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The impact of non-financial reporting regulations on ESG management systems: the case of Directive 2014/95/EU

We examine the impact of Directive 2014/95/EU on firms’ environmental, social, and corporate governance (ESG) management systems. The exploration is carried out through the lens of contingency theory, which posits that firms adapt their management control systems to changes in contextual factors, such as those related to regulation. Furthermore, managers are likely to design controls that prove useful in increasing effectiveness and maximizing outputs. We use a mixed method approach to analyse our hypotheses: (i) quantitative evidence from archival panel data and (ii) qualitative evidence from a set of semi-structured interviews. Overall, our findings suggest that (i) the directive increases the adoption of ESG management systems and (ii) in a cascading effect, the environmental and governance pillars are the most impacted in terms of operational outputs. Our results enrich the discussion about the impact of non-financial reporting regulations on both ESG processes and operational outputs. In doing so, we attend to calls from prior literature to advance the understanding of firm adoption of management control systems associated with non-financial reporting initiatives.