The effect of the EU’s directive on non-financial disclosures of the oil and gas industry

Mona Al-Dosari; Ana Marques; Jenny Fairbrass

doi:10.1080/01559982.2023.2198179

The effect of the EU’s directive on non-financial disclosures of the oil and gas industry

Al-Dosari, Mona; Marques, Ana; Fairbrass, Jenny 2023-04-03 00:00:00 ACCOUNTING FORUM https://doi.org/10.1080/01559982.2023.2198179 The eﬀect of the EU’s directive on non-ﬁnancial disclosures of the oil and gas industry a b b Mona Al-Dosari , Ana Marques and Jenny Fairbrass a b College of Business Administration, King Faisal University, Al-Ahsa, Saudi Arabia; Norwich Business School, University of East Anglia, Norwich, UK ABSTRACT ARTICLE HISTORY Received 28 June 2021 Owing to its substantial impact on the environment, economy, and Accepted 30 March 2023 society, we choose to examine the oil and gas industry, drawing on neo-institutionalist scholarship to concentrate on the mimetic, KEYWORDS coercive, and/or normative eﬀects discernible in the industry’s Directive 2014/95/EU; non-ﬁnancial disclosure (NFD) behaviour. Focusing on Directive corporate social 2014/95/EU, we construct scores to assess the evolution of the responsibility; sustainability sector’s NFD over time and the spillover eﬀects beyond EU large reporting; ESG and listed ﬁrms, the latter being directly subject to the legislation. ACCEPTED BY We scrutinise NFD over a decade, producing three main results. Diogenis Baboukardos, Silvia First, we ﬁnd that NFD increases immediately after the directive’s Gaia, Philippe Lassou and publication and further increases during the implementation Teerooven Soobaroyen phase. Second, the directive has a spillover eﬀect, sparking signiﬁcantly increased NFD among non-EU ﬁrms during the implementation period. Third, the NFD level of non-EU ﬁrms is associated with the number of EU employees and the extent of EU operations of these ﬁrms, but only following the implementation of the directive. These ﬁndings have clear repercussions for ﬁrms operating both inside and outside the EU as well as implications for EU public policymakers. 1. Introduction The European Union (EU) has sought to become a global pacesetter, exercising its normative power (Manners, 2002), across several public policy ﬁelds, including sus- tainability reporting. Such is the signiﬁcance of non-ﬁnancial disclosure (NFD) among business organisations for the EU that it has enacted legislation in the ﬁeld: namely, Directive 2014/95/EU. This directive requires all large European listed ﬁrms that have more than 500 employees to publish “… certain information on the way they operate and manage social and environmental challenges” (European Com- mission, 2014). CONTACT Mona Al-Dosari maldosari@kfu.edu.sa Diogenis Baboukardos, Silvia Gaia, Philippe Lassou and Teerooven Soobaroyen Previous literature uses the terms “CSR” and “ESG” but we use NFD, as the EU’s Directive is known as the non-ﬁnancial directive. © 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/ licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author (s) or with their consent. 2 M. AL-DOSARI ET AL. The EU’s Directive provides a critical focal point for the examination of ﬁrms in the oil and gas industry because of their signiﬁcant impact on the environment, economy, and society. Notably, oil and gas ﬁrms contribute considerably to the global economy, provid- ing inter-alia sizeable employment opportunities (IPIECA, 2015). However, this industry is also perceived as being “environmentally sensitive”, given that, historically, it has been one of the highest producers of carbon dioxide and methane emissions (Ritchie & Roser, 2020) and one whose operations can cause signiﬁcant environmental damage. Hence, the motivation to investigate this sector. Building on the above background and drawing on well-established neo-institutional- ist scholarship (Dillard et al., 2004; DiMaggio & Powell, 1983; Scott, 1987), we concen- trate speciﬁcally on Directive 2014/95/EU and the NFD levels of oil and gas ﬁrms. We create a novel NFD score that includes 31 variables and use it to assess how disclosure levels change over time, starting from a point in time ﬁve years before the directive was issued. This enables us to explore disclosure levels in a period before the enactment of this legal framework and the subsequent changes that occur after the EU’s directive was introduced. Additionally, we investigate whether there is a spillover eﬀect of the directive beyond large and listed EU ﬁrms, examining its impact on ﬁrms with headquar- ters outside the EU. Finally, we study whether the NFD of these ﬁrms varies with the number of employees and the scale of operations that they have in the EU. We examine 204 ﬁrms, operating in 35 countries, during the decade from 2009 to 2019, with a ﬁnal sample of 1,623 observations. We ﬁnd signiﬁcant variations in the level of NFD among ﬁrms and that EU ﬁrms have higher disclosure scores than do non-EU ﬁrms. These two sets of ﬁrms also diﬀer in terms of (i) the frequency with which they seek assurance of their sustainability reports, (ii) publication of a stand-alone report for Corporate Social Responsibility (CSR), and (iii) use of Global Reporting Initiative (GRI) standards. Our multivariate analysis indicates that overall NFD levels increased during the tran- sition period (as previously documented) and that a signiﬁcant increase in disclosure occurs after the directive’s implementation, expanding knowledge of its impact. In fact, when we use propensity score matching (PSM), we ﬁnd that the level of NFD increases sig- niﬁcantly only during the implementation phase. This is direct evidence of the impact of the directive issued by the EU. The substantial rise during the implementation phase is also present in our four sub-scores (environmental, social, human rights, and anti-corruption), and when we consider alternative disclosure score calculations. Moreover, our results indi- cate that the four proxies for the quality of NFD that we use are signiﬁcantly and positively associated with the NFD score, indicating that ﬁrms that provide more disclosures also dis- close better-quality information. This ﬁnding is aligned with the believe that NFD is one of the four main elements of quality for ﬁrms’ reporting (Afeltra et al., 2023). Following neo-institutionalist literature, we posit that although the EU’s Directive directly targets EU ﬁrms’ behaviour, it is also a catalyst for increased NFD among ﬁrms operating or based outside the EU, due to spillover or isomorphism. This may take the form of mimetic, and/or normative processes. When focusing on non-EU ﬁrms, we ﬁnd that although their levels of disclosure are not much lower than the level of EU ﬁrms overall, this changes signiﬁcantly during the implementation of the directive when NFD does increase. This ﬁnding is corroborated by our PSM analysis, and by using alternative ways of calculating our disclosure scores. However, this substan- tial rise during the implementation phase is present in only two of the four sub-scores ACCOUNTING FORUM 3 (namely, the social and environmental), indicating that the increase of disclosure was not homogeneous across all areas. Next, we analyse non-EU ﬁrms separately and ﬁnd that their number of EU employees is positively associated with NFD disclosures, when considering our unweighted scores, especially when it comes to social disclosures. Moreover, the association between overall NFD and EU employees is stronger after the directive’s implementation (in all scores). Another characteristic of non-EU ﬁrms is positively associated with the ﬁrms’ NFD during the implementation period: the scale of the operations that these ﬁrms have in the EU. Thus, these variables moderate the relationship between NFD of non-EU ﬁrms and the directive’s implementation. These results provide evidence of how the interaction between oil and gas ﬁrms and their institutional environment aﬀects their dis- closures, as predicted by neo-institutional theory, expanding previous studies that only considered the impact of EU actions in speciﬁc EU countries and reinforcing the signiﬁ- cance of the EU when it comes to NFD. Our research builds on and extends the extant scholarship in several important ways. First, we provide novel evidence about an industry for which, despite its environmental importance, relatively little is known regarding NFD. Crucially, we furnish data over a longer period following the implementation of the EU’s Directive, covering three years of implementation, in contrast to some previous studies that only cover the initial year of implementation (e.g.: Fiechter et al., 2022), a period of adjustment for ﬁrms. Thus, we join the many scholars who “argue that regulatory enforcement has an impact, driving high-quality disclosure and compliance” (Afeltra et al., 2023). Second, by custom-building NFD scores, we contribute to the scholarship concerning NFD measurement. While most studies focus on the level of NFD through the publication of a separate report (e.g.: Cuomo et al., 2022) or a manually collected disclosure score and do not address the growing concern about a uniform deﬁnition of NFD (Stolowy & Paugam, 2018), our disclosure indexes can be used in future studies, allowing for the analysis of disclosures across time, and across four speciﬁc areas, in a consistent way. Third, we provide evidence that the directive’s impact is not conﬁned to large and listed European ﬁrms. Our ﬁndings are relevant to a wide range of stakeholders. Clearly, they have direct rel- evance for the business managers of the ﬁrms in our selected sector, as well as for poten- tial investors and ﬁnancial analysts interested in this industry. Equally importantly, they are also likely to be germane to public policymakers. While EU regulators would hope and expect to directly inﬂuence large EU-based ﬁrms via the regulations that they enact, they should also be aware of the mimetic and normative eﬀects on a wider range of ﬁrms. Indeed, our evidence suggests that when the EU drafts and ratiﬁes legis- lation aimed at its largest ﬁrms, these decisions have much broader reach. This leads us to expect a wide impact of the recent corporate sustainability reporting directive, as well as the other initiatives that are related to the European Green Deal (European Commission, 2019a). After introducing our study, we now outline the structure of this paper. First, we discuss the institutional and regulatory settings relevant to the industry. Next, we review the literature and develop the hypotheses. Next, we outline the research method- ology used to test the hypotheses. The discussion of the results comes next. Finally, we present our conclusions. 4 M. AL-DOSARI ET AL. 2. Institutional settings Several major events have contributed to the increased importance of oil and gas industry NFD, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. This event gen- erated shockwaves for the entire industry, harming the environment and wildlife, and leading to reputational damage to the sector. In response to this unprecedented attention, many oil and gas ﬁrms have increased their social and environmental protection activities (Dyck et al., 2019). In parallel, the oil and gas industry was among the ﬁrst industries to introduce the dis- closure of their non-ﬁnancial activities (Venturelli et al., 2017) and has a high NFD level when compared to other industries (Carini et al., 2018; Matuszak & Różańska, 2017). However, as reported in The New York Times (Tabuchi, 2020), the oil and gas industry may be “a far bigger climate threat than we knew” since it has caused a considerable increase in the amount of methane emissions. Considering this evidence and the environmental sensitivity of this industry, we posit that the oil and gas industry is a prime target for the EU’s Directive. In addition, the industry has a signiﬁcant global economic impact. According to the International Petroleum Industry Environmental Conservation Association, the sector has considerable social value and can signiﬁcantly contribute to the growth of a strong economy (IPIECA, 2015). The GRI indicates that “global exports for mineral fuels and associated fuel products totalled USD 1.9 trillion in 2017” (GRI, 2019, p. 2). Moreover, as the United Nations Development Programme (UNDP, 2017) highlights, some of the importance of the oil and gas industry lies in creating economic growth by providing employment, building infrastructure, and creating services in diﬀerent countries. In the US alone, the industry contributes 9.8 million jobs to total US employment (American Petroleum Institute, 2020). Accordingly, “this sector has been the focus of regulation and public attention”, and therefore oil ﬁrms’ ability to manage their sustainability issues are likely to aﬀect their assets, liabilities, proﬁts, and capital (SASB, 2014). Legal requirements also have an impact on NFD in the selected industry. For example, since 2013, quoted companies in the UK have been required to disclose their greenhouse gas emissions. Beyond such national regulatory interventions, ﬁrms must also consider the legislation of supranational entities (such as the EU). EU’s Directive 2014/95/EU, also known as the non-ﬁnancial reporting directive, requires all large European listed ﬁrms with more than 500 employees to publish “… certain information on the way they operate and manage social and environmental challenges” (European Commission, 2014). This obligation became eﬀective, starting with the annual reports issued in 2018 (covering the ﬁscal year 2017 and beyond). The directive obliges ﬁrms to disclose infor- mation concerning ﬁve areas: (i) environmental protection, (ii) responsibility toward society, (iii) human rights, (iv) anti-corruption, and (v) diversity on company boards. It is intended to beneﬁt stakeholders (such as investors, consumers, and public policy- makers), to assist them in assessing the non-ﬁnancial performance of ﬁrms and to motiv- ate ﬁrms to adopt a more responsible approach to business. Consequently, many European ﬁrms raised their environmental and social standards following the EU’s Directive announcement (Fiechter et al., 2022; Mittelbach-Hörmanseder et al., 2020). While a direct impact of the EU’s Directive on large European ﬁrms’ NFD was to be expected, the possible implications of this directive on the NFD of ﬁrms located ACCOUNTING FORUM 5 outside the EU has not previously been addressed. Given the importance of the EU in the arena of NFD, we investigate this issue, providing evidence about whether EU oﬃcials can expect their actions to have an impact on ﬁrms operating outside EU boundaries. Crucially, ﬁrms can choose which NFD guidelines they adopt (EU Directive, para- graph 9). These include those produced by the United Nations Global Compact (UNGC), the Organisation for Economic Co-operation Development (OECD), and the GRI. Concerned about a possible lack of comparability of the disclosures, Breijer and Orij (2022) focus on the existing NFD frameworks and ﬁnd that mandatory adopters tend to use an investor-oriented framework. Some would argue that regulators should propose even more detailed NFD regulations to better understand the motivation behind ﬁrms’ actions (Song & Rimmel, 2021). Interestingly, in 2017, the European Com- mission announced further non-mandatory guidelines, to encourage ﬁrms to disclose more relevant, consistent, and comparable NFD. In 2019, the European Commission announced a new set of guidelines on reporting climate-related information (European Commission, 2019b), and decided to review the 2014 Directive in 2020. The corporate sustainability reporting directive, which is part of the European Green Deal, was approved in December of 2022. Finally, we must consider the Paris Agreement, signed in 2015. This was the ﬁrst global agreement on climate (European Commission, 2015), designed to raise global awareness of the threat of climate change and limit the increase in the average global temperatures. To achieve these aims, each signatory country made a pledge to create and review their nationally determined contributions, a decision that directly impacts the oil and gas ﬁrms. 3. Hypotheses’ development In this section, we intertwine extant theory with recent empirical studies to provide the foundations for our hypotheses. Our research draws on well-established neo-institution- alist scholarship that focuses on a range of isomorphic processes. In brief, neo-insti- tutional theory explores how organisations interact with their institutional environment, examining motivations for undertaking activities intended to secure social legitimacy (Dillard et al., 2004; DiMaggio & Powell, 1983; Meyer & Scott, 1983; Scott, 1987). The literature identiﬁes three distinct types of co-existing isomorphic press- ures. First, coercive forces are said to derive from institutional forces such as regulation. Second, normative pressure arises from the need and desire to achieve moral conformity. Finally, mimetic factors are deemed to be the result of copying other organisations in the same ﬁeld or industry. In the work that we undertake, we examine these isomorphic pressures operating and impacting on the NFD of our selected sample of oil and gas producers. We also build on past empirical research. Some previous scholarship is particularly noteworthy because it addresses the potential impact of the EU’s Directive in speciﬁc The EU directive 2022/2464 was approved on 14th Dec 2022. The ﬁrst companies will have to apply the new rules for the ﬁrst time in ﬁnancial year 2024, for reports published in 2025. Until then, the rules of the EU directive we study remain in place. Thus, this does not aﬀect our ﬁndings. More information can be found here: https://ﬁnance.ec.europa.eu/ capital-markets-union-and-ﬁnancial-markets/company-reporting-and-auditing/company-reporting/corporate- sustainability-reporting_en 6 M. AL-DOSARI ET AL. European countries. For example, Carini et al. (2018) share our industry focus by study- ing the largest ten European oil and gas ﬁrms. They ﬁnd that the disclosure level of non- ﬁnancial reports is “satisfactory” but expect the EU’s Directive to trigger further develop- ment. Other examples include Ogrean’s(2017) study of Romania, Szabó and Sørensen’s (2015) investigation into Denmark, Venturelli et al. (2017) and