With increased global business watchdogs, and in the standards of the business practices linked with OECD, UN Global Compact and World Bank, non-financial information and its reporting has gained momentum (Haller, Link & Groß, 2017). Besides, initiatives for the non-financial reporting have been incorporated and developed across the globe. Reporting of the non-financial information has also progressed with spread of the globalization as well as transformation in the legal, ethical accounting and social framework regulating these reporting (Brooks & Oikonomou, 2017). A good number of the firms operating across the globe are adopting the formal structure in reporting numerous social responsibility policies undertaken at periodical intervals. It is established that quite a good number of firms are paying ever-increasing significance to non-financial information disclosure. Further, with increasing significant of the ecological issues globally, there is also significantly increasing tendency for the firms to offer info concerning environmental, social, governance and so forth of their operations (Eccles & Serafeim, 2011). Such movements towards environmental, social and governance reporting has been especially apparent with the Australian form and throughout the globe since 1990s. Demand for the information regarding environmental, social, corporate social responsibility and governance comes from numerous different interested parties (Gozali, How & Verhoeven, 2002). In fact, investors and other stockholders are demanding for more disclosure of the non-financial information due to their concerns on the magnitude of the liabilities and costs linked with the non-financial issues (Brooks & Oikonomou, 2017). As a result, there is increasingly use in the non-financial information reporting requirements of the public listed firms by SEC in the recent years. The paper reviews the nature of non-financial information as well as economic consequences. It also presents the style in which the non-financial information ought to be conveyed and wrap up with a discussion of some of the economic concerns of the non-financial information.
Nature of Nonfinancial Information
The non-financial information entails all the qualitative and quantitative information on rules followed, business processes as well as consequences of the rules in the upshot or output, without any unswerving link with the financial recordkeeping scheme (Stolowy & Paugam, 2018). Issues of disclosing non-financial information has been of greater interest amongst academics and researchers. Even though disclosure of the non-financial information is increasing, it is quite questionable on whether the present practice of reporting could satisfy organizational needs in providing relevant financial information for estimation of the organizations’ social and environmental performance (Janggu, Darusi, Sawani & Zain, 2013). Besides, though disclosure of the non-financial information is increasing, it is a bit questionable whether present level of financial reporting could satisfy increasing demand for transparency and accountability indicated by the stakeholders (Haller, Link & Groß, 2017). The organizations’ stakeholders are becoming more interest not just in financial performance but also in the environmental and social performance.
Basically, non-financial information comprises of the issues linked to the corporate responsibility, sustainability, environmental, social and the governances (ESG), health, human capital, ethics as well as environment, health and the safety (EH&S) (Li, Gong, Zhang & Koh, 2018). Such could comprises of matters that deals with product innovation which accelerate a more sustainable lifestyle, efficient utilization of the high recycling rates and resources as well as trusted user of water, land and air (Haller et al., 2017). In addition, it comprises of matters dealing with products which create a sustainable infrastructure, healthy, safe, quality working lives, personal development and diversity for personnel. It also comprises of water and material use, welcomed and active member of a community, consumer protection as well as non-compliance issues, energy efficiency products, responsible energy user which assists create lower carbon future as well as efficient and transparent corporate governance (Stolowy & Paugam, 2018). In essence, non-financial information reporting entails procedure of collecting and unveiling information on the non-financial facets within an organization’s performance comprising social, ethical stuffs, environmental, employees, as well as defining measurements.
Nature of Economic Consequences
Economic consequences comprises of debt market and capital market effect of non-financial information. The researcher is interest on whether higher value of non-financial info translates to better pricing during debt and equity issuances (Gozali, How & Verhoeven, 2002). Since the effects of the non-financial information on cost of the capital are more probable to patent through the transitional instruments, the section would entail analysis of probable mechanisms which are generally not theoretically linked with reporting quality though have been recognized as influencing organization’s cost of the capital, stock liquidity, analyst coverage, and institutional ownership (Dong, Fu, Gao & Ni, 2015).
