Exploring Mandatory Sustainability Reporting in China: Economic Implications and Regulatory Effectiveness

Sustainability reporting refers to the measurement and communication of organizational environmental and social impacts and corporate governance. Over the past decades, many jurisdictions worldwide have been actively pursuing sustainability reporting mandates. Alongside the considerable attention paid to sustainability reporting, the demand for empirical studies on sustainability reporting has increased substantially. The upcoming disclosure regulations will extend firms’ reporting obligations and require new knowledge about measurement, reporting, and assurance. Specifically, the reporting mandate necessitates a systematic update of current accounting systems to facilitate collecting and processing sustainability information, enabling internal control, and incorporating sustainability information into decision-making processes at the Board level. These developments will presumably incur intended or unintended consequences. Therefore, it is vital to investigate and understand the economic consequences of mandatory sustainability reporting, which, in turn, could be fundamental for future evidence-based policymaking.
The first essay in this dissertation shows that firms affected by mandatory sustainability reporting experience a decrease in total risk and systematic risk after the mandate. There is no evidence supporting a decrease in idiosyncratic risk following the mandate. The decrease in total risk and systematic risk is more pronounced for firms headquartered in regions/provinces with strong legal enforcement. In addition, mandatory sustainability reporting does not necessarily induce firms to improve sustainable business practices by, for example, increasing R&D expenditures and employee salaries, implying that the intended purpose of the reporting mandate may not necessarily be accomplished.
The second essay suggests that following the mandate, the firms affected by mandatory sustainability reporting regulation experience a decrease in profitability. This impact is more pronounced (1) for firms with a lower analyst following and less analyst coverage, (2) for firms with higher ownership concentration, and (3) for firms with financial statements audited by non-Big 4 firms. This essay also shows that firms subject to mandatory sustainability reporting experience an increase in compliance cost following the mandate.
Using content analysis, the third essay shows that corporate sustainability reporting tends to be ceremonial rather than substantive even under the scope of mandatory reporting. Institutional factors play key roles in shaping firms’ sustainability reporting practices. Specifically, firms with shares cross-listed on foreign stock exchanges and those operating in environmentally sensitive industries demonstrate a greater likelihood of generating substantive sustainability reports. In summary, all three essays in this dissertation provide new insights into the impact of mandatory sustainability reporting.