1. Introduction
With the climate and environmental changes that have occurred in recent decades, the issue of sustainability and sustainable development has gained increasing attention from individuals, companies, government institutions, and international organizations, highlighting the importance that corporate social responsibility (CSR) should have and the role of businesses in promoting social and environmental well-being.
This increased attention has encouraged the disclosure of non-financial reporting by companies [
1]. In fact, a good CSR disclosure can improve returns, create new market opportunities, reduce risks, and improve the company’s reputation, promoting customer–company identification [
2,
3]. Non-financial reporting also promotes comparability among companies and economies, due to increased transparency and reliability, contributing to the rationale for decision making and for differentiation based on social concerns [
4,
5].
However, there are companies where these reports are nothing more than statements of policies and intentions, without real substance, and where no environmental and social data are presented. According to [
2], these reports are not expected to prevail over time. The trend of reporting non-financial information is increasing and likely to continue [
2,
6], and companies seek to improve their environmental performance and disclosure to gain a competitive advantage [
7]. Even if there are no direct benefits from disclosure, there may be disadvantages to not doing so [
8]. There are different frameworks that guide the production of these reports, such as the European Directive 2014/95/EU, the Global Reporting Initiative (GRI) standards for sustainability reporting, and the IIRC guidelines for integrated reporting. The GRI standards provide clear indications on how to identify and prioritize relevant issues through stakeholder engagement [
9]. Since 2014, and due to the European Directive 2014/95/EU, non-financial disclosure is mandatory for large companies and public interest entities, but still voluntary for any company not covered by the Directive.
Corporate sustainability requires companies to orient their social, environmental, and economic responsibilities in accordance with their stakeholders [
10]. Thus, the stakeholder engagement process is essential for the quality of the materiality analysis process [
1], which consists of determining the relevance and importance of an issue, both for the company and for its stakeholders, prioritizing these issues [
11], and promoting the disclosure of the most relevant ones [
9]. Thus, stakeholder engagement becomes crucial in sustainability reporting [
1,
12].
This study we analyze whether there is a better application of the materiality principle when the involvement of stakeholders in the materiality analysis process is in the form of direct involvement through participatory activities, and when GRI and/or IIRC standards are fully adopted.
A sample of 31 companies from the paper industry, operating in Portugal and Spain, which disclosed a CSR report in the period between 2015 and 2020 were analyzed, resulting in a set of 133 company-year observations. The choice of this activity sector relates to the environmental challenges it faces, being considered one of the most polluting sectors in the world [
5,
13,
14]. For this reason, companies tend to focus more attention on the disclosure of non-financial information.
The paper industry has a strong environmental impact, being considered one of the most polluting industries in the world, as it is the industry responsible for the fourth largest greenhouse and carbon emissions worldwide. In addition, the paper industry has been considered a major consumer of natural resources, specifically wood, water, and energy such as fossil fuels and electricity [
14]. As a result, water and energy use, as well as waste creation, is becoming an increasingly important concern [
15]. This industry has a crucial role in global sustainable development because of the raw material basis and increasing internationalization.
The paper industry, together with others such as oil, gas, chemicals, mining and steel, are identified as sensitive industrial sectors due to their high socio-environmental impacts [
5,
13]. Previous research has shown differences in the level of sustainability disclosure between companies belonging to these sensitive sectors compared with companies from non-sensitive industries. Companies within the first group tend to disclose non-financial reports mostly on a voluntary basis, but in a proactive way, presenting better CSR disclosure [
5] and more environmental data [
13] when compared with companies that operate in the second group.
However, companies belonging to sensitive sectors tend to apply the principle of materiality in a less complete and careful way, since they are familiar with the issues considered problematic due to society and stakeholders’ pressure for information on these topics [
1]. Additionally, these companies tend to show lower levels of financial performance [
13].
Therefore, this study contributes to a sector-specific analysis of one industry that is frequently under-represented.
This study contributes to the literature on stakeholder engagement in materiality analysis in several ways. First, it provides current evidence on the influence of stakeholders on the application of the materiality principle. Second, it provides a better understanding of the influence of legislation on reporting practices. Thirdly, it discusses the topic of social responsibility in countries such Portugal and Spain, not so commonly addressed in previous literature, particularly concerning the adoption of sustainability frameworks in the recent years and the quality of non-financial reporting. Finally, it adds value through the extension of the existing literature, addressing the lack of studies on how exactly stakeholders take part of the materiality analysis process. Although the importance of meeting stakeholders’ expectations is well known, the way this process is accomplished, the activities developed to collect stakeholders’ opinion and the impact of these activities in raising material issues, have not yet been the subject of research [
1].
In short, this study develops existing literature by extending the knowledge on the materiality theme and providing insights into companies’ stakeholder engagement processes in times when non-financial reporting is moving from a voluntary to a legislative perspective.
Regarding practical implications, this study contributes helping managers use different instruments of action when interacting with stakeholders, improving the way managers handle stakeholders’ needs, expectations, and demands.
