Economic Impact of A Corporate Reporting Framework Connecting Sustainability-Related Financial Disclosures with Traditional Financial

Abstract

Demand for additional sustainability-related disclosures to complement current financial disclosures is growing. The establishment of the International Sustainability Standards Board (ISSB), as well as its endorsement of principles underlying the Integrated Reporting (IR) Framework, attest to a regulatory intent to develop a disclosure framework better connecting sustainability-related financial disclosures with traditional financial disclosures. Strategic Reporting (SR), effective in the United Kingdom (U.K.) since 2013, is a prime example of such a framework. Utilizing proprietary data from PwC U.K., which has been identifying trends and excellence in reporting quality for FTSE 350 entities since 2003, we first examine the capital market impact of corporate disclosure quality during the SR period. We find a positive association between disclosure quality and capital market benefits: higher liquidity, lower cost of capital, and more accurate, less dispersed analysts’ forecasts. The four components of disclosure quality found to consistently and significantly contribute to the observed impact are: strategy and objectives; environmental, employee, social, community and human rights information; disclosure connectivity; and a forward-looking orientation. We then compare this impact with the capital market effects of disclosure quality under the reporting framework preceding SR and find that the effects of higher liquidity and lower cost of capital are more pronounced under SR. This suggests that SR, as a mandated, more connected reporting framework, enables more effective capital market communication. Further, we identify the types of entities benefiting most from this change to a more connected reporting framework. We find that the incremental capital market benefits are more significant in entities with higher exposure to the change, better sustainability performance and higher organizational complexity.

Keywords: Strategic reporting; integrated reporting; capital market; cost of capital; liquidity; analysts’ forecasts

JEL Classification: M41; M48; M14; G10