Veltri et al. (2020), who research Italy, and Matuszak and Różańska’s(2017) review of Poland. Signiﬁcantly, some of this research does not ﬁnd any change or much change because of the EU’s directive. For example, Szadziewska et al. (2018) ﬁnd no eﬀect arising from the EU’s Directive in Poland. Caputo et al. (2020) ﬁnd that in Italy, during the transition period, the quality of NFD increased, but only slightly, and suggest that this is due to a previously high stan- dard of reporting. Given that the EU’s Directive ﬁrst applied to ﬁrms’ 2017 annual reports, it is important to examine the disclosures made before and after that date, as suggested by Veltri et al. (2020). Similarly, Lock and Seele (2016) call for research on the devel- opment of mandatory NFD regulations in the EU over time. Fiechter et al. (2022) assess the ﬁrst year when disclosures are subject to the EU’s Directive and ﬁnds evi- dence of an increase in CSR activities of large and listed European ﬁrms before its implementation. Not surprisingly, they ﬁnd that the most discernible eﬀect was in countries with lower CSR disclosure regulations prior to the EU’s Directive. Cuomo et al. (2022) cover the ﬁrst two years of implementation of the EU’s Directive and ﬁnd that after the directive was issued EU listed ﬁrms published a separate sustainabil- ity report more frequently. However, these authors do not consider the disclosures included in these reports. Based on our understanding of isomorphic processes (as envisaged by the institutional theory outlined above and the ﬁndings of previous studies), our ﬁrst hypothesis is as follows: H1: The NFD level of ﬁrms in the oil and gas industry increased after the issuance of the EU’s Directive. The impact of the EU’s Directive on the NFD of ﬁrms not headquartered in Europe has not been previously reported. However, given the putative impact of the EU on the global economy and international reporting guidelines, as “the world’s largest single market with transparent rules and regulations” (European Commission, 2019c), there is a strong case for investigating a potential spillover eﬀect of the EU and its regu- lations on non-EU ﬁrms. Such impacts are likely to be especially discernible in the oil and gas industry because the sector tends to operate in several geographical regions (Carini et al., 2018). Crucially, it is an empirical question as to whether the introduction of a new directive is a “disruptive event” that accelerates convergence among ﬁrms in the same industry. While large and listed EU ﬁrms are legally required to comply with the EU’s Directive, non-EU ﬁrms may aspire to “keeping up with the Joneses”; that is, the latter may engage in mimetic behaviour or adopt the norms of their EU counterparts. Interestingly, Ioannou and Serafeim (2021) ﬁnd that the sustainability practices of ﬁrms in the same industry converge over time. However, by contrast, some researchers point to the lack of comparability between sustainability reports in the oil and gas industry (Cardoni et al., 2019; Gallego-Alvarez et al., 2018). ACCOUNTING FORUM 7 Particularly noteworthy regarding the issue of convergence is the trend observed by Li et al. (2022) in the context of CSR awards in China: non-winning ﬁrms tend to improve their CSR after their competitors win CSR awards. Under these circumstances, the award can be seen as a “disruptive event”, resulting in a diminished reputation for the non- winning ﬁrm (in comparison with the winner). Similarly, Tezer and Toﬁghi (2021) ﬁnd evidence of the knock-on eﬀect of a brand’s CSR activity in response to competing brands, demonstrating how receiving CSR information about one brand can have a nega- tive eﬀect on a competing brand’s image. Further, using the awareness-motivation-capability framework developed in the com- petitive dynamics’ literature mentioned above (Li et al., 2022), evidence reveals that non- winning ﬁrms’ improvement is more salient when there is greater awareness, motivation, and capability. Critically, given how widely the EU’s Directive was discussed, awareness of it was extremely high, and this ought to be associated with a strong increase in the NFD of non-EU ﬁrms. This greater awareness may even lead non-EU ﬁrms to adjust their disclosures as soon as the EU’s Directive was issued, that is, before its implemen- tation, to keep pace with their EU peers during the transition period. This increase in NFD of non-EU ﬁrms, during the transition period would be consistent with the impact documented for EU ﬁrms. Even if this occurred in the ﬁrst year of application of the directive, European countries were the leaders of CSR disclosure levels (KPMG, 2017); thus, the motivation for change should also be strong during the implementation period, leading to the prediction of a marked increase in the NFD of non-EU ﬁrms. This leads to our second hypothesis: H2: The NFD level of non-EU oil and gas ﬁrms increased after the issuance of the EU’s Directive. Delving deeper, we contend that if spillover from the EU’s Directive is revealed, it is vital to determine whether it varies according to the degree of ﬁrms’ involvement with the EU. As regards the level of ﬁnancial disclosure, it is already known that voluntary disclos- ure is positively related to the extent of ﬁrms’ globalisation of operations (Cahan et al., 2005), as companies with a greater presence in foreign countries are more internationally dependent and face higher agency costs (Kumar, 2013). In this respect, Cowan et al. (2013) ﬁnd evidence that ﬁrms with international experience are more likely to be aﬀected by other foreign ﬁrms, with the extent of foreign experience (such as having foreign employees or foreign operations) impacting their behaviour. Brammer et al. (2006) use a parallel argument to ﬁnd evidence that ﬁrms’ geographical scope signiﬁ- cantly and positively aﬀects their social and environmental performance, with their social performance strategy shaped by the breadth of their geographical operations. This is consistent with other ﬁndings (e.g. Sharfman et al., 2004), which suggest that geo- graphic diversity forces ﬁrms to consider international policies when determining their NFD. Moreover, ﬁrms in highly competitive industries (such as oil and gas) are more likely to adjust their disclosures when they believe that the beneﬁts of that decision out- weigh the costs (Verrecchia, 1983, 1990). Given these previous ﬁndings and drawing on institutional theory (DiMaggio & Powell, 1983; Scott, 1987), we anticipate that large international oil and gas ﬁrms may be encouraged to copy (i.e. engage in mimetic and normative isomorphism) and adopt the norms of other large European ﬁrms in the same industry, at least to some degree. 8 M. AL-DOSARI ET AL. This behaviour is likely to be more accentuated when ﬁrms have more experience and operations in the EU. Therefore, we contend that observable increases in NFD among non-EU ﬁrms are reinforced by the size of their workforce in the EU and extent of their operations in the region. This leads to our third hypothesis: H3a: The level of EU employees of a non-EU ﬁrm is positively associated with the NFD level of ﬁrms in the oil and gas industry. H3b: The level of EU operations of a non-EU ﬁrm is positively associated with the NFD level of ﬁrms in the oil and gas industry. 4. Methods To test H1, we ﬁrst assess whether the level of NFD changed after the directive was pub- lished, creating an indicator variable, Post_2014, coded as one if the observation corre- sponds to a ﬁscal year after 2014. The deﬁnition of this variable is aligned with the study of Cuomo et al. (2022). Second, we test whether the level of NFD changed after directive implementation. We create an indicator variable, Implementation, coded as one if the observation corresponds to a ﬁscal year when the directive was already in eﬀect (2017, 2018, or 2019). Finally, we assess whether there is a diﬀerence between the degree of change in NFD that occurs in the period that corresponds to the years after the directive was issued but before its implementation. We create an indicator vari- able, Transit, coded as one if the observation corresponds to ﬁscal years 2015 and 2016, and include it in a third model, with Implementation. These three indicator variables are our focus when testing H1. If the disclosures increased only after the directive was implemented, then only the estimated coeﬃcient for Implementation will be positive and statistically signiﬁcant. If the level of disclosure increased after the directive was issued, there are two possibilities: (i) a constant level of increase after the publication of the directive, or (ii) a diﬀerent level of increase in the transition period when compared with the implementation period. We expect positive associations between the NFD score and both the transition and implementation periods. To measure NFD we create a disclosure score (NFD_score), based on the directive, as well as the issued guidance, which covers four dimensions: environmental, social, human rights, and anti-corruption. These speciﬁc items were included because (i) they are men- tioned speciﬁcally in the directive (or guidance), and (ii) refer to disclosures and not actions of the ﬁrms (as the variables related to actions could be considered as non- ﬁnancial performance proxies). Thus, we believe our research instrument considers all relevant issues mentioned in the directive appropriately, having content validity. Appendix 1 presents the items considered in our score, as well as the variable from the Asset4 ESG database in Thomson Reuters used. The environmental dimension considers 14 variables, that measure ﬁrms’ disclosures on current and foreseeable impacts of the undertaking’s operations on the environment, the use of renewable energy, water use, Succinctly, these were the steps followed to identify the items included in our score: (i) reading the directive to identify areas where disclosure is required, (ii) reading the posterior guidance, and adjusting the initial list of areas, (iii) analys- ing the list of ESG variables in Asset4, identifying all those that are related with the identiﬁed areas, (iv) removing the variables related to actions from our list of variables, and (v) further removing those variables that have no data for all our sample, across our time period. ACCOUNTING FORUM 9 and air pollution. The social dimension comprises ten variables, related to issues such as gender diversity, human rights, training, and health and safety. The human rights dimen- sion includes four variables, reﬂecting disclosures on the prevention of human rights abuses and freedom of association. The last dimension is anti-corruption and bribery, which contains three variables. Thus, we consider 31 items. We consider two alternative ways of calculating NFD_score, following Tsalavoutas et al. (2010). Our ﬁrst score is unweighted, and we call it NFD_scoreU. In this case, the score of each ﬁrm is calculated as the ratio of the total items disclosed to the maximum possible score (31). Next, we consider that the number of items considered in our sub-scores is not the same, and thus our ﬁrst score puts more weight on environ- mental and social disclosures than on disclosures related to human rights and corruption. Our second score attributes equal weights to each of the sub-scores. NFD_scoreE is cal- culated as the sum of the sub-scores, divided by four. To control for possible outliers, the values of these scores (as well as the sub-scores and scores’ transformations used in the paper) were winsorized at the top and bottom one percent of the observations. Our ﬁrst set of empirical tests is based on the following models: NFD score = b + b Post 2014 + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (1) NFD score = b + b Implementation + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (2) NFD score = b + b Transit + b Implementation + Firm − levelcontrols 0 1 2 + Country − levelcontrols + 1 (3) Firm-level controls include (i) Size, (ii) ROA, (iii) Leverage, (iv) Assurance, (v) CSR_committee, (vi) CSR_report, (vii) GRI, (viii) UNGC and (ix) OECD. These variables are commonly used in the literature on NFD (e.g.: DeVilliers & Marques, 2016; Gallego- Alvarez et al., 2018; Venturelli et al., 2017). Four variables are indicators of the quality of NFD: Assurance, CSR_committee, CSR_report and GRI (Michelon et al., 2015), to con- sider the growing interest in how quality improves after the adoption of disclosure regu- lations (Afeltra et al., 2023). Data for these control variables come from Thomson Reuters Eikon. We include two country-level controls. The ﬁrst is NFD_Regulations, an indicator variable coded one if the ﬁrm is in a country that has any mandatory non-ﬁnancial infor- mation disclosure regulation. The second is Paris, an indicator variable coded one if the ﬁrm is in a country that has signed the Paris Agreement. This agreement may have a sub- stantial impact on the NFD of oil and gas ﬁrms, as climate-related disclosures of extrac- tive industries tend to be of poor quality (Baboukardos et al., 2021), but arguably improving overtime (Baboukardos et al., 2021). All variables, as well as the expected signs of their association with NFD_score, are presented in Appendix 2. The estimation of all models includes ﬁrm ﬁxed eﬀects, and standard errors are clustered by ﬁrm-year. We follow the list of countries in Krueger et al. (2021). 10 M. AL-DOSARI ET AL. To assess whether the impact of the EU’s Directive is also felt by non-EU ﬁrms (H2), we use three models. First, we focus on Non_EU ﬁrms, an indicator variable coded as one if the ﬁrm is non-European, and zero otherwise. A ﬁrm is considered non-European when its headquarters are not in the EU. We expect the estimated coeﬃcient of this vari- able to be negative, indicating that non-European ﬁrms have lower levels of NFD. Next, we test whether the NFD of non-EU ﬁrms remain lower than that of EU ﬁrms when con- trolling for the changes that occur during the transition and implementation periods. Finally, we use a diﬀerence-in-diﬀerences model to consider these two distinct periods. The models used are: NFD score = b + b Non EUfirms + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (4) NFD score = b + b Non EUfirms + b Transit + b Implementation 0 1 2 3 (5) + Firm − levelcontrols + Country − levelcontrols + 1 NFD score = b + b Non EUfirms + b Transit + b Implementation 0 1 2 3 ∗ ∗ + b Transit Non EUfirms + b Implementation Non − EUfirms (6) 4 5 + Firm − levelcontrols + Country − levelcontrols + 1 The coeﬃcient of the interaction variable Transit*Non_EU ﬁrms measures the mean additional impact on the NFD_score, for a non-European ﬁrm, during the transition period. The coeﬃcient of the interaction variable Implementation*Non_EU ﬁrms measures the mean additional impact on the NFD_score for a non-European ﬁrm, after the implementation of the EU’s Directive. We expect the estimated coeﬃcient for both interaction variables to be positive, indicating that although non-European ﬁrms have weaker NFD than EU ﬁrms, the EU’s Directive is associated with an increase in their level of NFD. To test H3, we analyse only the subsample of non-EU observations. First, we use EU_employee, a variable calculated as the logarithm of the total number of employees in the EU. We expect a positive coeﬃcient for EU_employee, indicating that the exist- ence of EU employees in a ﬁrm has a positive eﬀect on its NFD levels (H3a). Second, we use EU_ops, a variable calculated as the percentage of revenue generated from any EU country. We expect a positive coeﬃcient for EU_ops, indicating that ﬁrms operating in Europe have higher NFD levels (H3b). 5. Sample, descriptive statistics, and results’ discussion 5.1. Sample and descriptive statistics To identify our sample, we start from 9,105 ﬁrms classiﬁed as oil and gas producers in Reﬁnitiv DataStream. Next, we exclude all passive ﬁrms. Second, we remove 471 other ﬁrms: 30 have no available data at all, and the others have no total assets data. In Eikon: Geographic number of employees. In Eikon: Geographic external revenue. In Thomson Reuters: industry code 501020 - oil and gas production. ACCOUNTING FORUM 11 Table 1. Sample. Number of ﬁrms Oil and Gas producers (Reﬁnitiv DataStream) 9,105 Dead ﬁrms (6,899) No data available (30) Total assets information not available (441) Non-ﬁnancial information not available (1,075) Duplicate identiﬁers (456) Final sample 204 This table shows the ﬁnal total number of ﬁrms in the sample. Third, we exclude ﬁrms with missing non-ﬁnancial information. Finally, as this dataset contains several securities from the same ﬁrm, either dual-class shares or cross-listings, we follow the procedure from Landis and Skouras (2021) to identify the unique ﬁrms (Table 1). This leads to a ﬁnal sample of 204 ﬁrms, across 35 countries, and we calculate the NFD scores for 1,623 observations. We collect data for ﬁscal years 2009-2019, cover- ing ﬁve years before and ﬁve years after the release of the EU’s Directive in 2014. This covers three distinct periods: before the directive was issued, the transition period, and the implementation period. Panel A of Table 2 reports the descriptive statistics of the variables used in regressions. We present three sets of descriptive information: (i) for all observations, (ii) for obser- vations from EU ﬁrms, and (iii) for observations from non-EU ﬁrms. The overall average NFD_scoreU is 0.336 and its standard deviation is 0.199, while the overall average NFD_scoreE is 0.409 and its standard deviation is 0.194, showing a signiﬁcant variation in the level of NFD. Non_EU ﬁrms represent over 85 percent of the obser- vations. The mean value of NFD_scoreU (NFD_scoreE) of EU ﬁrms is 0.46 (0.51), but in the case of non-EU ﬁrms, this is only 0.31 (0.39). Furthermore, we ﬁnd that the fre- quency of assurance, existence of a CSR committee, publication of a stand-alone CSR report, and use of GRI standards are much higher in the EU subsample. For economy of space, Panel B of Table 2 reports descriptive statistics by country, but only for countries with more than 20 observations. The highest average of both NFD_scoreU and NFD_scoreE is found in a European country (Italy), while Australia has the lowest average (for both NFD scores). These values, together with those in Panel A, demonstrate the heterogeneity in non-ﬁnancial reporting in this industry, complementing the ﬁndings of heterogeneity in ﬁnancial reporting by Gray et al. (2019). Panel C reports the mean values of both our scores for NFD, as well as their subparts, by year. We ﬁnd that all sub- parts have been increasing throughout the study period. Table 2, Panel D presents the pairwise correlations between the variables included in our models. All the independent and the control variables are signiﬁcantly correlated with NFD_scoreU, except for Transit, and Paris, and the same is true for NFD_scoreE. The two score variables are positively and signiﬁcantly associated (correlation is 0.899), as one would expect. 