Average environmental performance of companies in the EU and the USA (2009-2020). Source: The British Accounting Review (2024). DOI: 10.1016/j.bar.2024.101437
Some of New Zealand’s largest companies made mandatory climate disclosures for the first time this year, but a new study shows that disclosures are no guarantee of better behavior.
This year, New Zealand was among the first countries in the world to require its largest companies and financial institutions (around 200 in total) to disclose their climate-related risks and opportunities in their annual reports and to submit reports to regulators.
These reports were submitted last month as part of the financial market regulator’s disclosure requirements. But do such initiatives improve environmental results?
A new study, which also included Professor Charl de Villiers (University of Auckland, Business School), concludes that mandatory disclosure of social and environmental data does not necessarily improve the performance of companies. The study “Does mandatory disclosure of social and environmental data improve the social and environmental performance of companies?: Broad-based evidence on the effectiveness of Directive 2014/95/EU” was published in The British Accounting Review.
“We must not assume that companies will do something better for the environment and people if we force them to disclose information,” says Professor de Villiers.
Professor de Villiers and his colleagues examined the impact of a major EU initiative on sustainability reporting, Directive 2014/95/EU, which came into force in 2017.
The law requires large companies to report on their performance in non-financial matters, including environmental issues, social and employee matters, human rights, and anti-corruption and anti-bribery.
But after analyzing a cross-country sample of companies between 2009 and 2020, researchers found that social and environmental outcomes did not improve significantly under the directive.
“Despite the regulatory initiative, European companies were unable to substantially improve their social and environmental performance, nor did they show any improvement compared to US companies.
“The results are surprising,” says Professor de Villiers. “It is important that we do not assume that companies that we force to disclose information are actually doing something good for the environment and people.”
The study, says de Villiers, provides comprehensive evidence of the lack of effectiveness of requiring companies to disclose social and environmental data to improve performance.
“We’re showing that you can’t just issue a law like this and expect things to improve. You really have to design it so that there are meaningful penalties for non-disclosure,” he explains.
The relative ineffectiveness of the EU directive may be partly due to the lack of detailed guidelines, testing requirements and low penalties for non-compliance, he says.
“For Aotearoa New Zealand and other countries that want to see significant progress, this underlines the importance of combining clear disclosure requirements with specific policies, rigorous audits and strong enforcement mechanisms,” adds Professor de Villiers.
New Zealand’s Financial Conduct Authority has announced that it will pursue a “generally educational and constructive approach” for at least the first year. It will only take enforcement action against companies and financial institutions if they fail to submit disclosure statements or if the statements are misleading or deceptive.
Things could get tougher from 2026 onwards.
Further information:
Charl de Villiers et al., Does mandatory corporate social and environmental data disclosure improve social and environmental performance?: Broad-based evidence on the effectiveness of Directive 2014/95/EU, The British Accounting Review (2024). DOI: 10.1016/j.bar.2024.101437
Provided by the University of Auckland
Quote: When climate reporting fails to make an impact (19 August 2024), accessed on 19 August 2024 from https://phys.org/news/2024-08-climate-impact.html
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