This year, New Zealand took a significant step towards addressing climate change by requiring some of its largest companies and financial institutions to disclose climate-related risks and opportunities in their annual reports.
The initiative, led by the Financial Markets Authority (FMA), positions New Zealand as one of the first countries globally to implement such a mandate. But, a new study raises questions about the effectiveness of such regulations in driving meaningful environmental change.
The study, published in journal The British Accounting Review and co-authored by Professor Charl de Villiers from the University of Auckland’s Business School, examined the impact of a similar initiative in the European Union, Directive 2014/95/EU. This directive, which came into effect in 2017, requires large companies in the EU to report on non-financial matters, including environmental performance, social and employee matters, human rights, and anti-corruption measures.
Despite the ambitious goals of the directive, the study found that the expected improvements in social and environmental outcomes did not materialize.
After analyzing data from a cross-country sample of businesses between 2009 and 2020, de Villiers and his fellow researchers discovered that the performance of European companies on these issues did not significantly improve following the directive’s implementation. Additionally, the study revealed that these companies did not perform better than their counterparts in the United States, where such mandates were not in place.
“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,” said Professor de Villiers. “The findings are surprising. 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.”
The study’s findings suggest that simply mandating disclosures is not enough to ensure better environmental or social performance. “We show that you can’t just put out a piece of legislation like this and assume things will improve. You really have to design it in such a way that there are meaningful sanctions for non-disclosure,” de Villiers explained.
He pointed to the EU Directive’s relative ineffectiveness, which he attributes in part to a lack of detailed guidelines, auditing requirements, and weak penalties for non-compliance.
As New Zealand embarks on its journey with mandatory climate-related disclosures, de Villiers’ research offers a cautionary tale. The FMA has indicated that it will adopt a “broadly educative and constructive approach” during the initial phase, focusing on ensuring that companies file their disclosure statements and avoid misleading or deceptive claims. However, the FMA may ramp up enforcement from 2026, potentially incorporating tougher measures to ensure compliance.
“For Aotearoa New Zealand, and other countries wanting to see meaningful progress, this highlights the importance of coupling clear disclosure requirements with specific guidelines, rigorous auditing, and strong enforcement mechanisms,” de Villiers noted.
As the world grapples with the pressing challenges of climate change, the experience of the EU and the insights from this study underscore the need for robust and well-designed regulatory frameworks that go beyond disclosure to drive real, impactful change.
Journal Reference:
Charl de Villiers, John Dumay, Federica Farneti, Jing Jia, Zhongtian Li, ‘Does mandating corporate social and environmental disclosure improve social and environmental performance?: Broad-based evidence regarding the effectiveness of directive 2014/95/EU’, The British Accounting Review 101437 (2024). DOI: 10.1016/j.bar.2024.101437
Article Source:
Press Release/Material by University of Auckland
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