5.2. Main multivariate results We begin by exploring whether the overall level of NFD is positively associated with the introduction of the directive. Panel A of Table 3 shows the results of our estimation of 12 M. AL-DOSARI ET AL. Table 2. Panel A - Descriptive statistics. All ﬁrms EU ﬁrms Non-EU ﬁrms Mean Std. Dev. Median Min Max Mean Std. Dev. Median Min Max Mean Std. Dev. Median Min Max NFD_scoreU 0.336 0.199 0.323 0.032 0.774 0.462 0.204 0.484 0.032 0.774 0.314 0.190 0.290 0.032 0.774 NFD_scoreE 0.409 0.194 0.375 0.000 0.816 0.511 0.206 0.504 0.000 0.816 0.392 0.187 0.354 0.000 0.816 Non_EU ﬁrms 0.856 0.351 1.000 0.000 1.000 0.000 0.000 0.000 0.000 0.000 1.000 0.000 1.000 1.000 1.000 EU_employee 0.327 1.616 0.000 0.000 11.095 1.905 3.575 0.000 0.000 11.095 0.062 0.653 0.000 0.000 9.243 EU_ops 2,625.291 12,444.213 0.000 0.000 112,587.477 10,218.794 26,082.334 0.000 0.000 112,587.477 1,352.424 7,477.655 0.000 0.000 84,360.031 Assurance 0.324 0.468 0.000 0.000 1.000 0.614 0.488 1.000 0.000 1.000 0.276 0.447 0.000 0.000 1.000 ROA 1.937 17.204 4.180 −226.290 268.740 1.964 10.799 3.970 −62.750 62.700 1.933 18.060 4.260 −226.290 268.740 CSR committee 0.628 0.483 1.000 0.000 1.000 0.738 0.441 1.000 0.000 1.000 0.610 0.488 1.000 0.000 1.000 CSR report 0.624 0.485 1.000 0.000 1.000 0.948 0.221 1.000 0.000 1.000 0.569 0.495 1.000 0.000 1.000 GRI 0.480 0.500 0.000 0.000 1.000 0.708 0.456 1.000 0.000 1.000 0.442 0.497 0.000 0.000 1.000 Leverage 0.252 0.177 0.236 0.000 1.978 0.248 0.159 0.235 0.000 1.351 0.252 0.180 0.236 0.000 1.978 Size 15.728 2.040 15.803 3.738 19.829 15.906 1.750 15.586 12.229 19.535 15.698 2.084 15.833 3.738 19.829 UNGC 0.234 0.423 0.000 0.000 1.000 0.481 0.501 0.000 0.000 1.000 0.192 0.394 0.000 0.000 1.000 OECD 0.062 0.241 0.000 0.000 1.000 0.253 0.436 0.000 0.000 1.000 0.029 0.169 0.000 0.000 1.000 NFD Regulations 0.183 0.387 0.000 0.000 1.000 0.614 0.488 1.000 0.000 1.000 0.111 0.314 0.000 0.000 1.000 Paris 0.094 0.292 0.000 0.000 1.000 0.090 0.287 0.000 0.000 1.000 0.095 0.293 0.000 0.000 1.000 ACCOUNTING FORUM 13 Table 2. Panel B - Means by country. Freq. NFD_scoreU NFD_scoreE Australia 140 0.191 0.269 Brazil 30 0.378 0.448 Canada 354 0.261 0.346 China 34 0.308 0.322 France 22 0.469 0.470 India 44 0.520 0.545 Italy 22 0.657 0.672 Japan 43 0.324 0.310 Korea, Rep. 39 0.443 0.501 Norway 25 0.422 0.498 Poland 20 0.423 0.426 Russian Federation 75 0.435 0.452 Thailand 42 0.545 0.623 Turkey 20 0.510 0.588 United Kingdom 92 0.369 0.465 United States 454 0.287 0.391 Only shows countries with more than 20 observations. See Appendix 2 for deﬁnition of variables. Table 2. Panel C - Means of NFD scores, and sub-scores, by ﬁscal year. Social_scr Envir_scr HR_scr Corrup_scr NFD_scoreU NFD_scoreE 2009 0.215 0.264 0.192 0.660 0.277 0.333 2010 0.232 0.272 0.195 0.702 0.291 0.350 2011 0.250 0.290 0.233 0.765 0.316 0.384 2012 0.255 0.303 0.261 0.790 0.330 0.403 2013 0.249 0.290 0.250 0.782 0.320 0.393 2014 0.260 0.281 0.266 0.794 0.323 0.400 2015 0.261 0.288 0.265 0.813 0.327 0.407 2016 0.271 0.302 0.264 0.824 0.338 0.415 2017 0.296 0.318 0.294 0.827 0.358 0.434 2018 0.324 0.334 0.316 0.841 0.378 0.454 2019 0.330 0.334 0.324 0.876 0.383 0.465 See Appendix 2 for deﬁnition of variables. equations 1-3. In the ﬁrst three columns we use NFD_scoreU, and in the last column we use NFD_scoreE. Model 1 (M1) shows a positive and signiﬁcant coeﬃcient for Post_2014. Thus, there is a signiﬁcant increase in the level of NFD after the announcement of the directive. M2 reports a signiﬁcant increase in NFD after the implementation of the direc- tive, providing evidence that further supports H1. M3 allows us to compare the level of increase in NFD of the transition period with the increase that occurs after implemen- tation. The results indicate that, although both the transition and implementation periods have signiﬁcant and positive coeﬃcients, the coeﬃcient of Implementation is higher (p-value = 0.000). This suggests that although the increase in NFD started immediately after the announcement of the EU’s Directive, this increase accelerated after the directive was implemented. When we consider the results for NFD_scoreE we ﬁnd consistent results (last column). We also ﬁnd that our four proxies for the quality of NFD (Assurance, CSR_report, CSR_committee, and GRI) are signiﬁcantly and positively associated with the level of the NFD scores (in all models), indicating that ﬁrms that provide a higher number of dis- closures also disclose better quality information. Panel B of Table 3 reports a similar analysis of the four sub-scores. We ﬁnd that while all sub-scores increased signiﬁcantly during the implementation period, only the anti- 14 M. AL-DOSARI ET AL. Table 2. Panel D - Pairwise Correlations. Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (1) NFD_scoreU 1.000 (2) NFD_scoreE 0.899* 1.000 (3) Post_2014 0.117* 0.117* 1.000 (4) Implementation 0.118* 0.118* 0.502* 1.000 (5) Transit −0.007 −0.006 0.470* −0.258* 1.000 (6) Non_EUﬁrms −0.259* −0.257* 0.024 0.010 0.010 1.000 (7) EU_employee 0.250* 0.250* −0.037 −0.030 −0.002 −0.400* 1.000 (8) EU_ops 0.087* 0.087* −0.033 0.001 −0.031 −0.250* 0.070* 1.000 (9) Assurance 0.644* 0.643* −0.029 0.001 −0.018 −0.253* 0.260* 0.113* 1.000 (10) ROA 0.144* 0.144* −0.120* 0.029 −0.185* −0.001 0.026 0.027 0.124* 1.000 (11) CSR_comm 0.491* 0.490* 0.044 0.066* −0.018 −0.093* 0.109* 0.077* 0.396* 0.071* 1.000 (12) CSR_report 0.717* 0.716* 0.057* 0.059* −0.010 −0.275* 0.148* 0.124* 0.538* 0.156* 0.468* 1.000 (13) GRI 0.730* 0.730* 0.030 0.041 −0.005 −0.187* 0.161* 0.138* 0.636* 0.135* 0.455* 0.746* 1.000 (14) Lev 0.054* 0.054* 0.167* 0.046 0.120* 0.008 −0.023 −0.043 0.016 −0.131* −0.029 0.019 0.052* 1.000 (15) Size 0.628* 0.626* −0.102* −0.067* −0.035 −0.036 0.157* 0.019 0.483* 0.304* 0.398* 0.567* 0.517* 0.047 1.000 (16) UNGC 0.506* 0.505* −0.009 −0.018 0.008 −0.239* 0.220* 0.090* 0.514* 0.068* 0.259* 0.399* 0.513* 0.061* 0.396* 1.000 (17) OECD 0.365* 0.361* −0.017 0.009 −0.010 −0.326* 0.493* 0.079* 0.310* 0.032 0.165* 0.189* 0.221* 0.001 0.203* 0.313* 1.000 (18)NFI_Regulations 0.198* 0.197* 0.054* 0.030 0.025 −0.456* 0.091* 0.161* 0.265* 0.049* 0.120* 0.322* 0.257* −0.034 0.215* 0.285* 0.051* 1.000 0.308* −0.159* 0.629* 0.006 −0.007 −0.024 −0.025 −0.049* −0.009 −0.019 −0.023 0.077* −0.053* −0.004 −0.013 −0.011 1.000 (19) Paris −0.006 −0.005 * Statistical signiﬁcance at the 0.05 level. See Appendix 2 for deﬁnition of variables ACCOUNTING FORUM 15 Table 3. Panel A - The association of EU’s Directive with NFD scores. M1- NFD_scoreU M2 - NFD_scoreU M3 - NFD_scoreU M3 - NFD_scoreE Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Post_2014 0.072 0.000 *** Implementation 0.075 0.000 *** 0.077 0.000 *** 0.082 0.000 *** Transit 0.010 0.045 ** 0.017 0.001 *** Assurance 0.037 0.001 *** 0.031 0.010 *** 0.031 0.009 *** 0.039 0.005 *** ROA 0.000 0.956 0.000 0.059 * 0.000 0.095 * −0.000 0.379 CSR_committee 0.043 0.000 *** 0.041 0.000 *** 0.041 0.000 *** 0.034 0.003 *** CSR_report 0.063 0.000 *** 0.069 0.000 *** 0.069 0.000 *** 0.049 0.000 *** GRI 0.052 0.000 *** 0.054 0.000 *** 0.054 0.000 *** 0.049 0.005 *** Leverage 0.014 0.444 0.053 0.004 *** 0.049 0.009 *** 0.041 0.036 ** Size 0.024 0.000 *** 0.019 0.001 *** 0.019 0.001 *** 0.017 0.026 ** UNGC 0.012 0.479 0.024 0.188 0.023 0.205 0.047 0.055 * OECD 0.056 0.023 ** 0.046 0.050 * 0.047 0.050 ** 0.025 0.364 NFD_Regulations 0.006 0.796 0.036 0.095 * 0.033 0.120 0.061 0.027 ** Paris −0.022 0.000 *** 0.028 0.000 *** 0.021 0.000 *** 0.016 0.002 *** Constant −0.184 0.047 ** −0.109 0.222 −0.115 0.200 −0.005 0.970 Firm FE Included Included Included Included N 1,623 1,623 1,623 1,623 Adjusted R-squared 0.722 0.719 0.719 0.592 Prob>F 0.000 0.000 0.000 0.000 Mean VIF 1.610 1.590 1.760 1.670 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. 16 M. AL-DOSARI ET AL. Table 4. Non-EU ﬁrms. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EU ﬁrms −0.050 0.096 * −0.009 0.781 −0.066 0.053 * −0.083 0.039 ** −0.013 0.750 0.138 0.112 Implementation 0.046 0.000 *** 0.074 0.000 *** 0.033 0.064 * 0.021 0.230 0.110 0.001 *** 0.138 0.004 *** Transit 0.014 0.279 0.037 0.012 ** 0.012 0.505 −0.012 0.427 0.054 0.063 * 0.092 0.001 *** Transit*Non_EU ﬁrms −0.004 0.785 −0.021 0.184 −0.010 0.617 0.021 0.197 −0.045 0.137 −0.050 0.096 * Implementation*Non_EU ﬁrms 0.030 0.040 ** 0.004 0.799 0.049 0.017 ** 0.047 0.014 ** −0.039 0.284 −0.048 0.335 Assurance 0.039 0.001 *** 0.043 0.001 *** 0.041 0.023 ** 0.032 0.018 ** 0.074 0.006 *** 0.035 0.245 ROA 0.000 0.026 ** −0.000 0.194 0.000 0.063 * 0.000 0.042 ** 0.000 0.261 0.000 0.720 CSR_committee 0.045 0.000 *** 0.040 0.000 *** 0.053 0.000 *** 0.044 0.000 *** 0.054 0.013 ** 0.012 0.581 CSR_report 0.069 0.000 *** 0.049 0.000 *** 0.055 0.000 *** 0.104 0.000 *** 0.048 0.078 * −0.008 0.776 GRI 0.063 0.000 *** 0.057 0.001 *** 0.065 0.000 *** 0.069 0.000 *** 0.092 0.002 *** 0.014 0.728 Leverage 0.039 0.021 ** 0.037 0.045 ** 0.041 0.085 * 0.038 0.078 * 0.058 0.093 * −0.006 0.891 Size 0.026 0.000 *** 0.021 0.000 *** 0.016 0.000 *** 0.038 0.000 *** 0.024 0.000 *** 0.008 0.487 UNGC 0.032 0.036 ** 0.051 0.017 ** 0.015 0.515 0.018 0.257 0.112 0.010 ** 0.075 0.054 * OECD 0.067 0.001 *** 0.047 0.059 * 0.101 0.002 *** 0.072 0.001 *** 0.059 0.268 −0.023 0.726 NFD_Regulations 0.010 0.585 0.022 0.389 0.000 0.998 −0.005 0.807 0.106 0.000 *** −0.020 0.811 Paris 0.021 0.000 *** 0.015 0.004 *** 0.022 0.001 *** 0.028 0.000 *** 0.009 0.419 0.004 0.645 Constant −0.202 0.002 *** −0.075 0.329 −0.078 0.262 −0.407 0.000 *** −0.313 0.001 *** 0.474 0.020 ** N 1,623 1,623 1,623 1,623 1,623 1,623 Adjusted R-squared 0.726 0.598 0.518 0.710 0.586 0.108 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 3.360 3.360 3.360 3.360 3.360 3.360 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 17 corruption sub-score increased signiﬁcantly during the transition period. Thus, the increases documented in Panel A are not present in all the NFD topics. Next, we test H2 to assess whether non-EU ﬁrms’ NFD is positively associated with the introduction of the directive. Given that we analyse the impact of a ﬁrm’s location, the results in Table 4 are from random eﬀects models. We ﬁnd an overall negative association between NFD_scoreU and non-EU ﬁrms, suggesting that the overall NFD of non-EU ﬁrms are lower. This result is consistent with previous studies that assert that EU ﬁrms are leaders in NFD and is robust to controlling for increases in the transition and implementation periods. However, when we use the score that attributes equal weights to our sub-scores, we do not ﬁnd evidence of this negative association. More importantly, the coeﬃcient estimated for Implementation*Non_EU ﬁrms is positive for NFD_scoreU, indicating that non-EU ﬁrms signiﬁcantly increased their overall disclosure levels during the implementation period. In the case of NFD_scoreE we ﬁnd no evidence of such an association, which reveals the level of disclosure did not increase consistently across the four sub-scores. In fact, the results from the sub-scores reveal only two of the four sub-scores (social and environmental) of non-EU ﬁrms increased during the implementation period. These results support our second hypoth- esis and the view that mimetic isomorphism and competitive forces are associated with NFD. Graph 1 complements this analysis by providing a time trend plot of our NFD scores, and sub-scores, for both EU and non-EU ﬁrms. The ﬁrst impression from the graph is that the disclosure of EU ﬁrms was signiﬁcantly higher, by an almost constant value, from 2009 to 2014. However, this diﬀerence decreased after that year – for the overall scores, as well as for the social and environmental sub-scores. Our third hypothesis has two subparts, assessing whether the importance of EU employees or operations inﬂuences the NFD level of non-EU ﬁrms. For these tests, we use only the subsample of observations from non-EU ﬁrms and estimate ﬁrm-ﬁxed eﬀects models. Panel A of Table 5 reports a signiﬁcant and positive estimated coeﬃcient for EU_employee, in the case of NFD_scoreU, suggesting that non-EU ﬁrms have a higher level of NFD when they have more employees in the EU, and supporting H3a. However, the results of equal weighted score do not provide evidence of such an association, once again indicating an unbalanced importance of the sub-scores. In fact, the only sub-score where this association exists is in the social sub-score. We also ﬁnd that the estimated coeﬃcient for Implementation*EU_employee is signiﬁcantly positive for both our NFD scores, indicating that non-EU ﬁrms with more employees have higher NFD during the implementation period. The results for the sub-scores reveal that this increase is caused by environmental and HR disclosures. Panel B of Table 5 presents our results, focusing on the EU operations of non-EU ﬁrms. Overall, we ﬁnd no support for H3b. In fact, in the case of NFD_scoreE, the esti- mated coeﬃcient is signiﬁcantly negative. However, the estimated coeﬃcient for Imple- mentation*EU_ops is signiﬁcantly positive for both NFD_scoreU and NFD_scoreE, indicating that non-EU ﬁrms with more operations have higher NFD during the implementation period. The results for the sub-scores reveal that this increase of disclos- ures during implementation is found in social, environmental, and human rights disclosures. 18 M. AL-DOSARI ET AL. Graph 1. NFD score, and its sub-scores, by ﬁscal year. Note: the values of the y-axis represent the score, times 100. ACCOUNTING FORUM 19 Graph 1 Continued 5.3. Robustness checks While we believe our main scores are good measures of NFD, we now test an alternative way of measuring NFD, using the log of the odds ratio, based on the work of Abdullah 20 M. AL-DOSARI ET AL. Table 5. Panel A - EU employees. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig EU_employee 0.004 0.028 ** 0.003 0.190 0.006 0.015 ** 0.005 0.230 0.008 0.273 −0.007 0.205 Implementation 0.080 0.000 *** 0.081 0.000 *** 0.088 0.000 *** 0.074 0.000 *** 0.076 0.000 *** 0.087 0.000 *** Transit 0.007 0.166 0.013 0.018 ** 0.002 0.759 0.005 0.499 0.009 0.428 0.037 0.001 *** Transit*EU_employee −0.009 0.702 −0.013 0.347 −0.004 0.774 −0.008 0.878 −0.019 0.298 −0.024 0.145 Implementation*EU_employee 0.051 0.081 * 0.037 0.096 * 0.035 0.446 0.067 0.050 * 0.160 0.007 *** −0.113 0.051 * Assurance 0.033 0.016 ** 0.040 0.008 *** 0.035 0.091 * 0.018 0.247 0.086 0.006 *** 0.023 0.426 ROA 0.000 0.117 −0.000 0.516 0.000 0.160 0.000 0.084 * 0.000 0.614 0.000 0.536 CSR_committee 0.042 0.000 *** 0.038 0.001 *** 0.043 0.021 ** 0.047 0.001 *** 0.043 0.092 * 0.017 0.394 CSR_report 0.062 0.000 *** 0.045 0.002 *** 0.044 0.007 *** 0.095 0.000 *** 0.041 0.143 0.002 0.954 GRI 0.058 0.001 *** 0.048 0.010 *** 0.063 0.000 *** 0.065 0.003 *** 0.064 0.057 * −0.001 0.979 Leverage 0.059 0.002 *** 0.054 0.005 *** 0.056 0.050 ** 0.063 0.010 ** 0.087 0.028 ** 0.009 0.832 Size 0.018 0.002 *** 0.016 0.040 ** 0.016 0.060 * 0.023 0.000 *** 0.015 0.075 * 0.012 0.628 UNGC 0.033 0.131 0.050 0.100 0.011 0.743 0.027 0.149 0.047 0.465 0.116 0.029 ** OECD 0.040 0.072 * 0.014 0.641 0.045 0.252 0.067 0.006 *** 0.082 0.227 −0.123 0.080 * NFD_Regulations 0.035 0.137 0.069 0.027 ** 0.013 0.778 −0.001 0.983 0.175 0.000 *** 0.087 0.416 Paris 0.023 0.000 *** 0.016 0.006 *** 0.022 0.002 *** 0.032 0.000 *** 0.007 0.607 0.004 0.672 Constant −0.114 0.201 0.003 0.982 −0.123 0.332 −0.240 0.016 ** −0.180 0.171 0.550 0.141 Firm FE Included Included Included Included Included Included N 1,390 1,390 1,390 1,390 1,390 1,390 Adjusted R-squared 0.735 0.592 0.500 0.738 0.581 0.163 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 1.640 1.650 1.640 1.640 1.640 1.640 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 21 Table 5. Panel B - EU operations. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig EU_ops −0.010 0.591 −0.000 0.027 ** 0.001 0.965 0.002 0.923 −0.002 0.956 −0.116 0.082 * Implementation 0.076 0.000 *** 0.077 0.000 *** 0.082 0.000 *** 0.073 0.000 *** 0.071 0.000 *** 0.083 0.000 *** Transit 0.005 0.358 0.011 0.054 * 0.000 0.993 0.002 0.754 0.008 0.469 0.035 0.002 *** Transit* EU_ops 0.037 0.145 0.022 0.241 0.045 0.244 0.051 0.230 0.007 0.741 −0.017 0.505 Implementation* EU_ops 0.086 0.001 *** 0.080 0.048 ** 0.160 0.003 *** 0.043 0.076 * 0.173 0.038 ** −0.008 0.927 Assurance 0.033 0.013 ** 0.039 0.010 *** 0.033 0.110 0.019 0.209 0.084 0.006 *** 0.025 0.397 ROA 0.000 0.106 −0.000 0.516 0.000 0.135 0.000 0.081 * 0.000 0.617 0.000 0.540 CSR_committee 0.044 0.000 *** 0.038 0.001 *** 0.045 0.012 ** 0.048 0.001 *** 0.044 0.086 * 0.019 0.362 CSR_report 0.062 0.000 *** 0.045 0.002 *** 0.046 0.004 *** 0.095 0.000 *** 0.041 0.140 0.002 0.935 GRI 0.057 0.001 *** 0.049 0.006 *** 0.061 0.000 *** 0.064 0.004 *** 0.064 0.058 * −0.001 0.972 Leverage 0.059 0.002 *** 0.054 0.005 *** 0.057 0.044 ** 0.063 0.013 ** 0.092 0.022 ** 0.007 0.860 Size 0.018 0.002 *** 0.016 0.039 ** 0.016 0.057 * 0.023 0.000 *** 0.015 0.073 * 0.012 0.616 UNGC 0.033 0.140 0.048 0.120 0.009 0.774 0.026 0.161 0.046 0.475 0.118 0.025 ** OECD 0.043 0.029 ** 0.010 0.719 0.055 0.085 * 0.066 0.018 ** 0.091 0.148 −0.127 0.076 * NFD_Regulations 0.030 0.172 0.050 0.096 * 0.007 0.864 −0.003 0.926 0.169 0.000 *** 0.069 0.516 Paris 0.023 0.000 *** 0.017 0.004 *** 0.022 0.002 *** 0.032 0.000 *** 0.006 0.626 0.005 0.593 Constant −0.117 0.196 0.005 0.969 −0.126 0.320 −0.244 0.016 ** −0.183 0.166 0.552 0.142 Firm FE Included Included *** Included Included Included N 1,390 1,390 1,390 1,390 1,390 1,390 Adjusted R-squared 0.737 0.592 0.503 0.738 0.583 0.164 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 1.660 1.630 1.660 1.660 1.660 1.660 22 M. AL-DOSARI ET AL. Table 6. PSM sample – NFD_scoreU. H1 H2 H3a H3b Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EUﬁrm −0.061 0.224 EU_employee 0.004 0.000 *** EU_ops 0.111 0.002 *** Implementation 0.087 0.000 *** 0.065 0.000 *** 0.067 0.000 *** 0.125 0.000 *** Transit −0.001 0.961 0.009 0.399 −0.007 0.384 −0.020 0.402 Transit*Non_EU ﬁrms −0.010 0.677 Implementation*Non_EUﬁrms 0.055 0.085 * Transit* EU_employee 0.008 0.303 Implementation* EU_employee −0.008 0.817 Transit* EU_ops 0.074 0.114 Implementation* EU_ops 0.016 0.666 Firm-level controls Included Included Included Included Firm FE Included - Included Included N 262 262 131 131 Adjusted R-squared 0.446 0.477 0.599 0.657 Prob > chi2 0.000 0.000 0.000 0.000 Mean VIF 1.600 1.920 1.600 2.070 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 23 Table 7. The association of EU’s Directive with CSR activities. H1 H2 H3a H3b Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EUﬁrms −4.683 0.137 EU_employee 0.340 0.158 EU_ops −2.511 −7.894 Implementation 3.879 0.000 *** 2.428 0.133 3.878 0.000 *** 3.756 2.395 *** Transit 1.814 0.001 *** 2.768 0.098 * 1.605 0.004 *** 1.612 0.481 *** Transit*Non_EU ﬁrms −1.100 0.530 Implementation*Non_EUﬁrms 0.859 0.633 Transit*EU_employee 1.784 0.654 Implementation*EU_employee 6.143 0.003 *** Transit* EU_ops −0.539 0.761 Implementation* EU_ops 3.398 0.467 Firm-level controls Included Included Included Included Firm FE Included - Included Included N 1,623 1,623 1,390 1,390 Adjusted R-squared 0.799 0.807 0.767 0.770 Prob > chi2 0.000 0.000 0.000 0.000 Mean VIF 1.750 2.990 1.700 1.750 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. 