Impact of sustainability performance & reporting on a firm's reputation

Past literature and anecdotal evidence suggest that firms which have faced a ESG scandal have suffered reputation and financial loss. However, this also implies that the firm was manipulating the sustainability disclosure all along. In this paper, we attempt to study the influence sustainability reporting has on the relationship between sustainability performance and a firm's reputation. We study the impact of sustainability reporting on firm reputation through two contrasting and opposing effects. The first effect we study is the compliance mechanism based on the normative perspective where the firm complies with the norms and values of the related industry. Secondly we analyze the disclosure mechanism where the firm chooses what to disclose i.e., the firm manipulates its disclosure to maintain stakeholder interest or financial return. The disclosure mechanism is based on the signaling framework. We extensively study the sustainability reporting and sustainability performance of 56 Indian firms over a period of 5 years (2014-2021). We analyze how these firms respond to the compliance and disclosure effects in the short and long run and the subsequent impact of sustainability performance and sustainability reporting on firm reputation. Results demonstrate that sustainability reporting positively influences firm reputation in the longer run but not in the shorter run i.e., the compliance mechanism is effective only in the long run. We also find that the sustainability reporting has a positive moderating effect on the positive influence of sustainability performance on firm reputation in the shorter run only. In the long-run the sustainability report has no effect. This further proves that the disclosure mechanism is effective in the short run only. In the long run, the firm may be penalized for its poor performance. These results will help managers understand the strategic role sustainability reporting can play and how environmental and social reporting can be used to achieve higher legitimacy and reputation and hence maximize firm returns.