Corporate Sustainability Reporting and Stakeholder Trust

The development and contested purposes of sustainability reporting

Corporate sustainability reporting, defined broadly as the voluntary or mandatory disclosure by organisations of their environmental, social, and governance (ESG) performance, has grown from a marginal practice of a small number of pioneering firms in the 1990s to a mainstream expectation for listed companies across most developed capital markets. The development of the Global Reporting Initiative (GRI) framework, first published in 2000, the Sustainability Accounting Standards Board (SASB) standards, and the International Sustainability Standards Board (ISSB) standards reflects the institutionalisation of sustainability reporting as a component of corporate accountability rather than a discretionary communications exercise. This analysis examines the contested purposes of sustainability reporting, evaluates the evidence on its effectiveness in producing the outcomes its proponents claim, and considers the implications of mandatory reporting for the direction of corporate sustainability practice.

Freeman (1984) defines stakeholders as any groups or individuals who can affect or are affected by the achievement of the organisation's purpose, and argues that sustainable long-term organisational performance requires the management of relationships with all significant stakeholder groups. The stakeholder theory foundation for sustainability reporting implies a demanding accountability standard: the provision of material information about corporate impacts on all relevant stakeholder groups, including those, such as affected communities and ecosystems, that lack the market power to demand disclosure through conventional financial channels.

Legitimacy theory and impression management

Legitimacy theory, as applied in social and environmental accounting research, proposes that organisations engage in sustainability reporting as a strategy for managing their social licence to operate by aligning, or appearing to align, their activities with the social norms, values, and expectations of relevant stakeholder groups (Suchman, 1995). Mahoney et al. (2013) found that companies with poorer environmental performance were more likely to engage in proactive sustainability reporting and to use positive rhetorical framings that obscured the gap between disclosure and performance, a pattern consistent with the legitimacy management prediction. Cho et al. (2012) demonstrate that the linguistic tone of sustainability disclosures is positively associated with the absolute level of pollutant emissions, suggesting that companies with higher actual pollution levels use more positive language in their sustainability reports, precisely the pattern that impression management theory would predict. These findings raise fundamental questions about the reliability of voluntary sustainability disclosures as indicators of actual corporate sustainability performance.

The effectiveness of mandatory sustainability reporting

Ioannou and Serafeim (2017) find that mandatory sustainability reporting is associated with improvements in actual corporate sustainability performance relative to matched firms in countries without mandatory requirements, providing empirical support for the claim that mandatory disclosure serves as an accountability mechanism rather than merely a legitimation exercise. The EU Corporate Sustainability Reporting Directive (2022), which introduces double materiality and requires disclosure of information relevant to the impacts of corporate activities on people and the planet as well as information relevant to investors, represents a significant departure from the narrower investor-focused materiality approach of the ISSB standards and reflects the ongoing policy debate about the purpose of sustainability reporting.

Conclusion

Sustainability reporting occupies an ambiguous position in the corporate accountability landscape, simultaneously serving as a legitimation mechanism through which organisations manage their social licence, as an accountability instrument through which stakeholders access information about corporate environmental and social impacts, and as a potential driver of improved sustainability performance through the discipline of public disclosure and the scrutiny it invites. The trajectory of regulatory development toward mandatory reporting, combined with the evidence that mandatory regimes produce better outcomes than voluntary ones, suggests a direction of travel, but the adequacy of that reporting in capturing the full range of corporate environmental and social impacts will depend on the resolution of the materiality debate in the direction of genuine double materiality rather than the narrower investor-focused conception.

The politics of sustainability reporting standard-setting

The development of sustainability reporting standards is not a purely technical exercise in accounting standard-setting but a political process in which competing interests, including investor groups seeking financial materiality, NGOs and civil society organisations seeking accountability for environmental and social impacts, national governments balancing economic competitiveness with regulatory ambition, and companies themselves seeking manageable disclosure requirements, contest the scope, content, and enforceability of disclosure obligations. The parallel development of the ISSB standards and the EU Corporate Sustainability Reporting Directive reflects this political pluralism: the ISSB framework prioritises investor-focused financial materiality and has been designed for adoption by capital market regulators globally, while the CSRD framework adopts double materiality and is embedded in a mandatory regulatory framework applicable to large EU companies. The potential for these two frameworks to diverge in their requirements creates compliance complexity for multinational companies operating in both jurisdictions, and has generated significant lobbying activity aimed at ensuring a degree of interoperability between the two frameworks (Christophers et al., 2021).