How the Nonfinancial Information Need to be Reported
There has been new drive or improvement on how non-financial information ought to be reported. While some of these requirements already existed, updates to Companies Act 2006 have taken this step further. In fact, the new requirements require the non-financial information statements being presented as part of strategic report (Dong et al., 2015). Basically, non-financial information should be reported in an organizations strategic report where an organization narrates its strategic stories. The non-financial information should contain relevant information to an extent significant for understanding organization’s development, position and performance as well as impact of an organization’s activities relating to environmental matters, social matters, employees, anti-bribery and anti-corruption matters as well as respect for the human rights (Brooks & Oikonomou, 2017).
Economic Consequences of Nonfinancial Information Reporting
Organizations with relatively better non-financial information reporting such as strong corporate governance and higher external financial requirements have a tendency of offering higher quality of the non-financial information (Li et al., 2018). Additionally, quality of organization’s information disclosure and its non-financial information reporting appear as a complementary whenever an organization is having strong non-financial information disclosure. In terms of the economic consequences, organizations could derive significantly higher benefits from their commitment to higher superiority of non-financial information reporting practice. As such, non-financial reporting is said to offer numerous economic benefits (Stolowy & Paugam, 2018). As such, the section discusses some of the economic consequences related with the non-financial information reporting.
To start with, the question on whether promoting CSR, environmental, social , green banking disclosure and social governance reporting could result in beneficial economic results for related business firm has been declared significant over forty years (Brooks & Oikonomou, 2017). In fact, the proponents of the CSR, ESG, social reporting and environmental reporting studies provided that the non-financial information could assist in solidifying and building trusting link with a wide range of the constituents; that is, local communities, concerned citizens, clients, environmental activists and employees that are crucial to an organization’s long-run financial standing and success (Haller, Link & Groß, 2017). Besides, non-financial reporting offers crucial additional aspect above and over the financial information. This assists in offering greater comprehension of an organization’s business operations (Janggu et al., 2013).
According to Erkens, Paugam and Stolowy (2015), countries that have adopted non-financial information reporting are said to have stronger capital market impacts. This is based on the fact that non-financial information reporting improves quality and transparency of the financial reporting. Besides, non-financial information reporting are more comprehensive and fair value-oriented than most of the local GAAP (Gozali, How & Verhoeven, 2002). Further, non-financial information reporting is said to improve organizations’ reputation and their relationship with the investors, government officials and bankers (Brooks & Oikonomou, 2017). Improved relationship with these individuals might be as well being translated to the economic benefits. For instance, high non-financial information reporting might improve organization’s access to the sources of the capital. Besides, non-financial information reporting is said to impact on financial market. In fact, capital market is rather indifferent to organizations undertaking non-financial reporting. In a study by Eccles and Serafeim (2011), it was established that the level to which an organization discloses non-financial information negatively affects capital market participants.
In terms of the economic values, organization could develop greater assistances from non-financial information reporting. Generally, organizations with higher scores of the non-financial information reporting are said to attract higher analyst coverage, greater stock liquidity as well as higher level of the institutional ownership (Eccles & Serafeim, 2011). These mechanisms eventually lead to higher valuation in the equity offerings as well as lower costs of the debts. Basically, the relationship between non-financial information reporting and analyst coverage is mixed (Li et al., 2018). A relatively advanced superiority of the non-financial information reporting could upsurge supply of the analysts since it become relatively easier for the analysts to process and collect information (Dong et al., 2015). Nonetheless, based on whether the info being revealed by an organization completes or complements with the analysts’ predictions, greater quality non-financial information revelation might either decrease or increase plea for the analyst services. Therefore, organizations with higher quality of the non-financial information revelation would have relatively higher analyst coverage. Disclosure of the non-financial information affects organization’s stock liquidity (Gao, Dong, Ni & Fu, 2016). In this case, higher quality non-financial information reporting increases transparency and mitigate adverse selection issues, which mean enhanced stock liquidity (Brooks & Oikonomou, 2017).
Furthermore, organizations with relatively higher quality non-financial information reporting could attract more institutional stakeholders. This is based on the fact that higher quality non-financial information reporting lessens information asymmetry, hence, price effect of the large trade turns to be less severe and investors become more willing to venture in such firms (Dong et al., 2015). Therefore, organizations with relatively high quality non-financial information reporting accord institutions significantly more beneficial opportunities; hence, they have high level of the institutional ownership (Gao et al., 2016).