24 M. AL-DOSARI ET AL. et al. (2015). We call these new variables Log_UW and Log_EW. The untabulated results for testing H1 indicate that, in both cases, the coeﬃcients estimated for Transit and Implementation are positive and statistically signiﬁcant, as in our main results. The unta- bulated results for testing H2 with these two alternative scores are also consistent with the results reported in Table 4, as the coeﬃcient of Implementation*Non_EU ﬁrms is signiﬁ- cantly positive, but only when considering the unweighted score variable (Log_UW). The untabulated results for testing H3a are consistent for both Log variables, and indicate that EU_employee is positively and statistically associated with the dependent variables, and that association is lower during the transition period (as the coeﬃcients for the inter- action variables with Transit are negative, but with lower values than that of EU_Em- ployee, and the interaction variables with Implementation are not statistically signiﬁcant). These results support our hypothesis and are consistent with our main ones. Finally, the untabulated results for H3b are also consistent with the main results, as they show that the positive association between the level of EU operations and NFD is only present after the implementation of the EU directive. We now use propensity score matching (PMS) to create a balanced matched sample (Shipman et al., 2017), using all control variables included in the previous equations (except OCED, UNGC and NFD regulations, as they only apply to a few ﬁrms). Accord- ingly, each EU ﬁrm (treatment group) in our sample has been matched to the non-EU ﬁrm (control group) using the period prior to the EU’s Directive, without replacement. Table 6 presents the results of the analysis, using NFD_scoreU: (i) a signiﬁcant increase in NFD during the implementation period (H1), (ii) an increase in the NFD of non-EU ﬁrms during the implementation period (H2), (iii) that the NFD of non-EU ﬁrms with more EU employees is higher overall (H3a), and (iv) that ﬁrms with more EU operations have higher NFD, but only during implementation (H3b – partial support). It can be argued that disclosure is closely associated with performance. Thus, we con- sider ﬁrms’ social and environmental activities, measured by Asset4, as the dependent variable, as in Fiechter et al. (2022). Table 7 presents the results. As in Table 3, the coeﬃ- cients of Transit and Implementation are positive and statistically signiﬁcant. However, the results of the tests of the other hypotheses are diﬀerent from our main results, as non-EU ﬁrms have a similar level of CSR performance to the EU ﬁrms, and the level of employees or operations in the EU do not seem to be associated with CSR perform- ance. These results suggest the impact of the directive was only on disclosure. Finally, we focus on the countries of our sample. First, we run our initial model with country ﬁxed eﬀects. Although several country indicator variables are signiﬁcant, the untabulated results, when using NFD_ScoreU, indicate that the coeﬃcient of Implemen- tation is positive and statistically signiﬁcant, reinforcing our belief that the EU’s Directive had an impact on NFD. Second, we consider that some countries are policy leaders and, thus, may have implemented the directive sooner than others. Using the results of Knill et al. (2012), who identify the EU countries that were leaders in environmental policy making in 2000, we create an indicator variable (Leader) coded as one when a ﬁrm is in one of the countries classiﬁed as “top leader” or “leader”. We then interact this variable with Transit and Implementation and run a model that extends the results in Table 3. The untabulated results indicate that none of the interaction coeﬃcients is statistically signiﬁ- cant. Therefore, from the point of view of our study, country-level policy leadership is not relevant. ACCOUNTING FORUM 25 6. Conclusions In this study, we focus on the oil and gas industry because of its substantial contribution to the global economy and sizeable impact on the environment and society. We examine the NFD levels exhibited, employing a well-established neo-institutionalist approach and exploring the isomorphic processes associated with the publication and implementation of the EU’s Directive 2014/95/EU. For our analyses, we construct scores based on key elements of the EU’s directive. The results indicate that NFD increases immediately fol- lowing the publication of the directive and that a more marked increase occurs after the Directive’s implementation. Moreover, there is a spillover from the EU’s Directive, resulting in the NFD of non-EU ﬁrms increasing signiﬁcantly after the EU’s directive is implemented. Finally, both the level of EU employees and the extent of EU operations of non-EU ﬁrms are positively associated with the level of NFD of ﬁrms in the oil and gas industry, during the implementation phase of the EU’s Directive. Our study has limitations. First, there may be a lack of external generalised validity, given that this research is based only on oil and gas ﬁrms. Therefore, future research should inves- tigate whether these results can be generalised to diﬀerent industries. Second, we do not assess whether NFD have an impact on the actions of socially responsible institutional investors, which would provide evidence about the usefulness of these disclosures. This is an avenue for future research. Third, the current design assumes that the data we collect from the Asset4 database correctly reﬂects ﬁrms’ disclosures, which may not be true in some cases. Lastly, we do not cover the period of the covid pandemic. Future studies could examine whether the level of NFD changes during this unusual period. We contend that our study is valuable and useful to a range of stakeholders: ﬁrms in the oil and gas industry, businesses in other sectors, investors and industry analysts, and public policymakers and regulators. Crucially, our data reveal evidence of isomorphism, indicating that the EU’s Directive aﬀects both ﬁrms directly targeted by the legislation and others who are not legally subject to the law. Our results should alert EU public pol- icymakers to the likely impact of preparing and enacting NFD legislation, both of which act as catalysts for altered business behaviour, among organisations located and operat- ing within the EU as well as those outside the EU. We recommend that further research provides deeper insights into how EU policy- makers shape regulations on NFD. The EU’s Corporate Sustainability Reporting Direc- tive, which amends the directive we study, continues to address the four areas we examine, instead of merely focusing on climate change (as, for example, the International Sustainability Board). Given that it will be applicable to a much larger number of com- panies than the directive we study, it is important to continue to examine the eﬀects of the current EU’s directive and to consider the eﬀects of new standards issued by relevant international institutions, such as the GRI. Thus, future studies must assess how ﬁrms manage these two external forces (directives and standards), and whether the resulting disclosures are informative, eﬀective or useful to a range of stakeholders. Acknowledgements We would like to thank Ricardo Malagueno, Fabio Motoki, Francesca Cuomo, and Diogenis Baboukardos for their useful comments, and the participants of the 1st Workshop on sustainability 26 M. AL-DOSARI ET AL. reporting (Essex, 2021), the BAFA 2021 doctoral masterclass, the 2021 AAA International Accounting Section Midyear, the Eighth International Conference of the JIAR (2021), and the 2022 AAA Annual Meeting. We also would like to thank the two anonymous reviewers for their constructive and helpful comments. Disclosure statement No potential conﬂict of interest was reported by the author(s). 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Business Strategy and the Environment, 29(6), 2226–2237. https://doi.org/10.1002/bse.2497 Venturelli, A., Caputo, F., Cosma, S., Leopizzi, R., & Pizzi, S. (2017). Directive 2014/95/EU: Are Italian companies already compliant? Sustainability, 9(8), 1385. https://doi.org/10.3390/ su9081385 Verrecchia, R. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5(1), 179– 194. https://doi.org/10.1016/0165-4101(83)90011-3 Verrecchia, R. (1990). Information quality and discretionary disclosure. Journal of Accounting and Economics, 12(1), 365–380. https://doi.org/10.1016/0165-4101(90)90021-U 30 M. AL-DOSARI ET AL. Appendices Appendix 1. Disclosure score. Dimensions Directive 2014/95/EU No Variables Code Dummy variable Environmental Details of the current and foreseeable impacts of the 1 Biodiversity Impact ENERDP019 Does the company report on its impact on biodiversity or on activities to undertaking’s operations on the environment. Reduction reduce its impact on the native ecosystems and species, as well as the biodiversity of protected and sensitive areas? 2 Land Environmental ENRRDP061 Does the company report on initiatives to reduce the environmental Impact Reduction impact on land owned, leased, or managed for production activities or extractive use? 3 Environmental ENERDP095 Does the company report on making proactive environmental Investments Initiatives investments or expenditures to reduce future risks or increase future opportunities? The use of renewable and/or non-renewable energy 4 Total Renewable Energy ENRRDP060 Does the company report on total primary renewable energy purchased and produced in gigajoules? 5 Renewable Energy ENRRDP0452 Does the company report on total energy produced from primary Produced renewable energy sources in gigajoules? 6 Renewable Energy ENRRDP0451 Does the company report on total primary renewable energy purchased Purchased in gigajoules? Greenhouse gas emissions 7 NOx and Sox emission ENERDP033 Does the company report on initiatives to reduce, reuse, recycle, reduction substitute, or phase out SOx (sulfur oxides) or NOx (nitrogen oxides) emissions? 8 Green Buildings ENRRDP052 Does the company report about environmentally friendly or green sites or oﬃces? Water use 9 Water Pollutant ENERDP058 Does the company report on total weight of water pollutant emissions in Emissions tonnes? 10 Water Recycled ENRRDP056 Does the company report on amount of water recycled or reused in cubic meters? 11 Water Withdrawal Total ENRRDP054 Does the company report on total water withdrawal in cubic meters? Air pollution 12 CO2 Equivalent ENERDP023 Does the company report about total Carbon dioxide (CO2) and CO2 Emissions Total equivalents emission in tonnes? Disclosure 13 Emissions Trading ENERDP068 Does the company report on its participation in any emissions trading initiative? Waste management (e.g. recycling rates). 14 Waste Reduction ENERDP062 Does the company report on initiatives to recycle, reduce, reuse, Initiatives substitute, treat or phase out total waste? Sub-score 14 Social Gender equality 1 Executive Members CGBSO19 Does the company report on the percentage of female executive Gender Diversity members? (Continued) ACCOUNTING FORUM 31 Appendix 1. Continued. Dimensions Directive 2014/95/EU No Variables Code Dummy variable Implementation of fundamental conventions of the 2 Fundamental Human SOHRDP012 Does the company claim to comply with the fundamental human rights International Labour Organisation Rights ILO UN convention of the ILO or support the UN declaration of human rights? Working conditions 3 Flexible Working Hours SODODP026 Does the company claim to provide ﬂexible working hours or working hours that promote a work-life balance? 4 Training Hours Total SOTDDP019 Does the company report on total training hours performed by all employees? Respect for the right of workers to be informed and 5 Employee Satisfaction ECPEDP039 Does the company report on the percentage of employee satisfaction as consulted reported by the company? Respect for trade union rights, health and safety at 6 Employee Health & SOHSDP009 Does the company report about the total hours of employee training on work Safety Training health & safety policies and procedures? 7 Supply Chain Health & SOHSDP0183 Does the company show through the use of surveys or measurements Safety Improvements that it is improving the level of employee health & safety in its supply chain? The dialogue with local communities, and/or the 8 Voluntary Turnover of SOEQDP038 Does the company report on the percentage of employee voluntary actions taken to ensure the protection and the Employees turnover? development of those communities. Gender diversity and other aspects of diversity; 9 Board Gender Diversity CGBSO03V Does the company report the percentage of females on the board? Average hours of training per year per employee, by 10 Average Training Hours SOTDDP018 Does the company report on average hours of training per year per gender; employee? Sub-score 10 Human rights Include information on the prevention of human rights 1 Human Rights SOHRDP026 Does the company report or show to use human rights criteria in the abuses and/or on instruments in place to ﬁght Contractor selection or monitoring process of its suppliers or sourcing partners? corruption and bribery. Operations and suppliers at signiﬁcant risk of human 2 Human Rights Breaches SOHRDP029 Does the company report or show to be ready to end a partnership with rights violations; Contractor a sourcing partner if human rights criteria are not met? Respect for freedom of association; 3 Policy Freedom of SOHRDP0101 Does the company describe, claim to have or mention the processes in Association place to ensure the freedom of association of its employees? Engagement with relevant stakeholders: 4 Stakeholder CGVSDP023 Does the company explain how it engages with its stakeholders? Engagement Sub-score 4 Anti-corruption Anti-corruption policies, procedures, and standards; 1 Policy Business Ethics SOCODP0069 Is the company under the spotlight of the media because of a and bribery controversy linked to bribery and corruption, political contributions, improper lobbying, money laundering, parallel imports, or any tax fraud? 2 Policy Bribery corruption SOCODP0067 Does the company describe in the code of conduct that it strives to avoid bribery and corruption at all its operations? The number of pending or completed legal actions on 3 Policy Fair Competition SOCODP0066 Does the company describe in the code of conduct that it strives to be a anti-competitive behaviour. fair competitor? Sub-score 3 Total score 31 32 M. AL-DOSARI ET AL. Appendix 2. List of variables Expected Variable Measurement impact NFD_scoreU Measures the level of NFD score, without attributing equal weights to the sub-scores. NFD_scoreE Measures the level of NFD score, attributing equal weights to the sub-scores. Post_2014 Dummy variable coded one for the ﬁscal years 2015, 2016, 2017, 2018 and 2019, and + zero otherwise. Implementation Dummy variable coded one for the ﬁscal years 2017, 2018 and 2019, and zero otherwise. + Transit Dummy variable coded one for the ﬁscal years 2015, and 2016, and zero otherwise. + Non_EU ﬁrms Dummy variable coded one when the ﬁrm’s headquarter is in non-European Union - countries, and zero otherwise. EU_employee A logarithm of the total number of employees from European Union countries. + EU_ops A percentage of the total revenues generated from European Union countries. + EU_ﬁrms Dummy variable coded one when the ﬁrm’s headquarter is in European Union countries, + and zero otherwise. Size Firms’ size, measured as the log of total assets + ROA Return on assets, measured as earnings before extraordinary items divided by total + assets, at the end of the ﬁscal year. Leverage Leverage, measured as total debt / total assets. + Assurance Dummy variable coded one when sustainability report is assured, and zero otherwise. + CSR_committee Dummy variable coded one when the ﬁrm has a CSR committee or team, and zero + otherwise. CSR_report Dummy variable coded one when the ﬁrm publishes a separate CSR/ health and safety + (H&S)/Sustainability report or publish a section in its annual report on CSR/health and safety (H&S)/Sustainability, and zero otherwise. GRI Dummy variable coded one if the ﬁrm’s CSR report published in accordance with the GRI + guidelines, and zero otherwise. UNGC Dummy variable coded one if the ﬁrm signed the UN Global Compact, and zero + otherwise. OECD Dummy variable coded one if the ﬁrm claims to follow the OECD Guidelines for + Multinational Enterprises, and zero otherwise. NFD_Regulations Dummy variable coded one if the ﬁrm is in a country that has any mandatory non- + ﬁnancial information disclosure regulation. Paris Dummy variable coded one if the ﬁrm is in a country that signed and applied Paris + climate agreement, and zero otherwise. Penalty Dummy variable coded one if the ﬁrm is liable to a penalty for non-compliance with the + EU Directivity and zero otherwise. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting Forum Taylor & Francis http://www.deepdyve.com/lp/taylor-francis/the-effect-of-the-eu-s-directive-on-non-financial-disclosures-of-the-GOwFgy8TWE