This study is divided into five sections. In the second section, we present the literature review, where the theoretical framework for the principles of materiality, stakeholders’ inclusion, CSR practices, and sustainability reporting in the paper sector is provided. The third section describes the methodology used, and the fourth section explores the analysis of the results. Finally, in the last section, the main conclusions, research limitations, and suggestions for future research are presented.
3. Methodology
3.1. Sample and Data Collection
The sample under analysis was made up of companies belonging to the forestry and paper industry and operating in the Iberian Peninsula that published at least one CSR report between 2015 and 2020. The Sustainability Disclosure database of the GRI and Bureau Van Dijk’s Orbis were used to select the sample. Data collection was conducted until September 2021.
In the first phase, 49 organizations were identified through the Sustainability Disclosure database. In the second stage, through Bureau Van Dijk’s Orbis, 2681 companies from the paper sector (NACE Rev. 2 primary code) operating in Portugal and Spain were identified. From these companies, only 33 were listed in both databases. However, two companies were excluded due to being in liquidation, culminating in the final sample of 31 companies and a set of 133 company-year observations. Data collection was carried out through a content analysis of the GRI and/or IIRC reports. The process of reading the non-financial reports and further analyses for the engagement section of the reports was all done manually.
Content analysis is a method based on categorizing and coding textual information into different groups or categories based on selected criteria [
36]. This method is widely used, being the dominant research method in CSR, having already proven its effectiveness in discovering patterns in non-financial reporting [
36]. In addition to the content analysis of the CSR reports, contact was established with some companies to request some missing information.
Similarly, to the studies from [
1,
37] we investigated the relationship between stakeholder engagement process and the application level of the materiality principle in non-financial reports and we followed these authors in choosing not to use any qualitative analysis software for text analysis purposes. The main reason for this choice arises from the absence of mandatory terms or expressions, nor any structured layout for the non-financial reports, despite existing frameworks. Thus, we chose to manually explore all the information regarding materiality, followed guidelines for stakeholder engagement, and chose not to use specific keywords or phrases.
3.2. Model
We developed our models based on previous research in order to highlight the importance of applying IIRC/GRI standards and stakeholder engagement in the reporting process, particularly in materiality analysis, to achieve a high level of materiality application and a good reporting quality for stakeholders [
1]:
As a dependent variable, materiality relevance (Quality) was included. This variable measures the quality of the report through the level of application of the materiality principle. It is an ordinal categorical variable, composed of six categories, which rank companies’ concern regarding materiality analysis, comprising the degree of breadth and depth of its implementation. The categories are as follows: “1” if there is no reference to materiality; “2” if the report only states that materiality principle was followed; “3” if the report includes a brief discussion of the topics considered material; “4” if the report includes, in addition to the discussion of the material topics, the material issues emerging from the analysis; “5” if the report describes the process and results in greater detail; and “6” if the report devotes significant attention to materiality. These 6 categories allowed us to see how far the company has progressed in applying the materiality principle and what types of processes have been implemented. Data were collected through a careful reading of the companies’ reports, with particular attention to the methodological note, the chapter on materiality analysis, and the materiality matrix.
As variables of interest, IIRC directives (IIRC), GRI guidelines (GRI) and stakeholders’ engagement (StakeEng) were considered, in models (1), (2) and (3), respectively; in order to test Hypotheses 1 and 2 Regarding the variable IIRC, the guidelines proposed by the International Integrated Reporting Council are related to Integrate Reporting and establish the structure and principles to be followed in case of a single report. It is an ordinal categorical variable that classifies the level of application of the IIRC reporting principles and their publication into 4 categories, being: “1” if there is no reference to the IR and IIRC; “2” if there is a statement expressing the aim to produce, soon, a first Integrate Reporting and/or there is a partial application of the IIRC principles; “3” if there is simultaneously an IR and a traditional set of IFRS; and “4” if the report is integrated and prepared according to the IIRC principles. Data were collected by analyzing the paragraph on methodology at the beginning or end of the report.
Regarding the GRI variable, companies that follow GRI guidelines have higher quality levels in their reports [
38], and we found it pertinent to include this ordinal categorical variable. Thus, after analyzing the paragraph on methodology at the beginning or end of the report, it was possible to classify the variable into three categories: “1” if there is no declaration of the level applied; “2” if it uses the option “compliance” in Version 4 and “essential” in Version 5; and “3” if it uses the option “comprehensive” in both Versions 4 and 5. “Version 4” should be considered the GRI G4 standards and “Version 5” should be considered the GRI Standards adopted in 2016.
Furthermore, the StakeEng variable is an ordinal categorical variable that aims to assess the extent and type of events/actions that promote stakeholders’ engagement in the materiality analysis process. Therefore, in view of the analysis of the reports, namely regarding the processes of materiality analysis and stakeholder relations, the variable can be classified into the following 3 categories: “1” if it is stated that there has been no involvement or if there are no statements on the subject; “2” if there was an indirect or partial involvement through remote activities, such as questionnaires, interviews, surveys, complaints or suggestions; and “3” if there was broader involvement through direct activities, involving participation, such as focus groups and events or meetings intended for this purpose. Following prior studies [
1], we considered all the variables of interest together in model (4) in order to increase the robustness of our results.