Non-financial information reporting could lessen information asymmetry by assisting investors examine an organization’s social and political liabilities or risks (Brooks & Oikonomou, 2017). In a word, non-financial information disclosure shows value relevant information to existing and potential investors and hereafter is crucial to the capital market players in making some investment choices irrespective of collective assessment effects of the non-financial information reporting activities (Stolowy & Paugam, 2018). Non-financial information is also said to affect cost of capital. For instance, organizations with higher probability of raising the capital might select to advance value of their non-financial information revelations in order to lessen costs of the capital. Value of non-financial information reporting could also directly lessen cost of the capital by conversely sinking level of covariance in between an organization’s cash inflow as well as that of the general market. In essence, advanced value in non-financial information reporting reduces the uncertainties of borrowers and therefore it default risks that result in lower costs of the debt (Gao et al., 2016).
The non-financial information attracts, maintains and retains satisfied employees. It also save resources as well as lessen operation costs and manage risks. Furthermore, non-financial information reporting strengthen customer retention, enhances good relations with the stakeholders, customers and suppliers (Stolowy & Paugam, 2018). In fact, organizations that have heavily invested in the non-financial information reporting have experienced significant growth in their turnover and their profitability level.
Conclusion
In conclusion, organizations with better non-financial reporting, tends to offer higher quality of the non-financial information. As a result, these organizations gain higher analyst coverage, better stock liquidity, advanced level of the institutional ownership, inferior yields to the maturity in the bond issuances as well as higher valuations in the SEOs. Such benefits are applicable largely to organizations with strong non-financial information reporting. Collectively, it was established that higher quality of the non-financial information disclosures has numerous economic benefits such as improved capital and debt market. To be more specific, with respect to the economic consequences, it is evident that relatively higher quality of the non-financial information reporting translates to better pricing during the bond and SEOs issuances through the mechanisms including higher analyst coverage, greater stock liquidity as well as higher institutional ownership. Nonetheless, these benefits are applicable mostly to organizations with relatively strong non-financial information reporting which suggest that existing and potential investors reward such disclosures or reporting only when an organization is socially responsible. It is also evident that non-financial information reporting affect cost of debt.
References
Brooks, C., & Oikonomou, I. (2017). The effects of environmental, social and governance disclosures and performance on firm value: a review of the literature in accounting and finance. The British Accounting Review.
Dong, Y., Fu, R., Gao, F., & Ni, C. (2015). Determinants and Economic Consequences of Nonfinancial Disclosure Quality. Retrieved from: https://poseidon01.ssrn.com/delivery.php?ID=444091009006080007030090126094095092096081003083049054069103121078089007120024084081107026040056062060105066029111092088024112012043009087045064075031069125092007003003048125113126088124013005092081114120122121029073074019006066003005027121088025084&EXT=pdf
Eccles, R. G., & Serafeim, G. (2011). Market interest in nonfinancial information. Journal of Applied Corporate Finance, 23(4), 113?128.
Erkens, M., Paugam, L., & Stolowy, H. (2015). Non-financial information: State of the art and research perspectives based on a bibliometric study. Comptabilité-Contrôle-Audit, 21(3), 15-92.
Gao, F., Dong, Y., Ni, C., & Fu, R. (2016). Determinants and economic consequences of non-financial disclosure quality. European Accounting Review, 25(2), 287-317.
Gozali, N. O., How, J. C., & Verhoeven, P. (2002). The economic consequences of voluntary environmental information disclosure. Retrieved from: https://scholarsarchive.byu.edu/cgi/viewcontent.cgi?article=3878&context=iemssconference
Haller, A., Link, M., & Groß, T. (2017). The term ‘non-financial information’–a semantic analysis of a key feature of current and future corporate reporting. Accounting in Europe, 14(3), 407-429.
Janggu, T., Darusi, F., Sawani, Y., & Zain, M. (2013). Assurance of CSR and Sustainability Reports: Empirical Evidence from an Emerging Economy. Journal of Energy Technologies and Policy, 3(11), 390-396.
Li, Y., Gong, M., Zhang, X. Y., & Koh, L. (2018). The impact of environmental, social, and governance disclosure on firm value: The role of CEO power. The British Accounting Review, 50(1), 60-75.
Stolowy, H., & Paugam, L. (2018). The expansion of non-financial reporting: an exploratory study. Accounting and Business Research, 48(5), 525-548.
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