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Publisher: Taylor & Francis
Copyright: © 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
ISSN: 1467-6303
eISSN: 0155-9982
DOI: 10.1080/01559982.2023.2198179
Publisher site: See Article on Publisher Site

Abstract

ACCOUNTING FORUM https://doi.org/10.1080/01559982.2023.2198179 The eﬀect of the EU’s directive on non-ﬁnancial disclosures of the oil and gas industry a b b Mona Al-Dosari , Ana Marques and Jenny Fairbrass a b College of Business Administration, King Faisal University, Al-Ahsa, Saudi Arabia; Norwich Business School, University of East Anglia, Norwich, UK ABSTRACT ARTICLE HISTORY Received 28 June 2021 Owing to its substantial impact on the environment, economy, and Accepted 30 March 2023 society, we choose to examine the oil and gas industry, drawing on neo-institutionalist scholarship to concentrate on the mimetic, KEYWORDS coercive, and/or normative eﬀects discernible in the industry’s Directive 2014/95/EU; non-ﬁnancial disclosure (NFD) behaviour. Focusing on Directive corporate social 2014/95/EU, we construct scores to assess the evolution of the responsibility; sustainability sector’s NFD over time and the spillover eﬀects beyond EU large reporting; ESG and listed ﬁrms, the latter being directly subject to the legislation. ACCEPTED BY We scrutinise NFD over a decade, producing three main results. Diogenis Baboukardos, Silvia First, we ﬁnd that NFD increases immediately after the directive’s Gaia, Philippe Lassou and publication and further increases during the implementation Teerooven Soobaroyen phase. Second, the directive has a spillover eﬀect, sparking signiﬁcantly increased NFD among non-EU ﬁrms during the implementation period. Third, the NFD level of non-EU ﬁrms is associated with the number of EU employees and the extent of EU operations of these ﬁrms, but only following the implementation of the directive. These ﬁndings have clear repercussions for ﬁrms operating both inside and outside the EU as well as implications for EU public policymakers. 1. Introduction The European Union (EU) has sought to become a global pacesetter, exercising its normative power (Manners, 2002), across several public policy ﬁelds, including sus- tainability reporting. Such is the signiﬁcance of non-ﬁnancial disclosure (NFD) among business organisations for the EU that it has enacted legislation in the ﬁeld: namely, Directive 2014/95/EU. This directive requires all large European listed ﬁrms that have more than 500 employees to publish “… certain information on the way they operate and manage social and environmental challenges” (European Com- mission, 2014). CONTACT Mona Al-Dosari maldosari@kfu.edu.sa Diogenis Baboukardos, Silvia Gaia, Philippe Lassou and Teerooven Soobaroyen Previous literature uses the terms “CSR” and “ESG” but we use NFD, as the EU’s Directive is known as the non-ﬁnancial directive. © 2023 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/ licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author (s) or with their consent. 2 M. AL-DOSARI ET AL. The EU’s Directive provides a critical focal point for the examination of ﬁrms in the oil and gas industry because of their signiﬁcant impact on the environment, economy, and society. Notably, oil and gas ﬁrms contribute considerably to the global economy, provid- ing inter-alia sizeable employment opportunities (IPIECA, 2015). However, this industry is also perceived as being “environmentally sensitive”, given that, historically, it has been one of the highest producers of carbon dioxide and methane emissions (Ritchie & Roser, 2020) and one whose operations can cause signiﬁcant environmental damage. Hence, the motivation to investigate this sector. Building on the above background and drawing on well-established neo-institutional- ist scholarship (Dillard et al., 2004; DiMaggio & Powell, 1983; Scott, 1987), we concen- trate speciﬁcally on Directive 2014/95/EU and the NFD levels of oil and gas ﬁrms. We create a novel NFD score that includes 31 variables and use it to assess how disclosure levels change over time, starting from a point in time ﬁve years before the directive was issued. This enables us to explore disclosure levels in a period before the enactment of this legal framework and the subsequent changes that occur after the EU’s directive was introduced. Additionally, we investigate whether there is a spillover eﬀect of the directive beyond large and listed EU ﬁrms, examining its impact on ﬁrms with headquar- ters outside the EU. Finally, we study whether the NFD of these ﬁrms varies with the number of employees and the scale of operations that they have in the EU. We examine 204 ﬁrms, operating in 35 countries, during the decade from 2009 to 2019, with a ﬁnal sample of 1,623 observations. We ﬁnd signiﬁcant variations in the level of NFD among ﬁrms and that EU ﬁrms have higher disclosure scores than do non-EU ﬁrms. These two sets of ﬁrms also diﬀer in terms of (i) the frequency with which they seek assurance of their sustainability reports, (ii) publication of a stand-alone report for Corporate Social Responsibility (CSR), and (iii) use of Global Reporting Initiative (GRI) standards. Our multivariate analysis indicates that overall NFD levels increased during the tran- sition period (as previously documented) and that a signiﬁcant increase in disclosure occurs after the directive’s implementation, expanding knowledge of its impact. In fact, when we use propensity score matching (PSM), we ﬁnd that the level of NFD increases sig- niﬁcantly only during the implementation phase. This is direct evidence of the impact of the directive issued by the EU. The substantial rise during the implementation phase is also present in our four sub-scores (environmental, social, human rights, and anti-corruption), and when we consider alternative disclosure score calculations. Moreover, our results indi- cate that the four proxies for the quality of NFD that we use are signiﬁcantly and positively associated with the NFD score, indicating that ﬁrms that provide more disclosures also dis- close better-quality information. This ﬁnding is aligned with the believe that NFD is one of the four main elements of quality for ﬁrms’ reporting (Afeltra et al., 2023). Following neo-institutionalist literature, we posit that although the EU’s Directive directly targets EU ﬁrms’ behaviour, it is also a catalyst for increased NFD among ﬁrms operating or based outside the EU, due to spillover or isomorphism. This may take the form of mimetic, and/or normative processes. When focusing on non-EU ﬁrms, we ﬁnd that although their levels of disclosure are not much lower than the level of EU ﬁrms overall, this changes signiﬁcantly during the implementation of the directive when NFD does increase. This ﬁnding is corroborated by our PSM analysis, and by using alternative ways of calculating our disclosure scores. However, this substan- tial rise during the implementation phase is present in only two of the four sub-scores ACCOUNTING FORUM 3 (namely, the social and environmental), indicating that the increase of disclosure was not homogeneous across all areas. Next, we analyse non-EU ﬁrms separately and ﬁnd that their number of EU employees is positively associated with NFD disclosures, when considering our unweighted scores, especially when it comes to social disclosures. Moreover, the association between overall NFD and EU employees is stronger after the directive’s implementation (in all scores). Another characteristic of non-EU ﬁrms is positively associated with the ﬁrms’ NFD during the implementation period: the scale of the operations that these ﬁrms have in the EU. Thus, these variables moderate the relationship between NFD of non-EU ﬁrms and the directive’s implementation. These results provide evidence of how the interaction between oil and gas ﬁrms and their institutional environment aﬀects their dis- closures, as predicted by neo-institutional theory, expanding previous studies that only considered the impact of EU actions in speciﬁc EU countries and reinforcing the signiﬁ- cance of the EU when it comes to NFD. Our research builds on and extends the extant scholarship in several important ways. First, we provide novel evidence about an industry for which, despite its environmental importance, relatively little is known regarding NFD. Crucially, we furnish data over a longer period following the implementation of the EU’s Directive, covering three years of implementation, in contrast to some previous studies that only cover the initial year of implementation (e.g.: Fiechter et al., 2022), a period of adjustment for ﬁrms. Thus, we join the many scholars who “argue that regulatory enforcement has an impact, driving high-quality disclosure and compliance” (Afeltra et al., 2023). Second, by custom-building NFD scores, we contribute to the scholarship concerning NFD measurement. While most studies focus on the level of NFD through the publication of a separate report (e.g.: Cuomo et al., 2022) or a manually collected disclosure score and do not address the growing concern about a uniform deﬁnition of NFD (Stolowy & Paugam, 2018), our disclosure indexes can be used in future studies, allowing for the analysis of disclosures across time, and across four speciﬁc areas, in a consistent way. Third, we provide evidence that the directive’s impact is not conﬁned to large and listed European ﬁrms. Our ﬁndings are relevant to a wide range of stakeholders. Clearly, they have direct rel- evance for the business managers of the ﬁrms in our selected sector, as well as for poten- tial investors and ﬁnancial analysts interested in this industry. Equally importantly, they are also likely to be germane to public policymakers. While EU regulators would hope and expect to directly inﬂuence large EU-based ﬁrms via the regulations that they enact, they should also be aware of the mimetic and normative eﬀects on a wider range of ﬁrms. Indeed, our evidence suggests that when the EU drafts and ratiﬁes legis- lation aimed at its largest ﬁrms, these decisions have much broader reach. This leads us to expect a wide impact of the recent corporate sustainability reporting directive, as well as the other initiatives that are related to the European Green Deal (European Commission, 2019a). After introducing our study, we now outline the structure of this paper. First, we discuss the institutional and regulatory settings relevant to the industry. Next, we review the literature and develop the hypotheses. Next, we outline the research method- ology used to test the hypotheses. The discussion of the results comes next. Finally, we present our conclusions. 4 M. AL-DOSARI ET AL. 2. Institutional settings Several major events have contributed to the increased importance of oil and gas industry NFD, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. This event gen- erated shockwaves for the entire industry, harming the environment and wildlife, and leading to reputational damage to the sector. In response to this unprecedented attention, many oil and gas ﬁrms have increased their social and environmental protection activities (Dyck et al., 2019). In parallel, the oil and gas industry was among the ﬁrst industries to introduce the dis- closure of their non-ﬁnancial activities (Venturelli et al., 2017) and has a high NFD level when compared to other industries (Carini et al., 2018; Matuszak & Różańska, 2017). However, as reported in The New York Times (Tabuchi, 2020), the oil and gas industry may be “a far bigger climate threat than we knew” since it has caused a considerable increase in the amount of methane emissions. Considering this evidence and the environmental sensitivity of this industry, we posit that the oil and gas industry is a prime target for the EU’s Directive. In addition, the industry has a signiﬁcant global economic impact. According to the International Petroleum Industry Environmental Conservation Association, the sector has considerable social value and can signiﬁcantly contribute to the growth of a strong economy (IPIECA, 2015). The GRI indicates that “global exports for mineral fuels and associated fuel products totalled USD 1.9 trillion in 2017” (GRI, 2019, p. 2). Moreover, as the United Nations Development Programme (UNDP, 2017) highlights, some of the importance of the oil and gas industry lies in creating economic growth by providing employment, building infrastructure, and creating services in diﬀerent countries. In the US alone, the industry contributes 9.8 million jobs to total US employment (American Petroleum Institute, 2020). Accordingly, “this sector has been the focus of regulation and public attention”, and therefore oil ﬁrms’ ability to manage their sustainability issues are likely to aﬀect their assets, liabilities, proﬁts, and capital (SASB, 2014). Legal requirements also have an impact on NFD in the selected industry. For example, since 2013, quoted companies in the UK have been required to disclose their greenhouse gas emissions. Beyond such national regulatory interventions, ﬁrms must also consider the legislation of supranational entities (such as the EU). EU’s Directive 2014/95/EU, also known as the non-ﬁnancial reporting directive, requires all large European listed ﬁrms with more than 500 employees to publish “… certain information on the way they operate and manage social and environmental challenges” (European Commission, 2014). This obligation became eﬀective, starting with the annual reports issued in 2018 (covering the ﬁscal year 2017 and beyond). The directive obliges ﬁrms to disclose infor- mation concerning ﬁve areas: (i) environmental protection, (ii) responsibility toward society, (iii) human rights, (iv) anti-corruption, and (v) diversity on company boards. It is intended to beneﬁt stakeholders (such as investors, consumers, and public policy- makers), to assist them in assessing the non-ﬁnancial performance of ﬁrms and to motiv- ate ﬁrms to adopt a more responsible approach to business. Consequently, many European ﬁrms raised their environmental and social standards following the EU’s Directive announcement (Fiechter et al., 2022; Mittelbach-Hörmanseder et al., 2020). While a direct impact of the EU’s Directive on large European ﬁrms’ NFD was to be expected, the possible implications of this directive on the NFD of ﬁrms located ACCOUNTING FORUM 5 outside the EU has not previously been addressed. Given the importance of the EU in the arena of NFD, we investigate this issue, providing evidence about whether EU oﬃcials can expect their actions to have an impact on ﬁrms operating outside EU boundaries. Crucially, ﬁrms can choose which NFD guidelines they adopt (EU Directive, para- graph 9). These include those produced by the United Nations Global Compact (UNGC), the Organisation for Economic Co-operation Development (OECD), and the GRI. Concerned about a possible lack of comparability of the disclosures, Breijer and Orij (2022) focus on the existing NFD frameworks and ﬁnd that mandatory adopters tend to use an investor-oriented framework. Some would argue that regulators should propose even more detailed NFD regulations to better understand the motivation behind ﬁrms’ actions (Song & Rimmel, 2021). Interestingly, in 2017, the European Com- mission announced further non-mandatory guidelines, to encourage ﬁrms to disclose more relevant, consistent, and comparable NFD. In 2019, the European Commission announced a new set of guidelines on reporting climate-related information (European Commission, 2019b), and decided to review the 2014 Directive in 2020. The corporate sustainability reporting directive, which is part of the European Green Deal, was approved in December of 2022. Finally, we must consider the Paris Agreement, signed in 2015. This was the ﬁrst global agreement on climate (European Commission, 2015), designed to raise global awareness of the threat of climate change and limit the increase in the average global temperatures. To achieve these aims, each signatory country made a pledge to create and review their nationally determined contributions, a decision that directly impacts the oil and gas ﬁrms. 3. Hypotheses’ development In this section, we intertwine extant theory with recent empirical studies to provide the foundations for our hypotheses. Our research draws on well-established neo-institution- alist scholarship that focuses on a range of isomorphic processes. In brief, neo-insti- tutional theory explores how organisations interact with their institutional environment, examining motivations for undertaking activities intended to secure social legitimacy (Dillard et al., 2004; DiMaggio & Powell, 1983; Meyer & Scott, 1983; Scott, 1987). The literature identiﬁes three distinct types of co-existing isomorphic press- ures. First, coercive forces are said to derive from institutional forces such as regulation. Second, normative pressure arises from the need and desire to achieve moral conformity. Finally, mimetic factors are deemed to be the result of copying other organisations in the same ﬁeld or industry. In the work that we undertake, we examine these isomorphic pressures operating and impacting on the NFD of our selected sample of oil and gas producers. We also build on past empirical research. Some previous scholarship is particularly noteworthy because it addresses the potential impact of the EU’s Directive in speciﬁc The EU directive 2022/2464 was approved on 14th Dec 2022. The ﬁrst companies will have to apply the new rules for the ﬁrst time in ﬁnancial year 2024, for reports published in 2025. Until then, the rules of the EU directive we study remain in place. Thus, this does not aﬀect our ﬁndings. More information can be found here: https://ﬁnance.ec.europa.eu/ capital-markets-union-and-ﬁnancial-markets/company-reporting-and-auditing/company-reporting/corporate- sustainability-reporting_en 6 M. AL-DOSARI ET AL. European countries. For example, Carini et al. (2018) share our industry focus by study- ing the largest ten European oil and gas ﬁrms. They ﬁnd