In terms of control variables, return on assets (ROA), size (Size), experience in voluntary disclosure (Exper), report review (Rev), indebtedness (Lev), and whether the company is listed (Public) were considered. We also controlled for the effects of different characteristics at the country and year level.
ROA, being a traditional measure of profitability, was obtained by dividing pre-tax income by total assets. Size is the logarithm of total assets. Lev represents the level of leverage, meaning the company’s debt or default risk, and it was obtained by dividing total debt by total assets. Public is a dummy variable that assumes value “1” if the company is listed and “0” otherwise. All these variables were calculated based on data from Orbis by Bureau Van Dijk.
Exper is a dummy variable that takes the value “1” if there is some previous experience in publishing sustainability reports and “0” in case there is no such experience. Data were collected by analyzing the introduction of the reports or through companies’ websites.
Rev indicates whether there has been a review of the report by a certified entity, so it is a dummy variable that assumes the value “1” if the report has been assured by a third party and “0” otherwise. The data were obtained from the analysis of the reports, where the auditors’ report is attached, which indicates whether the assurance is present or not.
In order to test the study hypotheses, model (1) was estimated, considering each variable of interest in isolation.
5. Conclusions
This study analyzes the level of application of the materiality principle for companies operating in the Iberian Peninsula, belonging to the paper industry and disclosing a CSR report in at least one of the years in the period between 2015 and 2020. To address this topic, we tested the relationship between the quality of the adoption of the materiality principle in CSR reporting, and the application of both the GRI and IIRC standards and the inclusion principle.
The results obtained confirm an increase in non-financial reporting in this activity sector during the period under study, previously suggested by [
30]. One of the main reasons for this increase may be linked with the adoption of the European Directive 2014/95/EU which made the disclosure of non-financial information mandatory for large companies and public interest entities [
7].
It is also confirmed that this commitment towards CSR disclosure is greater in Spain than in Portugal, with the difference in observations from these two countries being notable, which was also previously pointed out by [
30]. Nevertheless, Portuguese companies in the forestry and paper industry tend to engage with their stakeholders in a more direct and participative way, resulting in higher levels of quality in non-financial disclosure when compared with Spain.
This analysis showed that a high level of implementation of international guidelines leads to a higher level of application of the materiality principle, conferring greater quality to the analysis of material topics. In previous studies, there is a lack of consensus on this relationship. While some authors, such as [
1,
2] argued that international guidelines have a strong relationship with the quality of disclosures, others such as [
24] contradicted this by claiming that the most controversial themes end up not being reflected. Thus, this study confirms the arguments pointed out by [
1,
2].
It was also concluded that most companies engage in a broad and participative way with different stakeholders, and in this way these companies enhance the application of the materiality principle, resulting in higher-quality disclosure. This result is in line with the existing literature which claims that a correct understanding of stakeholders’ needs is fundamental to increasing the quality and credibility of disclosures [
1,
3]. However, the participatory means of involvement with stakeholders are rare as a form of critical accounting that creates opportunities for stakeholders to express their opinion. Thus, although in most cases within the forestry and paper industry stakeholders appear to provide opinions and feedback in a direct way, it is possible that in some companies they are not directly empowered by being appointed to boards or commissions.
Furthermore, [
1] claimed that large companies adopt more structured reporting, contrasting with the informal reporting of SMEs, where external stakeholders are not always heard. This study contradicts these arguments, concluding that smaller companies are more diligent in applying the materiality principle. We also obtained evidence that companies with a higher return on assets and a higher risk of default have higher levels of application of the materiality principle.
The main limitation of this study concerns the size and the composition of the sample used, since it consists of a small number of observations that do not allow for generalization, especially because it illustrates one single sector. In addition, the selection of countries included in the sample may affect the results due to the intrinsic characteristics of the countries in a peripheral region of the EU, which may not fully reflect the reality of this industry.
For future research, we suggest extending the sample in different ways. On one hand, it would be interesting to include all of the main European companies or test a different geographical area, to allow for generalization or to better explore differences between European regions. Based on authors such as [
16], the perception of CSR may vary according to variables such as historical events, political systems, ideologies, geography, social expectations, the global economy, and financial pressures. It would also be interesting to enlarge the sample to other activity sectors to test the robustness of the results. Finally, it would be interesting to extend the sample period, including years prior to the introduction of the standards, to properly analyze the differences in the reporting behavior for companies that started to disclose in a mandatory way.
Finally, we suggest that future research widens the study of stakeholders’ engagement, focusing on the type of engagement events/actions for each group of stakeholders separately since many companies listen only to their employees, despite doing so in a direct and participatory way.