Can sustainability reports regulate companies’ conduct?

Browsing articles in the research journal AAAJ the other day, I noticed that my own article, published over a year ago, was on their list of ‘most read in the past 7 days’. This fact made my week. It is more than great when your research matters to the research community, however, sometimes there are learning point for non-academic society too. Rereading the paper, I do think there are points in the paper that could be interesting for non-researchers as well. Hence this blog post.

In recent years, it has become mandatory for large companies to produce a sustainability report each year. In Sweden, it became mandatory because of an EU directive. The idea behind this kind of regulation is that the company’s sustainability report will inform its stakeholders- such as customers, local community, employees and investors- about what the company does in relation to sustainability issues such as climate change, human rights, anti-corruption etc. The stakeholders can then use this information, if they are unhappy with what the company does, to exert pressure on the company. The stakeholders can thus hold the company accountable for its actions. In this way, corporate conduct is regulated; the company will want to change its corporate conduct because of the stakeholder pressure. It is called ‘civil regulation’.

Interestingly, there are a number of cases in the research literature, specifically studying sustainability reporting, where civil regulation does not work as planned. There are cases of stakeholders, for example NGOs, that receive the sustainability reports and read them but do not feel equipped to exert pressure on the company. The company reports and the stakeholders receive it, but there is no civil regulation taking place. The company can continue with business as usual.

Reviewing these cases of ‘failed’ civil regulation, I try to explain why the reported information may not be enough to produce such civil regulation. My article argues that we, in these cases, tend to overestimate the ‘power’ of information and confuse it with knowledge. I use the example of ESG investor analysts, i.e. analysts that focus on how companies handle sustainability issues such as energy consumption, pollution, human rights etc. These investors do attempt to hold companies accountable for their unacceptable sustainability performance, a practice the industry calls ‘company engagement’. In my study I find that when the analysts do so, not all information is alike and the analysts rely on several other types of information, for example from consultants and media, plus many other types of resources such as theories, calculations etc. to show that they know what the company does and how it should change its practices.

Consequently, I argue that we need to carefully distinguish between information and knowledge. Information, such as sustainability reports, may indeed contribute to knowledge but is rarely enough on its own to hold the company accountable. We cannot assume that if someone has information about someone’s actions s/he will be able to hold this person accountable. What kind of information we hold matters: where it comes from, if it contradicts or confirms other accounts. It matters how it is used, together with other resources or to disprove other statements. Moreover, in some cases other resources other than information, for example theories, helped the analysts to hold the company accountable.

This study does not, however, show that sustainability reports are not useful for regulating companies’ conduct. It just illustrates that information in the form of a sustainability report is not enough on its own. If we construct this kind of reporting-based civil regulation, like the EU-directive, we should not overestimate the power of a single source of information. In this context, empirical studies such as the one in AAAJ can inform us about the role the reported sustainability information plays in practice.

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