University of Newcastle: Non-Financial Information Consequences Report

This report, prepared for a Financial Accounting course at the University of Newcastle, investigates the economic consequences of non-financial information. It begins by defining non-financial information, encompassing environmental, social, and governance (ESG) factors, and explores its nature and significance. The report then analyzes the ways non-financial information is reported, including voluntary and integrated reporting frameworks, such as GRI standards and UNPRI initiatives, and discusses their implications. A key focus is the economic consequences of non-financial disclosure, including its impact on cost of capital, analyst forecast accuracy, and firm valuation. The report highlights the relationship between high-quality non-financial disclosure and improved financial outcomes, emphasizing the role of CSR reporting, and concludes by summarizing the importance of non-financial data in promoting sustainable business growth and transparency, referencing relevant research articles.

Financial Accounting: Economic Consequences of Nonfinancial Information
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Introduction
There has been increasing emphasis placed on improving the business reporting by
incorporating detailed non-financial information in addition with the financial information to
protect the interests of the end-users. The major problem that is being faced by the business
regulators is developing a framework for non-financial reporting as per the level of IFRS or
USGAAP. This is essential to improve the quality of non-financial information reporting. This
report has been prepared in this regard for providing a discussion regarding the nature of non-
financial information and its economic consequences. This is followed by analysis of the ways in
which non-financial information should be reported and discussing its consequences. Lastly, the
overall findings derived from the report are restated within the conclusion section.
Part 1: Nature of non-financial information and economic consequences
Nature of non-financial information
Non financial information refers to the information which impacts the company
performance but it cannot be measured in numbers. Non-financial information requires
disclosure of environmental, social and governance information. It means non-financial
information is about information which has significant impact on variety of areas related with
environment, human rights, social and health of community in which company operates(Girella,
2018).
As per Global Reporting Initiative (GRI), companies all over the world are required to
provide non-financial information in form of reports or any other means. According to GRI, non-
financial information includes reporting on corporate social responsibility reporting/performance
(CSR), social reporting or performance, environmental, social and governance (ESG) reporting,
reporting on environmental performance, and lastly reporting on green banking (Aras, 2016).
Corporate social responsibility means company is socially accountable to stakeholders,
community and itself for the activities it performs in the within social context. CSR disclosures
require company to provide information on all its activities that are related with performance of
company itself, stakeholders and community in which company operates. Environment refers to
place within which company performs its activities and due to the impact of activities of
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company there is adverse effect to the nature or environment. So it is responsibility of the
company to provide information on impact it had caused to the environment such as emission of
greenhouse gases and other adverse impact to the nature (Malecki, 2018). Also, it is essential to
disclose what steps has been taken by the company to protect the environment and what success
has been achieved in protecting the environment. Social performance means reporting on actions
taken by company to protect the human rights and to take all such measures to ensure the safety
of human being. Welfare of human capital and stakeholder’s satisfaction must be the top priority
of any company and it must disclose all such information under the social performance report.
Corporate governance is very important non-financial information as it requires disclosure on
rules, practices and processes implemented by the board of directors and company management
to ensure accountability, transparency, and fairness in all the process company undertake to
provide services to the stakeholder’. So it can be said that non-financial information is both
internal in form of corporate governance and external is form of environment disclosure (Girella,
2018).
Nature of economic consequences
Economic consequences refer to the impact on the financial performance of the company
due to the quality of non-financial disclosure. There is direct relationship between quality of non
financial disclosure, and capital market & debt market impact of such disclosure. For example, if
poor non-financial disclosure has been made than it is certain that analyst will take very less
interest in analyzing the company performance and shareholder’s will not able to assess the
company market performance (Huang & Watson, 2015). On the other hand, if company makes
efforts and provide sufficient non financial information, it will help analyst to report on the
performance of the company in detail which in turn make investors to invest in such companies
as compared to companies that provide very less non financial information. Nature of economic
consequences is related with impact of disclosure of non-financial disclosures on the equity
capital and debt market where company seeks to obtain the funds for optimizing the capital
requirements (Gao, Dong, Ni & Fu, 2016).
Part 2: Discussion of Ways of Reporting of Non-Financial Information
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There has been rising interest level of stakeholders in environmental, social and
economic performance of a business entity. This is because this type of information is required
by stakeholders to gain an insight into the sustainability risks present within an entity that can
negatively impact its long-term growth and development. The non-financial information is
mainly the sustainability information that is required by business to be reported for increasing
transparency within their operations and improving tear accountability to the stakeholders. Such
type of disclosures ensures that businesses are carrying out their responsibilities in an ethical
manner and also that they are undertaking appropriate measures for improving their social and
environmental performance (Debnath, 2013).
The businesses are presently undertaking reporting of non-financial information on
voluntary basis in the absence of development of any mandatory reporting framework for
disclosure of such type of information. There have been increasing publishing of such type of
information within business reports recently for meeting the varying needs and expectations of
the stakeholders. There has been development of other initiatives in addition to voluntary
reporting to reporting the non-financial information. There have been development and
establishment of integrated reporting framework that has directed business entities to develop a
single integrated report for disclosing both financial and non-financial information. This type of
reporting framework has been mandated to be followed by business entities of South Africa. The
Johannesburg Stock Exchange (JSE) has mandated the listed companies to replace their annual
reports or sustainability reports with providing integrated reports(Eccles, & Serafeim, 2011).
