Is Integrated Reporting Really the Superior Mechanism for the Integration of Ethics into the Core Business Model? An Empirical Analysis

This paper examines the impact of integrated reporting (IR) on the integration of environmental, social, and governance (ESG) issues into the business model and the related economic and ESG performance changes. To investigate these internal and external transformational effects of IR, important differences between IR and alternative ESG reporting strategies are worked out. Using three matched samples of companies from around the world for the sample period 2002-2011, IR companies are matched with companies applying (a) no ESG reporting, (b) stand-alone ESG reporting, or (c) ESG reporting in the annual report. The results suggest that IR is a superior mechanism only for the integration of ESG issues into the core business model when comparing IR with the ESG reporting strategies of (a) no ESG reporting and (c) ESG reporting in annual reports. In comparison with (b), stand-alone ESG reporting, the results indicate that IR is negatively associated with the ESG integration level and with the economic and ESG performance. Moreover, this negative impact is lower for companies that have already implemented ESG management tools prior to the initiation of IR and is stronger for companies residing in countries with legal requirements for the disclosure of ESG information. A separate change analysis reveals that companies do not benefit from a switch from stand-alone ESG reporting to IR. Thus, this paper provides empirical evidence that contradicts the general notion of IR as a superior reporting mechanism, as the benefits of IR are driven by several factors.