Mandating the Sustainability Disclosure in Annual Reports—Evidence from the United Kingdom

Abstract

This study investigates the sustainability disclosure effects of the introduction of the Companies Act 2006 Regulations 2013 in the United Kingdom. The regulation mandates the disclosure of information on greenhouse gas emissions, gender distribution and human rights issues. We examine two research questions: first, whether firms increased disclosure on the mandated topics after the regulation became effective relative to a control group, and second, whether a potential increase in disclosure is moderated by firms' reporting incentives, namely, firms' capital market visibility, growth orientation, governance structure, prior voluntary sustainability disclosure levels and critical media coverage. Our sample consists of the FTSE-350 firms and a matched control group of US firms. We use textual analysis to assess the disclosure of the mandated sustainability topics in firms' annual reports. Specifically, we examine two types of disclosure, namely, the disclosure of the mandated key performance indicators and the narrative disclosure. Our results reveal a significant increase for both types of disclosure relative to the control group. Overall, this treatment effect tends to be smaller for firms with higher reporting incentives, i. e., reporting incentives mitigate the regulatory effect. Taken together, our results suggest that both standards and reporting incentives shape firms' sustainability disclosure level.

Stock Market Reactions and CSR Disclosure in the Context of Negative CSR Events

“…Table 2 provides an overview of the descriptive statistics for our disclosure measures and control variables. Consistent with the literature (Hummel et al, 2017;Hummel & Rotzel, 2019), the mean values of the disclosure measures are rather low, thereby reflecting the low presence of these topics in firms' annual reports. As expected, the mean values for the disclPOST measures are slightly larger than for the Table 3 displays the CAARs of all tested event windows for the events grouped along the three ESG categories as well as for a cumulative textual variable covering all three categories.…”

“…Compared to traditional approaches for measuring CSR disclosure-such as content analysis and ratings from external data providers-textual analysis enables researchers to analyse large amounts of text based on objective and replicable techniques. With the increase in computing power, textual analysis is increasingly used in CSR disclosure research (Hummel & Rotzel, 2019;Melloni, Caglio, & Perego, 2017;Mittelbach-Hoermanseder, Hummel, & Rammerstorfer, 2019;Muslu, Mutlu, Radhakrishnan, & Tsang, 2019;Nazari, Hrazdil, & Mahmoudian, 2017).…”

“…Next, we apply various pre-processing procedures to the text files to enhance the comparability of the text. 4 We then construct topic-specific disclosure measures to assess the extent of CSR disclosure among the three categories, "environmental," "social" and "governance," according to a procedure that was first developed by Hoberg and Maksimovic (2014) and refined in the context of CSR disclosure by Hummel et al (2017) and Hummel and Rotzel (2019). Our topic-specific disclosure measures are constructed as follows.…”

Disclosure on the Sustainable Development Goals – Evidence from Europe

“…'sell' recommendation) by financial analysts. Similarly, Hummel and Rötzel (2019) show a positive relationship between the number of analysts following a firm and non-financial disclosure in both voluntary and mandatory settings.…”

“…Textual analysis in general refers to the 'notion of parsing text for patterns' (Loughran & McDonald, 2016, p. 1187. With the rise in computing power, computer-assisted textual analysis has gained increasing attention in various fields of academic research, including finance and accounting research (for an overview, see Loughran & McDonald, 2016) and CSR disclosure research (Cho et al, 2010;Hummel et al, 2020;Hummel & Rötzel, 2019;Melloni et al, 2017). Prior to the textual analysis, we apply standard pre-processing methods to the texts to enhance the comparability of the texts.…”