The new NZ climate-reporting system is unlikely to deliver real-world improvements without tough sanctions for corporate breaches based on a new study of a longer-running mandatory ESG disclosure regime in Europe.
According to the paper published in the British Accounting Review, European corporate social and environmental metrics have barely budged since the introduction of compulsory reporting of such data in 2017
“We find that European companies’ performance has not improved substantially since the Directive came into effect in 2017, nor have they improved compared to US companies,” the study says. “Thus, the evidence suggests that the Directive has not improved European companies’ social and environmental performance.”
Co-authored by Auckland University accounting professor, Charl de Villiers, the in-depth analysis compared social and environmental data on a sample of almost 360 European companies over periods both before and after the mandatory regime was adopted.
The academics also measured the ESG-related performance of the European corporate dataset against a group of 470 US companies covering the same 2009 to 2020 timeframe.
“Despite the regulatory push, European companies didn’t exhibit substantial improvements in their social and environmental performance, nor did they improve when compared to US companies,” de Villiers said in a release.
“The findings are surprising,” he said. “It’s important that we don’t assume that if we force companies to disclose information, they are actually going to do better by the environment and people.”
But rather than just writing off mandatory ESG disclosure as useless, de Villiers said regimes such as the recently introduced NZ climate-reporting system require regulatory teeth to bring about substantial change in corporate behaviour.
He said the findings of the European study highlight “the importance of coupling clear disclosure requirements with specific guidelines, rigorous auditing and strong enforcement mechanisms”.
“We show that you can’t just put out a piece of legislation like this and assume things will improve,” de Villiers said. “You really have to design it in such a way that there are meaningful sanctions for non-disclosure.”
The paper carrying the catchy title of ‘Does mandating corporate social and environmental disclosure improve social and environmental performance?: Broad-based evidence regarding the effectiveness of directive 2014/95/EU’ initially used data from research house, Refinitiv – a London Stock Exchange Group subsidiary.
“… Refinitiv’s data can be criticised for being a noisy proxy for social and environmental performance,” the study says. “Therefore, we used an alternative dataset, MSCI, and found similar results.”