A new study finds that companies are increasingly disclosing climate data – yet coverage of value chains and social factors remains patchy.
Using an AI-powered method, a team from LMU Munich and the University of Cologne has analyzed 2.9 million sustainability indicators from ten years of annual reports. They found that companies are increasingly disclosing information about their carbon performance. But when it comes to environmental impacts along the value chain and social indicators, the picture is more mixed.
During the study, which was recently published in the journal Nature Communications, the research team evaluated the annual and sustainability reports of the 600 largest listed companies in Europe – a total of around 9,000 PDF documents, numbering 1.7 million pages, for the years 2014 through 2023. This period predates the entry into force of the new EU Corporate Sustainability Reporting Directive (CSRD), and the reports were largely compiled under the preceding rules. The researchers retrospectively applied the considerably more detailed disclosure requirements of the new CSRD as an analysis grid to assess how transparently companies were already reporting on environmental, social, and governance (ESG) matters prior to the stricter reporting requirements.
To master the huge volumes of data involved, the team used a large language model (Llama-3.1-70B-Instruct), which automatically scanned the reports for 501 environmental, social, and governance (ESG) indicators. “Until now, researchers, investors, and supervisory authorities had to rely on a few costly commercial datasets, which use a plethora of different definitions,” says Thorsten Sellhorn, Professor of Accounting and Auditing at LMU. “Our approach makes it possible for the first time to systematically track, free of charge, what companies actually report – and where transparency gaps become visible according to today’s standards.”
Transparency gap is closing, but progress remains unevenly distributed
Over the period observed, companies made significantly more data publicly available. The assessment revealed an average increase of 52.4 percent in the number of disclosed indicators between 2014 and 2023. During this period, companies with poor sustainability performance – those with low ESG ratings – caught up markedly. While in 2014 they disclosed 39.4% fewer sustainability indicators than the top 10 percent of sustainability performers, this gap had narrowed to 6.8 percent by 2023. Sustainability performance and transparency are thus converging.
When it comes to the actual values, the report card is more ambivalent: Although direct emissions fell considerably, reported indirect emissions from the value chain grew more than fivefold. “This is primarily because many companies are now recording more indirect emissions categories than before – not necessarily because their emissions have increased,” explains co-author Victor Wagner, who recently completed his PhD at LMU and has taken up an assistant professorship in accounting at Stockholm School of Economics. “At first glance, greater transparency about emissions can seem like a rise in emissions, although emissions may actually be flat or declining. If 500 companies publish emissions data today, where only 100 did so in the past, then total emissions appear to increase even though the average CO2 emissions per company is falling.” If one is to make progress in sustainability, then one must properly distinguish between data availability and actual performance, cautions Wagner.
Meanwhile, the evaluation of social indicators reveals a mixed picture. While the proportion of women in top management roles has gone up by 9.2 percentage points, the gap between executive compensation and median employee wages has increased over twelvefold since 2014. “Companies have made significant progress on certain issues,” says Sellhorn. At the same time, other challenges remain or have even intensified. “Sustainability is therefore not developing equally across all social dimensions.”
Open access for policymakers, investors, and the public
The team is making its dataset and code publicly available as part of the Sustainability Reporting Navigator open science initiative. “Before now, sustainability data were often buried in long reports or only available from commercial providers at a price,” says Kerstin Forster, lead author of the study. “Our open-source approach now empowers supervisory authorities, investors, and NGOs to systematically compare companies and hold them to account.”