Beyond NFRD Compliance: Does Social Tone Boost Corporate Social Performance?

Purpose: This study investigates whether and to what extent the social disclosure tone used in sustainability reports, herein ‘social tone’, is associated with enhanced corporate social performance (CSP) pre- and post- the entrance into force of the EU Non-Financial Reporting Directive 95/2014 (NFRD). Design/methodology/approach: Using a sample of sustainability reports available for the constituent firms of the Italian FTSE-All Index, we employ a textual analysis approach (i.e., Natural Language Processing [NLP]) to quantify the use of social tone in corporate sustainability reports and assess its relationship with CSP. Findings: Encompassing 329 firm-year observations from 2012 to 2021, we find that social tone is positively associated with CSP, thus demonstrating the strategic role played by the sustainability reporting narrative in impacting firms’ social performance. However, social tone is negatively associated with CSP in the period post-NFRD, suggesting a regulatory ceiling effect. Originality/value: This study underscores the dual importance of regulatory frameworks and narrative disclosure in shaping CSP, offering significant implications for policymakers and firms aiming to leverage corporate sustainability practices effectively. Practical implications: These results imply that while regulatory mandates elevate baseline CSP, the distinct contribution of social tone becomes less impactful under mandatory regulatory conditions when there is a lack of specific disclosure requirements.