that the disclosure level of non- ﬁnancial reports is “satisfactory” but expect the EU’s Directive to trigger further develop- ment. Other examples include Ogrean’s(2017) study of Romania, Szabó and Sørensen’s (2015) investigation into Denmark, Venturelli et al. (2017) and Veltri et al. (2020), who research Italy, and Matuszak and Różańska’s(2017) review of Poland. Signiﬁcantly, some of this research does not ﬁnd any change or much change because of the EU’s directive. For example, Szadziewska et al. (2018) ﬁnd no eﬀect arising from the EU’s Directive in Poland. Caputo et al. (2020) ﬁnd that in Italy, during the transition period, the quality of NFD increased, but only slightly, and suggest that this is due to a previously high stan- dard of reporting. Given that the EU’s Directive ﬁrst applied to ﬁrms’ 2017 annual reports, it is important to examine the disclosures made before and after that date, as suggested by Veltri et al. (2020). Similarly, Lock and Seele (2016) call for research on the devel- opment of mandatory NFD regulations in the EU over time. Fiechter et al. (2022) assess the ﬁrst year when disclosures are subject to the EU’s Directive and ﬁnds evi- dence of an increase in CSR activities of large and listed European ﬁrms before its implementation. Not surprisingly, they ﬁnd that the most discernible eﬀect was in countries with lower CSR disclosure regulations prior to the EU’s Directive. Cuomo et al. (2022) cover the ﬁrst two years of implementation of the EU’s Directive and ﬁnd that after the directive was issued EU listed ﬁrms published a separate sustainabil- ity report more frequently. However, these authors do not consider the disclosures included in these reports. Based on our understanding of isomorphic processes (as envisaged by the institutional theory outlined above and the ﬁndings of previous studies), our ﬁrst hypothesis is as follows: H1: The NFD level of ﬁrms in the oil and gas industry increased after the issuance of the EU’s Directive. The impact of the EU’s Directive on the NFD of ﬁrms not headquartered in Europe has not been previously reported. However, given the putative impact of the EU on the global economy and international reporting guidelines, as “the world’s largest single market with transparent rules and regulations” (European Commission, 2019c), there is a strong case for investigating a potential spillover eﬀect of the EU and its regu- lations on non-EU ﬁrms. Such impacts are likely to be especially discernible in the oil and gas industry because the sector tends to operate in several geographical regions (Carini et al., 2018). Crucially, it is an empirical question as to whether the introduction of a new directive is a “disruptive event” that accelerates convergence among ﬁrms in the same industry. While large and listed EU ﬁrms are legally required to comply with the EU’s Directive, non-EU ﬁrms may aspire to “keeping up with the Joneses”; that is, the latter may engage in mimetic behaviour or adopt the norms of their EU counterparts. Interestingly, Ioannou and Serafeim (2021) ﬁnd that the sustainability practices of ﬁrms in the same industry converge over time. However, by contrast, some researchers point to the lack of comparability between sustainability reports in the oil and gas industry (Cardoni et al., 2019; Gallego-Alvarez et al., 2018). ACCOUNTING FORUM 7 Particularly noteworthy regarding the issue of convergence is the trend observed by Li et al. (2022) in the context of CSR awards in China: non-winning ﬁrms tend to improve their CSR after their competitors win CSR awards. Under these circumstances, the award can be seen as a “disruptive event”, resulting in a diminished reputation for the non- winning ﬁrm (in comparison with the winner). Similarly, Tezer and Toﬁghi (2021) ﬁnd evidence of the knock-on eﬀect of a brand’s CSR activity in response to competing brands, demonstrating how receiving CSR information about one brand can have a nega- tive eﬀect on a competing brand’s image. Further, using the awareness-motivation-capability framework developed in the com- petitive dynamics’ literature mentioned above (Li et al., 2022), evidence reveals that non- winning ﬁrms’ improvement is more salient when there is greater awareness, motivation, and capability. Critically, given how widely the EU’s Directive was discussed, awareness of it was extremely high, and this ought to be associated with a strong increase in the NFD of non-EU ﬁrms. This greater awareness may even lead non-EU ﬁrms to adjust their disclosures as soon as the EU’s Directive was issued, that is, before its implemen- tation, to keep pace with their EU peers during the transition period. This increase in NFD of non-EU ﬁrms, during the transition period would be consistent with the impact documented for EU ﬁrms. Even if this occurred in the ﬁrst year of application of the directive, European countries were the leaders of CSR disclosure levels (KPMG, 2017); thus, the motivation for change should also be strong during the implementation period, leading to the prediction of a marked increase in the NFD of non-EU ﬁrms. This leads to our second hypothesis: H2: The NFD level of non-EU oil and gas ﬁrms increased after the issuance of the EU’s Directive. Delving deeper, we contend that if spillover from the EU’s Directive is revealed, it is vital to determine whether it varies according to the degree of ﬁrms’ involvement with the EU. As regards the level of ﬁnancial disclosure, it is already known that voluntary disclos- ure is positively related to the extent of ﬁrms’ globalisation of operations (Cahan et al., 2005), as companies with a greater presence in foreign countries are more internationally dependent and face higher agency costs (Kumar, 2013). In this respect, Cowan et al. (2013) ﬁnd evidence that ﬁrms with international experience are more likely to be aﬀected by other foreign ﬁrms, with the extent of foreign experience (such as having foreign employees or foreign operations) impacting their behaviour. Brammer et al. (2006) use a parallel argument to ﬁnd evidence that ﬁrms’ geographical scope signiﬁ- cantly and positively aﬀects their social and environmental performance, with their social performance strategy shaped by the breadth of their geographical operations. This is consistent with other ﬁndings (e.g. Sharfman et al., 2004), which suggest that geo- graphic diversity forces ﬁrms to consider international policies when determining their NFD. Moreover, ﬁrms in highly competitive industries (such as oil and gas) are more likely to adjust their disclosures when they believe that the beneﬁts of that decision out- weigh the costs (Verrecchia, 1983, 1990). Given these previous ﬁndings and drawing on institutional theory (DiMaggio & Powell, 1983; Scott, 1987), we anticipate that large international oil and gas ﬁrms may be encouraged to copy (i.e. engage in mimetic and normative isomorphism) and adopt the norms of other large European ﬁrms in the same industry, at least to some degree. 8 M. AL-DOSARI ET AL. This behaviour is likely to be more accentuated when ﬁrms have more experience and operations in the EU. Therefore, we contend that observable increases in NFD among non-EU ﬁrms are reinforced by the size of their workforce in the EU and extent of their operations in the region. This leads to our third hypothesis: H3a: The level of EU employees of a non-EU ﬁrm is positively associated with the NFD level of ﬁrms in the oil and gas industry. H3b: The level of EU operations of a non-EU ﬁrm is positively associated with the NFD level of ﬁrms in the oil and gas industry. 4. Methods To test H1, we ﬁrst assess whether the level of NFD changed after the directive was pub- lished, creating an indicator variable, Post_2014, coded as one if the observation corre- sponds to a ﬁscal year after 2014. The deﬁnition of this variable is aligned with the study of Cuomo et al. (2022). Second, we test whether the level of NFD changed after directive implementation. We create an indicator variable, Implementation, coded as one if the observation corresponds to a ﬁscal year when the directive was already in eﬀect (2017, 2018, or 2019). Finally, we assess whether there is a diﬀerence between the degree of change in NFD that occurs in the period that corresponds to the years after the directive was issued but before its implementation. We create an indicator vari- able, Transit, coded as one if the observation corresponds to ﬁscal years 2015 and 2016, and include it in a third model, with Implementation. These three indicator variables are our focus when testing H1. If the disclosures increased only after the directive was implemented, then only the estimated coeﬃcient for Implementation will be positive and statistically signiﬁcant. If the level of disclosure increased after the directive was issued, there are two possibilities: (i) a constant level of increase after the publication of the directive, or (ii) a diﬀerent level of increase in the transition period when compared with the implementation period. We expect positive associations between the NFD score and both the transition and implementation periods. To measure NFD we create a disclosure score (NFD_score), based on the directive, as well as the issued guidance, which covers four dimensions: environmental, social, human rights, and anti-corruption. These speciﬁc items were included because (i) they are men- tioned speciﬁcally in the directive (or guidance), and (ii) refer to disclosures and not actions of the ﬁrms (as the variables related to actions could be considered as non- ﬁnancial performance proxies). Thus, we believe our research instrument considers all relevant issues mentioned in the directive appropriately, having content validity. Appendix 1 presents the items considered in our score, as well as the variable from the Asset4 ESG database in Thomson Reuters used. The environmental dimension considers 14 variables, that measure ﬁrms’ disclosures on current and foreseeable impacts of the undertaking’s operations on the environment, the use of renewable energy, water use, Succinctly, these were the steps followed to identify the items included in our score: (i) reading the directive to identify areas where disclosure is required, (ii) reading the posterior guidance, and adjusting the initial list of areas, (iii) analys- ing the list of ESG variables in Asset4, identifying all those that are related with the identiﬁed areas, (iv) removing the variables related to actions from our list of variables, and (v) further removing those variables that have no data for all our sample, across our time period. ACCOUNTING FORUM 9 and air pollution. The social dimension comprises ten variables, related to issues such as gender diversity, human rights, training, and health and safety. The human rights dimen- sion includes four variables, reﬂecting disclosures on the prevention of human rights abuses and freedom of association. The last dimension is anti-corruption and bribery, which contains three variables. Thus, we consider 31 items. We consider two alternative ways of calculating NFD_score, following Tsalavoutas et al. (2010). Our ﬁrst score is unweighted, and we call it NFD_scoreU. In this case, the score of each ﬁrm is calculated as the ratio of the total items disclosed to the maximum possible score (31). Next, we consider that the number of items considered in our sub-scores is not the same, and thus our ﬁrst score puts more weight on environ- mental and social disclosures than on disclosures related to human rights and corruption. Our second score attributes equal weights to each of the sub-scores. NFD_scoreE is cal- culated as the sum of the sub-scores, divided by four. To control for possible outliers, the values of these scores (as well as the sub-scores and scores’ transformations used in the paper) were winsorized at the top and bottom one percent of the observations. Our ﬁrst set of empirical tests is based on the following models: NFD score = b + b Post 2014 + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (1) NFD score = b + b Implementation + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (2) NFD score = b + b Transit + b Implementation + Firm − levelcontrols 0 1 2 + Country − levelcontrols + 1 (3) Firm-level controls include (i) Size, (ii) ROA, (iii) Leverage, (iv) Assurance, (v) CSR_committee, (vi) CSR_report, (vii) GRI, (viii) UNGC and (ix) OECD. These variables are commonly used in the literature on NFD (e.g.: DeVilliers & Marques, 2016; Gallego- Alvarez et al., 2018; Venturelli et al., 2017). Four variables are indicators of the quality of NFD: Assurance, CSR_committee, CSR_report and GRI (Michelon et al., 2015), to con- sider the growing interest in how quality improves after the adoption of disclosure regu- lations (Afeltra et al., 2023). Data for these control variables come from Thomson Reuters Eikon. We include two country-level controls. The ﬁrst is NFD_Regulations, an indicator variable coded one if the ﬁrm is in a country that has any mandatory non-ﬁnancial infor- mation disclosure regulation. The second is Paris, an indicator variable coded one if the ﬁrm is in a country that has signed the Paris Agreement. This agreement may have a sub- stantial impact on the NFD of oil and gas ﬁrms, as climate-related disclosures of extrac- tive industries tend to be of poor quality (Baboukardos et al., 2021), but arguably improving overtime (Baboukardos et al., 2021). All variables, as well as the expected signs of their association with NFD_score, are presented in Appendix 2. The estimation of all models includes ﬁrm ﬁxed eﬀects, and standard errors are clustered by ﬁrm-year. We follow the list of countries in Krueger et al. (2021). 10 M. AL-DOSARI ET AL. To assess whether the impact of the EU’s Directive is also felt by non-EU ﬁrms (H2), we use three models. First, we focus on Non_EU ﬁrms, an indicator variable coded as one if the ﬁrm is non-European, and zero otherwise. A ﬁrm is considered non-European when its headquarters are not in the EU. We expect the estimated coeﬃcient of this vari- able to be negative, indicating that non-European ﬁrms have lower levels of NFD. Next, we test whether the NFD of non-EU ﬁrms remain lower than that of EU ﬁrms when con- trolling for the changes that occur during the transition and implementation periods. Finally, we use a diﬀerence-in-diﬀerences model to consider these two distinct periods. The models used are: NFD score = b + b Non EUfirms + Firm − levelcontrols + Country 0 1 − levelcontrols + 1 (4) NFD score = b + b Non EUfirms + b Transit + b Implementation 0 1 2 3 (5) + Firm − levelcontrols + Country − levelcontrols + 1 NFD score = b + b Non EUfirms + b Transit + b Implementation 0 1 2 3 ∗ ∗ + b Transit Non EUfirms + b Implementation Non − EUfirms (6) 4 5 + Firm − levelcontrols + Country − levelcontrols + 1 The coeﬃcient of the interaction variable Transit*Non_EU ﬁrms measures the mean additional impact on the NFD_score, for a non-European ﬁrm, during the transition period. The coeﬃcient of the interaction variable Implementation*Non_EU ﬁrms measures the mean additional impact on the NFD_score for a non-European ﬁrm, after the implementation of the EU’s Directive. We expect the estimated coeﬃcient for both interaction variables to be positive, indicating that although non-European ﬁrms have weaker NFD than EU ﬁrms, the EU’s Directive is associated with an increase in their level of NFD. To test H3, we analyse only the subsample of non-EU observations. First, we use EU_employee, a variable calculated as the logarithm of the total number of employees in the EU. We expect a positive coeﬃcient for EU_employee, indicating that the exist- ence of EU employees in a ﬁrm has a positive eﬀect on its NFD levels (H3a). Second, we use EU_ops, a variable calculated as the percentage of revenue generated from any EU country. We expect a positive coeﬃcient for EU_ops, indicating that ﬁrms operating in Europe have higher NFD levels (H3b). 5. Sample, descriptive statistics, and results’ discussion 5.1. Sample and descriptive statistics To identify our sample, we start from 9,105 ﬁrms classiﬁed as oil and gas producers in Reﬁnitiv DataStream. Next, we exclude all passive ﬁrms. Second, we remove 471 other ﬁrms: 30 have no available data at all, and the others have no total assets data. In Eikon: Geographic number of employees. In Eikon: Geographic external revenue. In Thomson Reuters: industry code 501020 - oil and gas production. ACCOUNTING FORUM 11 Table 1. Sample. Number of ﬁrms Oil and Gas producers (Reﬁnitiv DataStream) 9,105 Dead ﬁrms (6,899) No data available (30) Total assets information not available (441) Non-ﬁnancial information not available (1,075) Duplicate identiﬁers (456) Final sample 204 This table shows the ﬁnal total number of ﬁrms in the sample. Third, we exclude ﬁrms with missing non-ﬁnancial information. Finally, as this dataset contains several securities from the same ﬁrm, either dual-class shares or cross-listings, we follow the procedure from Landis and Skouras (2021) to identify the unique ﬁrms (Table 1). This leads to a ﬁnal sample of 204 ﬁrms, across 35 countries, and we calculate the NFD scores for 1,623 observations. We collect data for ﬁscal years 2009-2019, cover- ing ﬁve years before and ﬁve years after the release of the EU’s Directive in 2014. This covers three distinct periods: before the directive was issued, the transition period, and the implementation period. Panel A of Table 2 reports the descriptive statistics of the variables used in regressions. We present three sets of descriptive information: (i) for all observations, (ii) for obser- vations from EU ﬁrms, and (iii) for observations from non-EU ﬁrms. The overall average NFD_scoreU is 0.336 and its standard deviation is 0.199, while the overall average NFD_scoreE is 0.409 and its standard deviation is 0.194, showing a signiﬁcant variation in the level of NFD. Non_EU ﬁrms represent over 85 percent of the obser- vations. The mean value of NFD_scoreU (NFD_scoreE) of EU ﬁrms is 0.46 (0.51), but in the case of non-EU ﬁrms, this is only 0.31 (0.39). Furthermore, we ﬁnd that the fre- quency of assurance, existence of a CSR committee, publication of a stand-alone CSR report, and use of GRI standards are much higher in the EU subsample. For economy of space, Panel B of Table 2 reports descriptive statistics by country, but only for countries with more than 20 observations. The highest average of both NFD_scoreU and NFD_scoreE is found in a European country (Italy), while Australia has the lowest average (for both NFD scores). These values, together with those in Panel A, demonstrate the heterogeneity in non-ﬁnancial reporting in this industry, complementing the ﬁndings of heterogeneity in ﬁnancial reporting by Gray et al. (2019). Panel C reports the mean values of both our scores for NFD, as well as their subparts, by year. We ﬁnd that all sub- parts have been increasing throughout the study period. Table 2, Panel D presents the pairwise correlations between the variables included in our models. All the independent and the control variables are signiﬁcantly correlated with NFD_scoreU, except for Transit, and Paris, and the same is true for NFD_scoreE. The two score variables are positively and signiﬁcantly associated (correlation is 0.899), as one would expect. 