In addition to this, there has been development of sustainability initiative of United
Nations Principles for Responsible Investment (UNPRI). This framework also intends to
improve the ways of reporting economic, social and governance (ESG) performance by
improving the collaboration between investors, regulators and companies to report such
information. The stock exchanges of various countries across the world such as Brazil, Chain,
India, Malaysia, and Indonesia have directed their business entities to comply with ESG rules.
There also has been increasing emphasis placed by the global investors for embedding the
sustainability reporting into the listing rules of stock exchanges. This would mandate the
business entities to place importance on providing information related to their sustainability
performance. This is required to protect the interests of investors by ensuring that business are
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adopting the use of sustainability initiatives in their long-term strategic planning and thus are
associated with significant less operational and strategic risks (Huang & Watson, 2015).
In this context, there has also been devolvement of GRI (Global Reporting Initiatives)
standards that are recognized as the first and widely accepted global standards for development
and presentation of sustainability reports. This reporting framework has been used by businesses
largely all over the world to idnetfy the type of sustainability information that is required to be
presented for meeting the varying needs and expectations of the stakeholders. However, it is also
a voluntary reporting framework that has been developed to be used by various business entities
for disclosure of their environmental and social performance. The GRI reporting standards has
however not able to match the financial reporting standards such as IFRS and is largely followed
by only few countries. Thus, it can be said on the basis of discussing the various reporting
frameworks that there still exist needs for developing a reporting framework that can mandate
the sustainability reporting within the business entities across the world (Brown, Jong &
Lessidrenska, 2009).
Part 3: Discussion of Economic Consequences of nonfinancial information reporting
The major goal of providing disclosure regarding the sustainability performance by an
entity is to improve transparency within the business operations and facilitating better decision-
making of investors. The disclosure of non-financial information has an impact on the firm value
as it influences the cost of capital. It has been stated within this context that the quality of non-
financial information disclosure results in reducing the cost of equity capital or a firm. This is
because detailed disclosure of non-financial information results in providing better information
to the investors and this reduces the betas of firms and significantly cost of equity capital
(Dhaliwal, Li, Tsang and Yang, 2011). The greater disclosure of nonsocial and environmental
performance would help in minimizing the information asymmetry among investors and results
in improved flow of financial resources for the firm. This helps in promoting the business growth
and expansions and thereby enhancing the value created for stakeholders. It also helps them to
seek the support of government by effectively complying with the sustainability regulations
developed by the government and thus reducing the compliance costs. The less risk related with
the business operations have a positive impact on increasing the stock price of the firms and thus
maximizing the value created for the shareholders and thereby also helpful in reducing the
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agency cost (Kim & Li, 2014). This in turns increases the attractiveness of the firm in the mind
of the institutional shareholders by legitimizing its business operations in their mind. This in turn
has a large impact on increasing the stock liquidity of the firms by gaining more funds and
investment form the institutional shareholders (Ghoul, Guedhami, Kwok & Mishra, 2011).
It has also been argued in this context that CSR reporting by business firms helps in
reducing the cost of borrowing by banks. Banks register improved CSR disclosures as having
less risk related to a business entity growth and performance and therefore it helps in reducing
the cost of debt on the bank loans. The reduction of the agency risks with less sustainability risks
is helpful for business firm to easily assess the loans and thus promoting their long-term growth
and expansions (Feng, Wang & Huang, 2015). The banks are placing large emphasis on the CSR
concerns related with a business performance at the time of developing the loan contract terms.
The reduction in the cost of capital has a direct impact on improving the earning performance of
a firm. Therefore, a higher level of CSR disclosure results in improving the price to earnings
ratio. Thus, it can be said that non-financial information disclosed by a business entity has a
significant impact on both the cost of equity and debt to a large extent (Gao, Dong, Ni & Fu,
2016).
The financial analysts in the capital market can accurately identify the business reports
providing higher quality of sustainability information in comparison to those who are providing
less information about their sustainability performance. The financial analysts perceived such
business firms to be associated with higher level of risks which can negatively impacting their
stock returns and thus investor gains. The negative perception related to the future cash flows of
a firm providing less significant information about its sustainability performance generally
results in influencing the flow of financial resources (Cahan, Villiers, Jeter, 2016). The restricted
availability of capital thus can impact its value in the long-term by decreasing the profits realized
and increase in the cost of capital. Thus, it can be said that implementation of a systematic
process of reporting of non-financial information would result in improving the earning forecast
accuracy by the financial analysts. However, the area still requires future research to be carried
out in the context regarding the type of non-financial information that should be provided within
the sustainability reports which can lead in analyzing its earning potential (Bose, Podder &
Biswas, 2017).
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Conclusion
The overall discussion held has identified the importance of providing disclosure
regarding non-financial data by a business firm to promote its sustainability growth and
development. The non-financial information that includes development of CSR, ESG and
integrated reports are essential to maintain transparency within the business operations. There
has also been development of various voluntary reporting initiatives for guiding the businesses to
report their non-financial data. As discussed above, it includes development of GRI or integrated
reporting system frameworks. However, there still need to develop a mandatory set of
international standards that can be adopted by all business entities as per the level of IFRS. Also,
the economic consequences of the non-financial information reporting include reducing the cost
of equity and debt by reducing the informational asymmetry and thus reducing the risk perceived
by investors. This helps in improving the stock liquidity and gaining access to better sources of
finance and thus improving the firm value in long-term.
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