of members of an occupation to define the conditions and methods of their work ^[27][64]. It takes place when companies seek professional guidance in the form of consultants or guidelines, internalizing a set of norms or practices because they believe it is ‘the right thing to do’ ^[30][67].

In other words, according to Institutional Theory, non-financial reporting practices and the quality of NFI could be shaped by imitation (what other companies in the same context do), routine (what the company has done in the past) and institutions (regulations, laws and customs) ^[31][68].

Prior to the implementation of the Directive, the obligation of Portuguese listed companies to disclose NFI was closely tied to the Companies Act requirements of information to be presented in the Management Report regarding environmental and employee matters. The Portuguese regulation did not provide specific guidelines on this disclosure, so each company decided on the extent and detail of the information to be disclosed in the Management Report on these matters. The presentation of sustainability reports, and their assurance, were also voluntary practices, even for listed companies. Previous empirical evidence about NFI reporting by the largest Portuguese companies concluded that GRI guidelines were the dominant standard orienting the production of sustainability reports, and these reports were mainly assured by the Big 4 accounting firms ^[32][51].

The transposition of the Directive into national law may stimulate a form of coercive isomorphism among companies in Member States since an increase in the quality of the NFI disclosed is expected, especially by companies that have not previously disclosed this type of information. Furthermore, the Directive is flexible concerning the presentation format, the preparation framework and the level of assurance to be adopted by companies. Member States, in general, maintained this flexibility in their national legislation ^[33][69]. This flexibility creates uncertainty in companies about the options to be taken, giving room for imitation (mimetic isomorphism) of those considered the best practices. The flexibility of the Directive also leaves room for preparers and auditors to impose their past practices, especially when companies have already voluntarily prepared NFI (normative isomorphism).

The RQ1 and RQ2 concern the reporting practices adopted by Portuguese listed companies, under the Directive, in the years 2017 and 2018. The evidence presented in the previous section does not provide complete explanations for the options made by companies. For example, Caputo et al. ^[18][33], Doni et al. ^[20][35] and Sierra-Garcia et al. ^[15][29] found that, although the presentation of separate reports is associated with better disclosure, not all European companies made this choice in 2017, without providing possible explanations for this result. The analysis of the reporting practices made by Portuguese-listed companies over two years, in the light of the Institutional Theory isomorphisms, will allow a better understanding of how companies dealt with ‘uncertainty’ in this new reporting context. The small size of the Portuguese stock market, the predominance of the Big 4 auditors and the presence of companies with previous sustainability practices are factors that may favor mimetic or normative isomorphisms.

The RQ3 and RQ4 concern the effects of the Directive on the quality of NFI disclosed in the years 2017 and 2018 and the possible effect of prior experience in non-financial reporting on it. With the implementation of the Directive, companies that did not prepare NFI are compelled to do so. For this reason, thwe researchers would expect an overall increase in the quality of the NFI disclosed by companies in 2017, as observed in previous studies ^[17][18][25][30,31,33].

Previous evidence showed that experience in voluntary non-financial reporting had a positive effect on the quality of the NFI disclosed after the Directive ^[17][18][20][30,33,35]. By comparing the impact of the Directive in two countries with different experiences in sustainability reporting, the results of Mion and Adaui ^[17][30] suggested the implementation of the Directive may have created a coercive isomorphism, bringing the quality of NFI of companies with no experience in sustainability reporting, closer to those that voluntarily prepared sustainability reports before the Directive. The answer to RQ4 will allow the researcherus to make inferences about the presence of a coercive isomorphism based on companies in the same country.