5.2. Main multivariate results We begin by exploring whether the overall level of NFD is positively associated with the introduction of the directive. Panel A of Table 3 shows the results of our estimation of 12 M. AL-DOSARI ET AL. Table 2. Panel A - Descriptive statistics. All ﬁrms EU ﬁrms Non-EU ﬁrms Mean Std. Dev. Median Min Max Mean Std. Dev. Median Min Max Mean Std. Dev. Median Min Max NFD_scoreU 0.336 0.199 0.323 0.032 0.774 0.462 0.204 0.484 0.032 0.774 0.314 0.190 0.290 0.032 0.774 NFD_scoreE 0.409 0.194 0.375 0.000 0.816 0.511 0.206 0.504 0.000 0.816 0.392 0.187 0.354 0.000 0.816 Non_EU ﬁrms 0.856 0.351 1.000 0.000 1.000 0.000 0.000 0.000 0.000 0.000 1.000 0.000 1.000 1.000 1.000 EU_employee 0.327 1.616 0.000 0.000 11.095 1.905 3.575 0.000 0.000 11.095 0.062 0.653 0.000 0.000 9.243 EU_ops 2,625.291 12,444.213 0.000 0.000 112,587.477 10,218.794 26,082.334 0.000 0.000 112,587.477 1,352.424 7,477.655 0.000 0.000 84,360.031 Assurance 0.324 0.468 0.000 0.000 1.000 0.614 0.488 1.000 0.000 1.000 0.276 0.447 0.000 0.000 1.000 ROA 1.937 17.204 4.180 −226.290 268.740 1.964 10.799 3.970 −62.750 62.700 1.933 18.060 4.260 −226.290 268.740 CSR committee 0.628 0.483 1.000 0.000 1.000 0.738 0.441 1.000 0.000 1.000 0.610 0.488 1.000 0.000 1.000 CSR report 0.624 0.485 1.000 0.000 1.000 0.948 0.221 1.000 0.000 1.000 0.569 0.495 1.000 0.000 1.000 GRI 0.480 0.500 0.000 0.000 1.000 0.708 0.456 1.000 0.000 1.000 0.442 0.497 0.000 0.000 1.000 Leverage 0.252 0.177 0.236 0.000 1.978 0.248 0.159 0.235 0.000 1.351 0.252 0.180 0.236 0.000 1.978 Size 15.728 2.040 15.803 3.738 19.829 15.906 1.750 15.586 12.229 19.535 15.698 2.084 15.833 3.738 19.829 UNGC 0.234 0.423 0.000 0.000 1.000 0.481 0.501 0.000 0.000 1.000 0.192 0.394 0.000 0.000 1.000 OECD 0.062 0.241 0.000 0.000 1.000 0.253 0.436 0.000 0.000 1.000 0.029 0.169 0.000 0.000 1.000 NFD Regulations 0.183 0.387 0.000 0.000 1.000 0.614 0.488 1.000 0.000 1.000 0.111 0.314 0.000 0.000 1.000 Paris 0.094 0.292 0.000 0.000 1.000 0.090 0.287 0.000 0.000 1.000 0.095 0.293 0.000 0.000 1.000 ACCOUNTING FORUM 13 Table 2. Panel B - Means by country. Freq. NFD_scoreU NFD_scoreE Australia 140 0.191 0.269 Brazil 30 0.378 0.448 Canada 354 0.261 0.346 China 34 0.308 0.322 France 22 0.469 0.470 India 44 0.520 0.545 Italy 22 0.657 0.672 Japan 43 0.324 0.310 Korea, Rep. 39 0.443 0.501 Norway 25 0.422 0.498 Poland 20 0.423 0.426 Russian Federation 75 0.435 0.452 Thailand 42 0.545 0.623 Turkey 20 0.510 0.588 United Kingdom 92 0.369 0.465 United States 454 0.287 0.391 Only shows countries with more than 20 observations. See Appendix 2 for deﬁnition of variables. Table 2. Panel C - Means of NFD scores, and sub-scores, by ﬁscal year. Social_scr Envir_scr HR_scr Corrup_scr NFD_scoreU NFD_scoreE 2009 0.215 0.264 0.192 0.660 0.277 0.333 2010 0.232 0.272 0.195 0.702 0.291 0.350 2011 0.250 0.290 0.233 0.765 0.316 0.384 2012 0.255 0.303 0.261 0.790 0.330 0.403 2013 0.249 0.290 0.250 0.782 0.320 0.393 2014 0.260 0.281 0.266 0.794 0.323 0.400 2015 0.261 0.288 0.265 0.813 0.327 0.407 2016 0.271 0.302 0.264 0.824 0.338 0.415 2017 0.296 0.318 0.294 0.827 0.358 0.434 2018 0.324 0.334 0.316 0.841 0.378 0.454 2019 0.330 0.334 0.324 0.876 0.383 0.465 See Appendix 2 for deﬁnition of variables. equations 1-3. In the ﬁrst three columns we use NFD_scoreU, and in the last column we use NFD_scoreE. Model 1 (M1) shows a positive and signiﬁcant coeﬃcient for Post_2014. Thus, there is a signiﬁcant increase in the level of NFD after the announcement of the directive. M2 reports a signiﬁcant increase in NFD after the implementation of the direc- tive, providing evidence that further supports H1. M3 allows us to compare the level of increase in NFD of the transition period with the increase that occurs after implemen- tation. The results indicate that, although both the transition and implementation periods have signiﬁcant and positive coeﬃcients, the coeﬃcient of Implementation is higher (p-value = 0.000). This suggests that although the increase in NFD started immediately after the announcement of the EU’s Directive, this increase accelerated after the directive was implemented. When we consider the results for NFD_scoreE we ﬁnd consistent results (last column). We also ﬁnd that our four proxies for the quality of NFD (Assurance, CSR_report, CSR_committee, and GRI) are signiﬁcantly and positively associated with the level of the NFD scores (in all models), indicating that ﬁrms that provide a higher number of dis- closures also disclose better quality information. Panel B of Table 3 reports a similar analysis of the four sub-scores. We ﬁnd that while all sub-scores increased signiﬁcantly during the implementation period, only the anti- 14 M. AL-DOSARI ET AL. Table 2. Panel D - Pairwise Correlations. Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (1) NFD_scoreU 1.000 (2) NFD_scoreE 0.899* 1.000 (3) Post_2014 0.117* 0.117* 1.000 (4) Implementation 0.118* 0.118* 0.502* 1.000 (5) Transit −0.007 −0.006 0.470* −0.258* 1.000 (6) Non_EUﬁrms −0.259* −0.257* 0.024 0.010 0.010 1.000 (7) EU_employee 0.250* 0.250* −0.037 −0.030 −0.002 −0.400* 1.000 (8) EU_ops 0.087* 0.087* −0.033 0.001 −0.031 −0.250* 0.070* 1.000 (9) Assurance 0.644* 0.643* −0.029 0.001 −0.018 −0.253* 0.260* 0.113* 1.000 (10) ROA 0.144* 0.144* −0.120* 0.029 −0.185* −0.001 0.026 0.027 0.124* 1.000 (11) CSR_comm 0.491* 0.490* 0.044 0.066* −0.018 −0.093* 0.109* 0.077* 0.396* 0.071* 1.000 (12) CSR_report 0.717* 0.716* 0.057* 0.059* −0.010 −0.275* 0.148* 0.124* 0.538* 0.156* 0.468* 1.000 (13) GRI 0.730* 0.730* 0.030 0.041 −0.005 −0.187* 0.161* 0.138* 0.636* 0.135* 0.455* 0.746* 1.000 (14) Lev 0.054* 0.054* 0.167* 0.046 0.120* 0.008 −0.023 −0.043 0.016 −0.131* −0.029 0.019 0.052* 1.000 (15) Size 0.628* 0.626* −0.102* −0.067* −0.035 −0.036 0.157* 0.019 0.483* 0.304* 0.398* 0.567* 0.517* 0.047 1.000 (16) UNGC 0.506* 0.505* −0.009 −0.018 0.008 −0.239* 0.220* 0.090* 0.514* 0.068* 0.259* 0.399* 0.513* 0.061* 0.396* 1.000 (17) OECD 0.365* 0.361* −0.017 0.009 −0.010 −0.326* 0.493* 0.079* 0.310* 0.032 0.165* 0.189* 0.221* 0.001 0.203* 0.313* 1.000 (18)NFI_Regulations 0.198* 0.197* 0.054* 0.030 0.025 −0.456* 0.091* 0.161* 0.265* 0.049* 0.120* 0.322* 0.257* −0.034 0.215* 0.285* 0.051* 1.000 0.308* −0.159* 0.629* 0.006 −0.007 −0.024 −0.025 −0.049* −0.009 −0.019 −0.023 0.077* −0.053* −0.004 −0.013 −0.011 1.000 (19) Paris −0.006 −0.005 * Statistical signiﬁcance at the 0.05 level. See Appendix 2 for deﬁnition of variables ACCOUNTING FORUM 15 Table 3. Panel A - The association of EU’s Directive with NFD scores. M1- NFD_scoreU M2 - NFD_scoreU M3 - NFD_scoreU M3 - NFD_scoreE Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Post_2014 0.072 0.000 *** Implementation 0.075 0.000 *** 0.077 0.000 *** 0.082 0.000 *** Transit 0.010 0.045 ** 0.017 0.001 *** Assurance 0.037 0.001 *** 0.031 0.010 *** 0.031 0.009 *** 0.039 0.005 *** ROA 0.000 0.956 0.000 0.059 * 0.000 0.095 * −0.000 0.379 CSR_committee 0.043 0.000 *** 0.041 0.000 *** 0.041 0.000 *** 0.034 0.003 *** CSR_report 0.063 0.000 *** 0.069 0.000 *** 0.069 0.000 *** 0.049 0.000 *** GRI 0.052 0.000 *** 0.054 0.000 *** 0.054 0.000 *** 0.049 0.005 *** Leverage 0.014 0.444 0.053 0.004 *** 0.049 0.009 *** 0.041 0.036 ** Size 0.024 0.000 *** 0.019 0.001 *** 0.019 0.001 *** 0.017 0.026 ** UNGC 0.012 0.479 0.024 0.188 0.023 0.205 0.047 0.055 * OECD 0.056 0.023 ** 0.046 0.050 * 0.047 0.050 ** 0.025 0.364 NFD_Regulations 0.006 0.796 0.036 0.095 * 0.033 0.120 0.061 0.027 ** Paris −0.022 0.000 *** 0.028 0.000 *** 0.021 0.000 *** 0.016 0.002 *** Constant −0.184 0.047 ** −0.109 0.222 −0.115 0.200 −0.005 0.970 Firm FE Included Included Included Included N 1,623 1,623 1,623 1,623 Adjusted R-squared 0.722 0.719 0.719 0.592 Prob>F 0.000 0.000 0.000 0.000 Mean VIF 1.610 1.590 1.760 1.670 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. 16 M. AL-DOSARI ET AL. Table 4. Non-EU ﬁrms. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EU ﬁrms −0.050 0.096 * −0.009 0.781 −0.066 0.053 * −0.083 0.039 ** −0.013 0.750 0.138 0.112 Implementation 0.046 0.000 *** 0.074 0.000 *** 0.033 0.064 * 0.021 0.230 0.110 0.001 *** 0.138 0.004 *** Transit 0.014 0.279 0.037 0.012 ** 0.012 0.505 −0.012 0.427 0.054 0.063 * 0.092 0.001 *** Transit*Non_EU ﬁrms −0.004 0.785 −0.021 0.184 −0.010 0.617 0.021 0.197 −0.045 0.137 −0.050 0.096 * Implementation*Non_EU ﬁrms 0.030 0.040 ** 0.004 0.799 0.049 0.017 ** 0.047 0.014 ** −0.039 0.284 −0.048 0.335 Assurance 0.039 0.001 *** 0.043 0.001 *** 0.041 0.023 ** 0.032 0.018 ** 0.074 0.006 *** 0.035 0.245 ROA 0.000 0.026 ** −0.000 0.194 0.000 0.063 * 0.000 0.042 ** 0.000 0.261 0.000 0.720 CSR_committee 0.045 0.000 *** 0.040 0.000 *** 0.053 0.000 *** 0.044 0.000 *** 0.054 0.013 ** 0.012 0.581 CSR_report 0.069 0.000 *** 0.049 0.000 *** 0.055 0.000 *** 0.104 0.000 *** 0.048 0.078 * −0.008 0.776 GRI 0.063 0.000 *** 0.057 0.001 *** 0.065 0.000 *** 0.069 0.000 *** 0.092 0.002 *** 0.014 0.728 Leverage 0.039 0.021 ** 0.037 0.045 ** 0.041 0.085 * 0.038 0.078 * 0.058 0.093 * −0.006 0.891 Size 0.026 0.000 *** 0.021 0.000 *** 0.016 0.000 *** 0.038 0.000 *** 0.024 0.000 *** 0.008 0.487 UNGC 0.032 0.036 ** 0.051 0.017 ** 0.015 0.515 0.018 0.257 0.112 0.010 ** 0.075 0.054 * OECD 0.067 0.001 *** 0.047 0.059 * 0.101 0.002 *** 0.072 0.001 *** 0.059 0.268 −0.023 0.726 NFD_Regulations 0.010 0.585 0.022 0.389 0.000 0.998 −0.005 0.807 0.106 0.000 *** −0.020 0.811 Paris 0.021 0.000 *** 0.015 0.004 *** 0.022 0.001 *** 0.028 0.000 *** 0.009 0.419 0.004 0.645 Constant −0.202 0.002 *** −0.075 0.329 −0.078 0.262 −0.407 0.000 *** −0.313 0.001 *** 0.474 0.020 ** N 1,623 1,623 1,623 1,623 1,623 1,623 Adjusted R-squared 0.726 0.598 0.518 0.710 0.586 0.108 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 3.360 3.360 3.360 3.360 3.360 3.360 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 17 corruption sub-score increased signiﬁcantly during the transition period. Thus, the increases documented in Panel A are not present in all the NFD topics. Next, we test H2 to assess whether non-EU ﬁrms’ NFD is positively associated with the introduction of the directive. Given that we analyse the impact of a ﬁrm’s location, the results in Table 4 are from random eﬀects models. We ﬁnd an overall negative association between NFD_scoreU and non-EU ﬁrms, suggesting that the overall NFD of non-EU ﬁrms are lower. This result is consistent with previous studies that assert that EU ﬁrms are leaders in NFD and is robust to controlling for increases in the transition and implementation periods. However, when we use the score that attributes equal weights to our sub-scores, we do not ﬁnd evidence of this negative association. More importantly, the coeﬃcient estimated for Implementation*Non_EU ﬁrms is positive for NFD_scoreU, indicating that non-EU ﬁrms signiﬁcantly increased their overall disclosure levels during the implementation period. In the case of NFD_scoreE we ﬁnd no evidence of such an association, which reveals the level of disclosure did not increase consistently across the four sub-scores. In fact, the results from the sub-scores reveal only two of the four sub-scores (social and environmental) of non-EU ﬁrms increased during the implementation period. These results support our second hypoth- esis and the view that mimetic isomorphism and competitive forces are associated with NFD. Graph 1 complements this analysis by providing a time trend plot of our NFD scores, and sub-scores, for both EU and non-EU ﬁrms. The ﬁrst impression from the graph is that the disclosure of EU ﬁrms was signiﬁcantly higher, by an almost constant value, from 2009 to 2014. However, this diﬀerence decreased after that year – for the overall scores, as well as for the social and environmental sub-scores. Our third hypothesis has two subparts, assessing whether the importance of EU employees or operations inﬂuences the NFD level of non-EU ﬁrms. For these tests, we use only the subsample of observations from non-EU ﬁrms and estimate ﬁrm-ﬁxed eﬀects models. Panel A of Table 5 reports a signiﬁcant and positive estimated coeﬃcient for EU_employee, in the case of NFD_scoreU, suggesting that non-EU ﬁrms have a higher level of NFD when they have more employees in the EU, and supporting H3a. However, the results of equal weighted score do not provide evidence of such an association, once again indicating an unbalanced importance of the sub-scores. In fact, the only sub-score where this association exists is in the social sub-score. We also ﬁnd that the estimated coeﬃcient for Implementation*EU_employee is signiﬁcantly positive for both our NFD scores, indicating that non-EU ﬁrms with more employees have higher NFD during the implementation period. The results for the sub-scores reveal that this increase is caused by environmental and HR disclosures. Panel B of Table 5 presents our results, focusing on the EU operations of non-EU ﬁrms. Overall, we ﬁnd no support for H3b. In fact, in the case of NFD_scoreE, the esti- mated coeﬃcient is signiﬁcantly negative. However, the estimated coeﬃcient for Imple- mentation*EU_ops is signiﬁcantly positive for both NFD_scoreU and NFD_scoreE, indicating that non-EU ﬁrms with more operations have higher NFD during the implementation period. The results for the sub-scores reveal that this increase of disclos- ures during implementation is found in social, environmental, and human rights disclosures. 18 M. AL-DOSARI ET AL. Graph 1. NFD score, and its sub-scores, by ﬁscal year. Note: the values of the y-axis represent the score, times 100. ACCOUNTING FORUM 19 Graph 1 Continued 5.3. Robustness checks While we believe our main scores are good measures of NFD, we now test an alternative way of measuring NFD, using the log of the odds ratio, based on the work of Abdullah 20 M. AL-DOSARI ET AL. Table 5. Panel A - EU employees. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig EU_employee 0.004 0.028 ** 0.003 0.190 0.006 0.015 ** 0.005 0.230 0.008 0.273 −0.007 0.205 Implementation 0.080 0.000 *** 0.081 0.000 *** 0.088 0.000 *** 0.074 0.000 *** 0.076 0.000 *** 0.087 0.000 *** Transit 0.007 0.166 0.013 0.018 ** 0.002 0.759 0.005 0.499 0.009 0.428 0.037 0.001 *** Transit*EU_employee −0.009 0.702 −0.013 0.347 −0.004 0.774 −0.008 0.878 −0.019 0.298 −0.024 0.145 Implementation*EU_employee 0.051 0.081 * 0.037 0.096 * 0.035 0.446 0.067 0.050 * 0.160 0.007 *** −0.113 0.051 * Assurance 0.033 0.016 ** 0.040 0.008 *** 0.035 0.091 * 0.018 0.247 0.086 0.006 *** 0.023 0.426 ROA 0.000 0.117 −0.000 0.516 0.000 0.160 0.000 0.084 * 0.000 0.614 0.000 0.536 CSR_committee 0.042 0.000 *** 0.038 0.001 *** 0.043 0.021 ** 0.047 0.001 *** 0.043 0.092 * 0.017 0.394 CSR_report 0.062 0.000 *** 0.045 0.002 *** 0.044 0.007 *** 0.095 0.000 *** 0.041 0.143 0.002 0.954 GRI 0.058 0.001 *** 0.048 0.010 *** 0.063 0.000 *** 0.065 0.003 *** 0.064 0.057 * −0.001 0.979 Leverage 0.059 0.002 *** 0.054 0.005 *** 0.056 0.050 ** 0.063 0.010 ** 0.087 0.028 ** 0.009 0.832 Size 0.018 0.002 *** 0.016 0.040 ** 0.016 0.060 * 0.023 0.000 *** 0.015 0.075 * 0.012 0.628 UNGC 0.033 0.131 0.050 0.100 0.011 0.743 0.027 0.149 0.047 0.465 0.116 0.029 ** OECD 0.040 0.072 * 0.014 0.641 0.045 0.252 0.067 0.006 *** 0.082 0.227 −0.123 0.080 * NFD_Regulations 0.035 0.137 0.069 0.027 ** 0.013 0.778 −0.001 0.983 0.175 0.000 *** 0.087 0.416 Paris 0.023 0.000 *** 0.016 0.006 *** 0.022 0.002 *** 0.032 0.000 *** 0.007 0.607 0.004 0.672 Constant −0.114 0.201 0.003 0.982 −0.123 0.332 −0.240 0.016 ** −0.180 0.171 0.550 0.141 Firm FE Included Included Included Included Included Included N 1,390 1,390 1,390 1,390 1,390 1,390 Adjusted R-squared 0.735 0.592 0.500 0.738 0.581 0.163 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 1.640 1.650 1.640 1.640 1.640 1.640 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 21 Table 5. Panel B - EU operations. NFD_scoreU NFD_scoreE Social Environmental HR Anti-corruption Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig EU_ops −0.010 0.591 −0.000 0.027 ** 0.001 0.965 0.002 0.923 −0.002 0.956 −0.116 0.082 * Implementation 0.076 0.000 *** 0.077 0.000 *** 0.082 0.000 *** 0.073 0.000 *** 0.071 0.000 *** 0.083 0.000 *** Transit 0.005 0.358 0.011 0.054 * 0.000 0.993 0.002 0.754 0.008 0.469 0.035 0.002 *** Transit* EU_ops 0.037 0.145 0.022 0.241 0.045 0.244 0.051 0.230 0.007 0.741 −0.017 0.505 Implementation* EU_ops 0.086 0.001 *** 0.080 0.048 ** 0.160 0.003 *** 0.043 0.076 * 0.173 0.038 ** −0.008 0.927 Assurance 0.033 0.013 ** 0.039 0.010 *** 0.033 0.110 0.019 0.209 0.084 0.006 *** 0.025 0.397 ROA 0.000 0.106 −0.000 0.516 0.000 0.135 0.000 0.081 * 0.000 0.617 0.000 0.540 CSR_committee 0.044 0.000 *** 0.038 0.001 *** 0.045 0.012 ** 0.048 0.001 *** 0.044 0.086 * 0.019 0.362 CSR_report 0.062 0.000 *** 0.045 0.002 *** 0.046 0.004 *** 0.095 0.000 *** 0.041 0.140 0.002 0.935 GRI 0.057 0.001 *** 0.049 0.006 *** 0.061 0.000 *** 0.064 0.004 *** 0.064 0.058 * −0.001 0.972 Leverage 0.059 0.002 *** 0.054 0.005 *** 0.057 0.044 ** 0.063 0.013 ** 0.092 0.022 ** 0.007 0.860 Size 0.018 0.002 *** 0.016 0.039 ** 0.016 0.057 * 0.023 0.000 *** 0.015 0.073 * 0.012 0.616 UNGC 0.033 0.140 0.048 0.120 0.009 0.774 0.026 0.161 0.046 0.475 0.118 0.025 ** OECD 0.043 0.029 ** 0.010 0.719 0.055 0.085 * 0.066 0.018 ** 0.091 0.148 −0.127 0.076 * NFD_Regulations 0.030 0.172 0.050 0.096 * 0.007 0.864 −0.003 0.926 0.169 0.000 *** 0.069 0.516 Paris 0.023 0.000 *** 0.017 0.004 *** 0.022 0.002 *** 0.032 0.000 *** 0.006 0.626 0.005 0.593 Constant −0.117 0.196 0.005 0.969 −0.126 0.320 −0.244 0.016 ** −0.183 0.166 0.552 0.142 Firm FE Included Included *** Included Included Included N 1,390 1,390 1,390 1,390 1,390 1,390 Adjusted R-squared 0.737 0.592 0.503 0.738 0.583 0.164 Prob > chi2 0.000 0.000 0.000 0.000 0.000 0.000 Mean VIF 1.660 1.630 1.660 1.660 1.660 1.660 22 M. AL-DOSARI ET AL. Table 6. PSM sample – NFD_scoreU. H1 H2 H3a H3b Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EUﬁrm −0.061 0.224 EU_employee 0.004 0.000 *** EU_ops 0.111 0.002 *** Implementation 0.087 0.000 *** 0.065 0.000 *** 0.067 0.000 *** 0.125 0.000 *** Transit −0.001 0.961 0.009 0.399 −0.007 0.384 −0.020 0.402 Transit*Non_EU ﬁrms −0.010 0.677 Implementation*Non_EUﬁrms 0.055 0.085 * Transit* EU_employee 0.008 0.303 Implementation* EU_employee −0.008 0.817 Transit* EU_ops 0.074 0.114 Implementation* EU_ops 0.016 0.666 Firm-level controls Included Included Included Included Firm FE Included - Included Included N 262 262 131 131 Adjusted R-squared 0.446 0.477 0.599 0.657 Prob > chi2 0.000 0.000 0.000 0.000 Mean VIF 1.600 1.920 1.600 2.070 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. ACCOUNTING FORUM 23 Table 7. The association of EU’s Directive with CSR activities. H1 H2 H3a H3b Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Coef. p-value Sig Non_EUﬁrms −4.683 0.137 EU_employee 0.340 0.158 EU_ops −2.511 −7.894 Implementation 3.879 0.000 *** 2.428 0.133 3.878 0.000 *** 3.756 2.395 *** Transit 1.814 0.001 *** 2.768 0.098 * 1.605 0.004 *** 1.612 0.481 *** Transit*Non_EU ﬁrms −1.100 0.530 Implementation*Non_EUﬁrms 0.859 0.633 Transit*EU_employee 1.784 0.654 Implementation*EU_employee 6.143 0.003 *** Transit* EU_ops −0.539 0.761 Implementation* EU_ops 3.398 0.467 Firm-level controls Included Included Included Included Firm FE Included - Included Included N 1,623 1,623 1,390 1,390 Adjusted R-squared 0.799 0.807 0.767 0.770 Prob > chi2 0.000 0.000 0.000 0.000 Mean VIF 1.750 2.990 1.700 1.750 *** p<.01, ** p<.05, * p<.1. See Appendix 2 for deﬁnition of variables. 