Sustainability Reporting in a Regulated Setting: Evidence from the European Union

The general objective of this dissertation is to deepen the understanding on the effects of regulation on sustainability reporting, and sustainability and financial performance.Specifically, the Directive 2014/95/EU or also known as the Non-Financial Reporting Directive (NFRD) is considered as the mandatory requirement for companies in the European Union (EU)to disclose sustainability information. This dissertation includes three main chapters which explore i) the state of research related to the NFRD and draws a research agenda, ii) the sustainability reporting before and after the NFRD with a focus on quantity and quality of disclosure, and iii) the mandatory sustainability reporting impact on companies’ sustainability performance and financial performance. The first chapter presents a systematic literature review on the research related to the NFRD, representing the first attempt to systemize literature around the topic and draw an agenda for further research. The research agenda identifies four avenues of research such as: i) the potential impact of the NFRD on sustainability reporting and financial performance, ii) the role of contextual aspects in addressing mandatory sustainability reporting, iii) the interplay between the binding NFRD and non-binding guidelines, and iv) theorising in regulation studies. The second chapter, drawing on the institutional theory and the notion of normativity, explains how the quantity and quality of disclosure of a banking group developed prior and after the regulation. While the regulation has caused the quantity of information to increase, the quality instead is enhanced only for thematic disclosure with high importance for the banking group. Such results suggest that the different institutional mechanisms co-existed in the banking group to drive sustainability reporting. However, the production of normativity was achieved as a result of internal beliefs and the sense of appropriateness, thus leading some certain thematic disclosure to be much more developed than the others. The third chapter aims at understanding the impact of the NFRD on both sustainability and financial performance by conducting a difference-in-differences (DiD) analysis. The results suggest that subsequent to the regulation, the sustainability performance of EU companies has significantly improved, relative to the control sample. Instead, the financial performance of EU companies worsened after the NFRD came in place. Companies need to maintain their legitimacy and comply to the NFRD and as such, they expand sustainability actions which gives them the opportunity to signal a good performance. However, employing new sustainability actions and adjusting to disclosure is reflected economically. The results of this study show that the short-term effects of the NFRD on financial performance are negative. Consequently, maintaining legitimacy and signalling good sustainability performance as a response to a regulation can be expensive.