Non-financial information from Italian SMEs, trade-off between cost and stakeholder engagement

Environmental, social, and governance (ESG) disclosure has emerged as a crucial element of corporate reporting in recent years, gaining popularity among academics and practitioners. (Baldini et al., 2018; Ng & Rezaee, 2015). Since Verrecchia (1983), scholars have focused their attention on assessing the benefits and costs of ESG disclosure, attributing them primarily to agency theory (Jensen & Meckling, 1979) or stakeholder theory (Donaldson & Preston, 1995). Increasingly, sustainability is a critical success factor for companies around the world. In fact, stakeholders are increasingly interested in and attentive to the sustainability of the operations of the companies with which they have relationships. This, valid generally for all companies, was initially true only for large, often listed companies whose ratings are strongly influenced by the non-financial disclosures they are able to produce. The fundamental idea is that benefits often outweigh costs, which is largely supported by actual evidence: Performance is expected to improve for businesses that freely provide ESG data through company websites, annual reports, and/or CSR reports. (Surroca, Tribó, & Waddock, 2010). However, despite increased interest, the majority of these studies have focused on large corporations, leaving little research on the situation of small and medium-sized enterprises (SMEs) (Baumann-Pauly, Wickert, Spence, & Scherer, 2013). Non-financial information from Italian SMEs, trade-off between cost and stakeholder engagement Marco Ammaturo, Francesco Antonio Rusciani 2 TITOLO DEL VOLUME In December 2022, the EU Directive 2022/2464 (CSRD, Corporate Sustainability Reporting Directive) was published. The document will have to be prepared in accordance with the ESRS (European Sustainability Reporting Standards), currently being developed by EFRAG, and, for SMEs, by the appropriate sustainability reporting principles to be adopted by the European Commission by virtue of the reporting requirement for this category of companies as well. The application of the above principles and, therefore, the preparation of the sustainability report entails costs that small and medium-sized enterprises often do not consider worthwhile. Thus, in the trade-off between costs and sustainability enhancement, there is still a tendency to favor short-term savings. In fact, many companies give evidence of all ESG initiatives on their website or at trade shows and events, but do not find it convenient to do so through NFD, as they are not obligated to do so. The practical importance of closing this gap is clear. SME enterprises make up 90% of businesses globally and 99% of businesses in the EU, respectively (Bakos et al., 2020; Bartolacci et al., 2020); they differ greatly from large businesses in terms of structural, social, and functional aspects (Russo & Perrini, 2010). In fact, SMEs are far from being "small large enterprises" (Tilley, 2000) and their specific characteristics (De et al., 2020), such as easier management, are very different one from another. The disclosure of environmental, social, and governance (ESG) factors has grown in importance in corporate reporting. Despite the fact that small and medium-sized firms (SMEs) make up the majority of businesses in Italy, their efficacy has not received much attention. