By Yang Yang, Guido Orzes, Fu Jia, & Lujie Chen

Over the last decade, sustainability reporting has become mainstream, with an increasing number of firms moving toward monitoring the impact of their activities on the social and natural environments. According to a survey by KPMG (2020), 80 percent of companies worldwide now report on sustainability. In addition to responding to the pressures from emerging laws and regulations, reporting firms are more likely to be prepared for the growing risks from climate change, human and material resource shortages, and supply chain disruptions. In a volatile and uncertain world, it is more essential than ever before for risk managers to have the expertise to assess the multiple sustainability risks facing businesses.

Among the different standards for sustainability reporting, the Global Reporting Initiative (GRI) guidelines have become one of the most widely adopted. These guidelines help firms determine what to report and how to report the information in sustainability reporting and provide a unified standard for sustainability reporting, allowing for the comparison of information between various firms. GRI sustainability reporting could help to partially address the issue of “selective reporting” used by some firms for greenwashing, in which firms reveal a subset of private information to create a misleadingly positive public impression.

In recent years, under the mounting pressure from Chinese governments and society, there has been a considerable growth in Chinese firms implementing and reporting their socially responsible behaviors. However, the number of Chinese firms that adopt GRI still remains low. We believe that one of the reasons may be related to the unclear economic benefits of GRI in China.

Consequently, we conducted a study exploring the link between the adoption of GRI guidelines in sustainability reporting and a firm’s financial performance. The study was on 122 firms in China and compared GRI-reporting firms with non GRI-reporting firms by controlling for industry type, firm size, and preadoption performance. We compared changes in return on assets (ROA) of each sampled firm with those of a portfolio of control firms.

We found that there is a significant improvement in ROA due to the adoption of GRI guidelines. Moreover, the performance improvement is significantly correlated with firms’ ties with the local government, but not with firms’ ties with the central government. Interestingly, firms with a higher level of internationalization appear to benefit less from the adoption of GRI guidelines. Due to the fierce competition and difficulties of gaining legitimacy in the global market, many firms in the international markets have already reported GRI sustainability – so as to shift from “implicit” to more “explicit” CSR. In such a context, recent Chinese adoptees of GRI sustainability reporting do not obtain significant competitive advantages.

Based on the results, we offer several suggestions. First, the choice of the adoption of the GRI in sustainability reporting is a firm’s strategic investment that transfers positive and green signals to outside stakeholders, reduces information asymmetry, and builds a close connection with diverse stakeholders to gain their support. Managers can expect that the adoption will lead to increased financial performance in the long run. In China, governments and stakeholders are paying an increasing amount of attention to severe environmental and social issues; thus, it is a good time now for firms to take actions on sustainability-related practices and structure their sustainability reporting well by using the new GRI standards. Second, the contingent nature of the relationship between GRI adoption and financial performance may provide an important insight for practitioners and firms in identifying and exploiting their motivational advantages. For example, firms can try to establish good relationship with local governments so as to get more support from them.

Reference:

Yang, Y., Orzes, G., Jia, F., & Chen, L. 2021. Does GRI Sustainability Reporting Pay Off? An Empirical Investigation of Publicly Listed Firms in China. Business & Society, 60(7): 1738-1772.