As a potential investor, what type of information about a company would you look for? Balance sheet, P&L, cash flow statement… or anything beyond plain figures? Guest Professor Charles Cho, Schulich School of Business at York University Canada, and his fellow researchers discuss if shareholders are actually willing to open their wallets to access different types of corporate information.

Exploring the willingness of shareholders to pay for disclosureby CoBS Editor Olga Panashchenko. Related research: De Villiers, C., Cho, C., Turner, M. & Scarpa, R. 2021. ARE SHAREHOLDERS PREPARED TO PAY FOR ADDITIONAL FINANCIAL, SOCIAL AND ENVIRONMENTAL DISCLOSURE? A CHOICE-BASED EXPERIMENT, European Accounting Review.

Strategic Shift

Just a couple of decades ago, words such as ‘ESG statement’, ‘integrated reporting’ or ‘social accounting’ sounded like something new and exciting. Companies that implemented these practices were seen as ambitious and innovative. Now, barely twenty years later, sustainability reporting is neither innovation nor surprise. The Triple Bottom Line (People, Profit, Planet) has become an omnipresent element in corporate strategic reports worldwide. Shareholders, employees, consumers, society-at-large – all groups of stakeholders keep a close eye on what a company is doing in order to achieve largely discussed sustainable development goals. The bigger the company, the higher the stakes.  

Focusing on a particular group of stakeholders – namely shareholders – what about their willingness to access various types of corporate information before making an investment decision? The fact that shareholders are really interested in financial disclosure leaves no doubt. Any rational investor wants to make sure that the company will not go bust too soon. Shareholders therefore invest time and effort into getting the most accurate financial information, especially when it is not publicly available or available only to a limited extent. Alongside that, in view of increased global challenges, shareholders are becoming more and more interested in non-financial information. Sustainability reports are now a good sign that a company’s goals lie beyond short-term profits.

Trade-off dilemma

Previous studies confirm that the vast majority (72%) of shareholders view environmental information as a tool for investment decision-making. Some shareholders even support the idea to make such disclosures compulsory. However, investors’ interest in non-financial disclosure tend to rapidly fade away when confronted with the necessity to dip into their pocket.

While it is easy to accuse such investors of hypocrisy, it is necessary to keep in mind their financial interest. Regardless of the type of the investment, it is always aimed at gaining returns. On the one hand, shareholders can accept lower returns from companies with more disclosures. Financial disclosure allows for a better predictability of cash flows, but non-financial disclosure may just as well influence investment returns. For instance, a B-Corp status can increase the firm’s value among customers and boost sales. Therefore, accepting lower returns in exchange for higher level of disclosure works for both financial and non-financial information.

On the other hand, revealing various types of corporate information might be very costly. A firm that spends huge resources on providing detailed ESG reports, is likely to offer significantly lower returns. If these returns are too low, investors will also decrease the share price that they are ready to pay. Responsible investment is still investment, so it implies trade-offs – otherwise it is called philanthropy.

As such, there must be a point where shareholders agree to pay the same amount for the shares of both companies – with little disclosure, but higher return and with more disclosure, but less return. However, shareholders are expected to pay more for a company that discloses higher than the average level of value-relevant information.

Unveiling the cover

In the context of rising global issues, neglecting a firm’s social and environmental performance is viewed as bad manners. The research based on 700+ responses from actual investors reveals that shareholders are indeed interested in more than the minimum level of environmental disclosure and are ready to pay for it. Similarly, they are interested in financial disclosure. At the same time the results of the research demonstrate that shareholders are not willing to pay for social disclosure. This interesting finding once again brings up the heated discussion about the fake image of a ‘socially conscious’ investor.

Moreover, shareholders are not equally interested in above-the-average level of financial and non-financial disclosure. They give more importance to above-the-average disclosure of financial data rather than environmental or social. Such a conclusion raises the question as to whether compliance with the minimum ESG criteria has become a formal obligation. With no additional effort to promote social and environmental disclosure, it might actually mean that a great number of these ‘responsible future leaders’ are not as responsible as they make you believe.

In support of shareholders, the affirmation that financial information is always preferable to non-financial information is not the ultimate truth. The appreciation of information disclosure can vary across industries. Also, it is still true that financial information is of great value to shareholders, it seems that some of them are ready to look beyond profit margins.

It could make sense to suggest that investors are more interested in social and environmental disclosures from environmentally sensitive industries such as oil & gas or mining. However, there is no such evidence. To the contrary, according to the research findings, shareholders were more willing to pay for environmental disclosure in a sports apparel firm compared to a mining firm. Even though it may seem strange, there is a possible explanation behind it: mining firms have relatively well-known environmental issues. On the flip side, environmental issues in sports apparel are less transparent so potential shareholders have hard time setting a buy price. In particular, large sports apparel companies such as Nike and Hennes & Mauritz are rather concerned with negative media attention so they have more incentives to make positive corporate environmental disclosures.

Stay tuned

All in all, there is no sufficient reliable evidence to draw conclusions about shareholders’ willingness to pay for disclosure across industries. The question remains open, one thing being clear – however, investor decisions are multidimensional and are driven by numerous forces.

The results of the current study are based upon empirical evidence. However, nothing is perfect and there is still space for improvement. In particular, the researchers put an emphasis on the amount of disclosure (low and high, versus the average baseline), but they do not estimate the quality of this disclosure. This an important vector for future research: investors should be expected to pay more for more reliable information. Taking into account the quality component, it could possibly explain some of the controversial tendencies.

Finally, the results of the study apply best to a voluntary disclosure environment. If disclosure of integrated reporting information is non-voluntary, it might bring a different set of costs and benefits. Since the conversation about compulsory integrated reporting is on the agenda, the realities of ESG investing may change very soon.

Useful links:

• Link up with Professor Charles H. Cho on LinkedIn
• Read a related article: How social and environmental accounting can change the nature of our game
• Discover COERB at Schulich and follow the Center on Twitter.

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The Council on Business & Society (The CoBS), visionary in its conception and purpose, was created in 2011, and is dedicated to promoting responsible leadership and tackling issues at the crossroads of business and society including sustainability, diversity, ethical leadership and the place responsible business has to play in contributing to the common good.  

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