24 M. AL-DOSARI ET AL. et al. (2015). We call these new variables Log_UW and Log_EW. The untabulated results for testing H1 indicate that, in both cases, the coeﬃcients estimated for Transit and Implementation are positive and statistically signiﬁcant, as in our main results. The unta- bulated results for testing H2 with these two alternative scores are also consistent with the results reported in Table 4, as the coeﬃcient of Implementation*Non_EU ﬁrms is signiﬁ- cantly positive, but only when considering the unweighted score variable (Log_UW). The untabulated results for testing H3a are consistent for both Log variables, and indicate that EU_employee is positively and statistically associated with the dependent variables, and that association is lower during the transition period (as the coeﬃcients for the inter- action variables with Transit are negative, but with lower values than that of EU_Em- ployee, and the interaction variables with Implementation are not statistically signiﬁcant). These results support our hypothesis and are consistent with our main ones. Finally, the untabulated results for H3b are also consistent with the main results, as they show that the positive association between the level of EU operations and NFD is only present after the implementation of the EU directive. We now use propensity score matching (PMS) to create a balanced matched sample (Shipman et al., 2017), using all control variables included in the previous equations (except OCED, UNGC and NFD regulations, as they only apply to a few ﬁrms). Accord- ingly, each EU ﬁrm (treatment group) in our sample has been matched to the non-EU ﬁrm (control group) using the period prior to the EU’s Directive, without replacement. Table 6 presents the results of the analysis, using NFD_scoreU: (i) a signiﬁcant increase in NFD during the implementation period (H1), (ii) an increase in the NFD of non-EU ﬁrms during the implementation period (H2), (iii) that the NFD of non-EU ﬁrms with more EU employees is higher overall (H3a), and (iv) that ﬁrms with more EU operations have higher NFD, but only during implementation (H3b – partial support). It can be argued that disclosure is closely associated with performance. Thus, we con- sider ﬁrms’ social and environmental activities, measured by Asset4, as the dependent variable, as in Fiechter et al. (2022). Table 7 presents the results. As in Table 3, the coeﬃ- cients of Transit and Implementation are positive and statistically signiﬁcant. However, the results of the tests of the other hypotheses are diﬀerent from our main results, as non-EU ﬁrms have a similar level of CSR performance to the EU ﬁrms, and the level of employees or operations in the EU do not seem to be associated with CSR perform- ance. These results suggest the impact of the directive was only on disclosure. Finally, we focus on the countries of our sample. First, we run our initial model with country ﬁxed eﬀects. Although several country indicator variables are signiﬁcant, the untabulated results, when using NFD_ScoreU, indicate that the coeﬃcient of Implemen- tation is positive and statistically signiﬁcant, reinforcing our belief that the EU’s Directive had an impact on NFD. Second, we consider that some countries are policy leaders and, thus, may have implemented the directive sooner than others. Using the results of Knill et al. (2012), who identify the EU countries that were leaders in environmental policy making in 2000, we create an indicator variable (Leader) coded as one when a ﬁrm is in one of the countries classiﬁed as “top leader” or “leader”. We then interact this variable with Transit and Implementation and run a model that extends the results in Table 3. The untabulated results indicate that none of the interaction coeﬃcients is statistically signiﬁ- cant. Therefore, from the point of view of our study, country-level policy leadership is not relevant. ACCOUNTING FORUM 25 6. Conclusions In this study, we focus on the oil and gas industry because of its substantial contribution to the global economy and sizeable impact on the environment and society. We examine the NFD levels exhibited, employing a well-established neo-institutionalist approach and exploring the isomorphic processes associated with the publication and implementation of the EU’s Directive 2014/95/EU. For our analyses, we construct scores based on key elements of the EU’s directive. The results indicate that NFD increases immediately fol- lowing the publication of the directive and that a more marked increase occurs after the Directive’s implementation. Moreover, there is a spillover from the EU’s Directive, resulting in the NFD of non-EU ﬁrms increasing signiﬁcantly after the EU’s directive is implemented. Finally, both the level of EU employees and the extent of EU operations of non-EU ﬁrms are positively associated with the level of NFD of ﬁrms in the oil and gas industry, during the implementation phase of the EU’s Directive. Our study has limitations. First, there may be a lack of external generalised validity, given that this research is based only on oil and gas ﬁrms. Therefore, future research should inves- tigate whether these results can be generalised to diﬀerent industries. Second, we do not assess whether NFD have an impact on the actions of socially responsible institutional investors, which would provide evidence about the usefulness of these disclosures. This is an avenue for future research. Third, the current design assumes that the data we collect from the Asset4 database correctly reﬂects ﬁrms’ disclosures, which may not be true in some cases. Lastly, we do not cover the period of the covid pandemic. Future studies could examine whether the level of NFD changes during this unusual period. We contend that our study is valuable and useful to a range of stakeholders: ﬁrms in the oil and gas industry, businesses in other sectors, investors and industry analysts, and public policymakers and regulators. Crucially, our data reveal evidence of isomorphism, indicating that the EU’s Directive aﬀects both ﬁrms directly targeted by the legislation and others who are not legally subject to the law. Our results should alert EU public pol- icymakers to the likely impact of preparing and enacting NFD legislation, both of which act as catalysts for altered business behaviour, among organisations located and operat- ing within the EU as well as those outside the EU. We recommend that further research provides deeper insights into how EU policy- makers shape regulations on NFD. The EU’s Corporate Sustainability Reporting Direc- tive, which amends the directive we study, continues to address the four areas we examine, instead of merely focusing on climate change (as, for example, the International Sustainability Board). Given that it will be applicable to a much larger number of com- panies than the directive we study, it is important to continue to examine the eﬀects of the current EU’s directive and to consider the eﬀects of new standards issued by relevant international institutions, such as the GRI. Thus, future studies must assess how ﬁrms manage these two external forces (directives and standards), and whether the resulting disclosures are informative, eﬀective or useful to a range of stakeholders. Acknowledgements We would like to thank Ricardo Malagueno, Fabio Motoki, Francesca Cuomo, and Diogenis Baboukardos for their useful comments, and the participants of the 1st Workshop on sustainability 26 M. AL-DOSARI ET AL. reporting (Essex, 2021), the BAFA 2021 doctoral masterclass, the 2021 AAA International Accounting Section Midyear, the Eighth International Conference of the JIAR (2021), and the 2022 AAA Annual Meeting. We also would like to thank the two anonymous reviewers for their constructive and helpful comments. Disclosure statement No potential conﬂict of interest was reported by the author(s). 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Reduction reduce its impact on the native ecosystems and species, as well as the biodiversity of protected and sensitive areas? 2 Land Environmental ENRRDP061 Does the company report on initiatives to reduce the environmental Impact Reduction impact on land owned, leased, or managed for production activities or extractive use? 3 Environmental ENERDP095 Does the company report on making proactive environmental Investments Initiatives investments or expenditures to reduce future risks or increase future opportunities? The use of renewable and/or non-renewable energy 4 Total Renewable Energy ENRRDP060 Does the company report on total primary renewable energy purchased and produced in gigajoules? 5 Renewable Energy ENRRDP0452 Does the company report on total energy produced from primary Produced renewable energy sources in gigajoules? 6 Renewable Energy ENRRDP0451 Does the company report on total primary renewable energy purchased Purchased in gigajoules? Greenhouse gas emissions 7 NOx and Sox emission ENERDP033 Does the company report on initiatives to reduce, reuse, recycle, reduction substitute, or phase out SOx (sulfur oxides) or NOx (nitrogen oxides) emissions? 8 Green Buildings ENRRDP052 Does the company report about environmentally friendly or green sites or oﬃces? Water use 9 Water Pollutant ENERDP058 Does the company report on total weight of water pollutant emissions in Emissions tonnes? 10 Water Recycled ENRRDP056 Does the company report on amount of water recycled or reused in cubic meters? 11 Water Withdrawal Total ENRRDP054 Does the company report on total water withdrawal in cubic meters? Air pollution 12 CO2 Equivalent ENERDP023 Does the company report about total Carbon dioxide (CO2) and CO2 Emissions Total equivalents emission in tonnes? Disclosure 13 Emissions Trading ENERDP068 Does the company report on its participation in any emissions trading initiative? Waste management (e.g. recycling rates). 14 Waste Reduction ENERDP062 Does the company report on initiatives to recycle, reduce, reuse, Initiatives substitute, treat or phase out total waste? Sub-score 14 Social Gender equality 1 Executive Members CGBSO19 Does the company report on the percentage of female executive Gender Diversity members? (Continued) ACCOUNTING FORUM 31 Appendix 1. Continued. Dimensions Directive 2014/95/EU No Variables Code Dummy variable Implementation of fundamental conventions of the 2 Fundamental Human SOHRDP012 Does the company claim to comply with the fundamental human rights International Labour Organisation Rights ILO UN convention of the ILO or support the UN declaration of human rights? Working conditions 3 Flexible Working Hours SODODP026 Does the company claim to provide ﬂexible working hours or working hours that promote a work-life balance? 4 Training Hours Total SOTDDP019 Does the company report on total training hours performed by all employees? Respect for the right of workers to be informed and 5 Employee Satisfaction ECPEDP039 Does the company report on the percentage of employee satisfaction as consulted reported by the company? Respect for trade union rights, health and safety at 6 Employee Health & SOHSDP009 Does the company report about the total hours of employee training on work Safety Training health & safety policies and procedures? 7 Supply Chain Health & SOHSDP0183 Does the company show through the use of surveys or measurements Safety Improvements that it is improving the level of employee health & safety in its supply chain? The dialogue with local communities, and/or the 8 Voluntary Turnover of SOEQDP038 Does the company report on the percentage of employee voluntary actions taken to ensure the protection and the Employees turnover? development of those communities. Gender diversity and other aspects of diversity; 9 Board Gender Diversity CGBSO03V Does the company report the percentage of females on the board? Average hours of training per year per employee, by 10 Average Training Hours SOTDDP018 Does the company report on average hours of training per year per gender; employee? Sub-score 10 Human rights Include information on the prevention of human rights 1 Human Rights SOHRDP026 Does the company report or show to use human rights criteria in the abuses and/or on instruments in place to ﬁght Contractor selection or monitoring process of its suppliers or sourcing partners? corruption and bribery. Operations and suppliers at signiﬁcant risk of human 2 Human Rights Breaches SOHRDP029 Does the company report or show to be ready to end a partnership with rights violations; Contractor a sourcing partner if human rights criteria are not met? Respect for freedom of association; 3 Policy Freedom of SOHRDP0101 Does the company describe, claim to have or mention the processes in Association place to ensure the freedom of association of its employees? Engagement with relevant stakeholders: 4 Stakeholder CGVSDP023 Does the company explain how it engages with its stakeholders? Engagement Sub-score 4 Anti-corruption Anti-corruption policies, procedures, and standards; 1 Policy Business Ethics SOCODP0069 Is the company under the spotlight of the media because of a and bribery controversy linked to bribery and corruption, political contributions, improper lobbying, money laundering, parallel imports, or any tax fraud? 2 Policy Bribery corruption SOCODP0067 Does the company describe in the code of conduct that it strives to avoid bribery and corruption at all its operations? The number of pending or completed legal actions on 3 Policy Fair Competition SOCODP0066 Does the company describe in the code of conduct that it strives to be a anti-competitive behaviour. fair competitor? Sub-score 3 Total score 31 32 M. AL-DOSARI ET AL. Appendix 2. List of variables Expected Variable Measurement impact NFD_scoreU Measures the level of NFD score, without attributing equal weights to the sub-scores. NFD_scoreE Measures the level of NFD score, attributing equal weights to the sub-scores. Post_2014 Dummy variable coded one for the ﬁscal years 2015, 2016, 2017, 2018 and 2019, and + zero otherwise. Implementation Dummy variable coded one for the ﬁscal years 2017, 2018 and 2019, and zero otherwise. + Transit Dummy variable coded one for the ﬁscal years 2015, and 2016, and zero otherwise. + Non_EU ﬁrms Dummy variable coded one when the ﬁrm’s headquarter is in non-European Union - countries, and zero otherwise. EU_employee A logarithm of the total number of employees from European Union countries. + EU_ops A percentage of the total revenues generated from European Union countries. + EU_ﬁrms Dummy variable coded one when the ﬁrm’s headquarter is in European Union countries, + and zero otherwise. Size Firms’ size, measured as the log of total assets + ROA Return on assets, measured as earnings before extraordinary items divided by total + assets, at the end of the ﬁscal year. Leverage Leverage, measured as total debt / total assets. + Assurance Dummy variable coded one when sustainability report is assured, and zero otherwise. + CSR_committee Dummy variable coded one when the ﬁrm has a CSR committee or team, and zero + otherwise. CSR_report Dummy variable coded one when the ﬁrm publishes a separate CSR/ health and safety + (H&S)/Sustainability report or publish a section in its annual report on CSR/health and safety (H&S)/Sustainability, and zero otherwise. GRI Dummy variable coded one if the ﬁrm’s CSR report published in accordance with the GRI + guidelines, and zero otherwise. UNGC Dummy variable coded one if the ﬁrm signed the UN Global Compact, and zero + otherwise. OECD Dummy variable coded one if the ﬁrm claims to follow the OECD Guidelines for + Multinational Enterprises, and zero otherwise. NFD_Regulations Dummy variable coded one if the ﬁrm is in a country that has any mandatory non- + ﬁnancial information disclosure regulation. Paris Dummy variable coded one if the ﬁrm is in a country that signed and applied Paris + climate agreement, and zero otherwise. Penalty Dummy variable coded one if the ﬁrm is liable to a penalty for non-compliance with the + EU Directivity and zero otherwise.

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Accounting Forum – Taylor & Francis

Published: Apr 3, 2023

Keywords: Directive 2014/95/EU; corporate social responsibility; sustainability reporting; ESG

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The effect of the EU’s directive on non-financial disclosures of the oil and gas industry

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