Extent and quality of sustainability reporting: A content analysis of sustainability reporting for Swedish large cap and small cap firms under the new EU-directive legislation

Abstract

Background and problem discussion: Sustainability reporting (SR) is a topic which has become increasingly important for organisations over the last thirty years. The quality of SR is an aspect which has been heavily scrutinised and reports have been criticised for lacking balance, reliability and comparability. In 2017, the new EU-directive mandating reporting on sustainability matters (business model, social, environmental and ethical) will be introduced for all larger companies in Sweden. The expectation is that the new directive will provide information that is clear, comparable and decision-useful for stakeholders. Therefore, this study addresses a research gap in the SR literature on how legal pressure affects the quality of SR. Purpose and research question: The purpose of this study is to see what implications the EUdirective 2014/95/EU has had on the extent and/or quality of large cap and small cap firms listed on Nasdaq OMX Stockholm. Furthermore, the institutional theory is used as a theoretical lens for the analysis of the institutional pressures driving SR for large cap and small cap firms. How does the new sustainability reporting legislation affect the extent and quality of sustainability reporting? Methodology: This study examines the quantitative and qualitative impacts of the new EUdirective on reporting practices for 15 large cap and 15 small cap manufacturing firms on Nasdaq OMX Stockholm using a content analysis combining form-oriented and meaning-oriented approaches. The form-oriented approaches applied for measuring the extent of SR is a page count and a sentence count. The meaning-oriented approach applied is a disclosure index developed by Dyduch and Kradusomska (2017) in order to observe the quality of business model, environmental, social and employee and ethical disclosures. Results and conclusions: This study examines the extent and quality of SR two years prior (2015 and 2016) to the introduction of the new EU-directive and the first year under the new directive (2017). Three traits can be noted for SR of large cap and small cap firms. First, a specific upturn in the extent and quality of SR can be noticed for small cap firms due to the introduction of the new EU-directive. Second, the quality and extent of reporting for large cap firms is at a significant higher level for large cap firms due to the adoption of SR frameworks both prior and after the regulation. Third, a small increase in extent and quality can be noticed for the development of extent and quality of reporting for large cap firms. However, the ”comply or explain” approach of the EU-directive do not obtain similar results as previous studies on country-specific legislations using a ”command and control” approach to SR legislation.