Summary
Governments have increasingly regulated CSR, mainly by requiring transparency rather than defining corporate outcomes or taking stronger action against misleading corporate claims (greenwashing). In our study, published in the Journal of Management Studies, we show that transparency regulation increases stakeholder accusations, supporting the policy goal of greater stakeholder involvement in CSR and sustainability governance. However, it also heightens firms’ reputational risks. As reporting becomes mainstream and mandatory, it no longer creates the “insurance effect” in the sense of stakeholder goodwill generated through voluntary reporting.
Changing Landscape in Corporate Sustainability – From Voluntary to Mandatory
Corporate social responsibility (CSR) or corporate sustainability reporting were mainly voluntary activities. Companies that chose to publish reports could showcase their sustainability activities and build goodwill with stakeholders. Reporting could consequently function as a shield against criticism, often described as a form of “insurance”.
However, since about the 2010s, governments have increasingly regulated CSR, mainly by demanding transparency rather than defining corporate outcomes or taking stronger action against misleading corporate claims (greenwashing). European Union regulation required large companies to disclose information about their CSR activities since 2017. This has increased the amount of publicly available information and created a level playing field for comparison. Corporate reports have become more similar, particularly because companies that previously disclosed relatively little have begun catching up.
Importantly, the regulation mandates disclosure, but governments do not provide all the oversight. Instead, stakeholders and market actors are expected to examine the information and hold companies accountable.
Our paper examined whether these policies successfully activate this form of stakeholder oversight.
More Transparency, More Scrutiny – The Transparency Mechanism
For our empirical analysis, we used data from RepRisk. This data is used by academics, investors and others to identify accusations against businesses relating to a wide range of sustainability issues, sourced from various data sources. In our analysis, we examined how such accusations changed over time by comparing countries before and after the introduction of disclosure policies, as well as comparing countries with and without such policies, in order to take into account general economic developments. Such an approach is a well-established method in academia for robustly measuring the effect of policies on corporate performances.
Our analysis found that companies required to disclose information about their environmental, social, and governance activities received significantly more public accusations of irresponsible business conduct. We call this the transparency mechanism. New sustainability reporting rules have made it easier for stakeholders to compare companies. Transparency gives investors, NGOs, journalists, and other stakeholders more information with which to identify corporate failures, inconsistencies, and shortcomings. It also makes comparisons between companies easier.
The increased comparability helps explain why stakeholders are raising more concerns about corporate conduct. When regulation was largely absent, companies could reduce criticism by emphasizing relatively general sustainability initiatives. We observed this pattern when we saw that CSR performance acted as a form of ‘insurance’ against criticism during a time when regulation was absent and CSR less institutionalized. However, with the increasing institutionalization of CSR, this insurance effect disappeared. This is not only the case for companies in countries with regulation; it is a general pattern. In addition to this trend, regulation has created a more level playing field. Here, companies that disclose more detailed information may also raise expectations about responsible business conduct and consequently attract greater scrutiny.
From a regulatory perspective, this is a positive outcome. The increased scrutiny suggests that the regulation is activating stakeholder oversight as intended.
CSR as a Shield Against Criticism? Not Anymore!
At the same time, businesses must keep pace with rising expectations and close any gap between their sustainability claims and actual conduct. For companies, however, the findings carry a clear message: reporting alone no longer provides protection from criticism. Disclosed commitments must be matched by credible and responsible business practices.
Our findings show how regulation can heighten firms’ reputational risks. As reporting becomes mainstream and mandatory, it no longer creates the “insurance effect” in the sense of stakeholders’ goodwill historically generated through voluntary reporting.
This finding is important for professionals involved in sustainability reporting, of course. It challenges the understanding of CSR reporting as a form of reputational insurance. Although reporting may have provided reputational protection in the past, our findings show that it no longer necessarily does so. This development is not solely linked to the regulation: it is also evident among firms in the US, for instance, where regulation is less comprehensive. In countries with stricter transparency regulation, such as EU member states since 2017, the effect goes beyond the disappearance of reputational insurance: reporting can actively backfire by attracting additional scrutiny and accusations. We refer to this escalation as the “backfire effect.”
Implications for Mangers and Current Policy Debates
Our findings have important implications for both managers and policymakers. For managers, the results underscore that compliance alone is unlikely to be sufficient in environments where stakeholders have increasing access to information. As sustainability reporting becomes more widespread and standardised, firms may need to move beyond symbolic disclosures and demonstrate substantive action if they wish to build trust and maintain legitimacy.
For policymakers, our study demonstrates how disclosure regulation can strengthen stakeholder monitoring. This is particularly relevant given current debates about the future of sustainability reporting regulation in the EU. Efforts to reduce reporting obligations are often justified by concerns about administrative burden and competitiveness. However, our study suggests that less stringent reporting requirements do not necessarily benefit companies. Detailed and comparable disclosure can help stakeholders distinguish between firms that make meaningful investments in responsible business conduct and those that rely primarily on symbolic claims.
More broadly, our study demonstrates that disclosure requirements do more than generate information. They support an important market mechanism through which firms can be differentiated based on their responsible business practices. Policies that substantially weaken such transparency may therefore reduce stakeholders’ ability to identify meaningful sustainability efforts and and differentiate between genuine and symbolic commitments.
