Climate Change Risk Disclosure in Europe: The Role of Cultural-Cognitive, Regulative, and Normative Factors

ABSTRACT

Climate change is a key issue faced by the contemporary world. Through the lens of neoinstitutionalism and the normativity concept, this study examines whether cultural, regulative, and normative dimensions affect the quality of climate change risk disclosures. This paper uses a sample of 653 European companies and measures the quality of their disclosures based on Carbon Disclosure Project (CDP) ratings. The results show that the quality of such disclosures is associated with cultural and normative dimensions, but substantive legitimacy is found to be influenced by all the examined institutional factors. The interactions between the examined cultural and normative dimensions are shown to be (not) important for firms that operated in weaker (stronger) regulative contexts prior to Directive 2014/95/EU. This study provides a better understanding of the challenges related to climate change reporting and the role of institutional differences in the process of achieving normativity in cross-national contexts such as that of the European Union.

Keywords:

• climate change
• nonfinancial disclosure
• CDP
• Directive 2014/95/EU
• neoinstitutional theory

Acknowledgments

We would like to thank the participants of the 9th International Conference Financial Reporting and Auditing in Krakow, Poland, for their helpful comments and suggestions.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 According to the Directive, large PIEs should disclose, among other nonfinancial information, their principal risks related to environmental, social, and employee matters in their annual reports or in separate nonfinancial disclosure statements. These provisions were to be applied by entities within the financial year commencing on 1 January 2017 or during the calendar year 2017.

2 France has a long tradition of social and environmental reporting, as the first law requiring such disclosures dates back to 2002 (The Nouvelles Régulations Economiques (NRE)); in Sweden, state-owned companies have been required to publish annual sustainability reports in accordance with Global Reporting Initiative guidelines since the financial year starting on 1 January 2008 (Guidelines for external reporting by state-owned companies issued by the Ministry of Enterprise, Energy and Communications in 2007); and since 2009, the largest companies in Denmark have been required to provide environmental, social and governance disclosures (Danish Financial Statements Act adopted in 2008).

3 E.g. Denmark 70/100, the Netherlands 68/100, and Sweden 78/100 (Hofstede, 2020).

4 The UK is included in our sample because in 2018 (the year of analysis), it was still an EU member state under the influence of the EU.

5 The database is available on-line at www.hofstede-insights.com. This website allows individuals to select countries and values of cultural dimensions and view cross-country comparisons.

6 Multicollinearity was evaluated with a variance inflation factor (VIF) test. The mean VIF value of 1.51 excluded a multicollinearity issue.

7 Given that the sample is made up of only CDP reporters, heteroskedasticity was evaluated with a Breusch-Pagan/Cook-Weisberg test. This test evaluates the null hypothesis that the error variances are all equal versus the alternative, namely, that the error variances are a multiplicative function of one or more variables. If the chi-squared value is significant with a p-value below the appropriate threshold (e.g. p < 0.05), then the null hypothesis of homoskedasticity is rejected and heteroskedasticity is assumed. In this study's case, the probability is not significant (with a p-value of 0.4913), which indicates that heteroskedasticity is not an issue in the model.

8 Once again, the size of this effect is led by the normative coefficient, which is 2.6833, rather than the LTO coefficient, which is equal to −0.0143.

Additional information

Funding

This work was supported by the National Science Centre, Poland under Grant number 2019/33/B/HS4/00998.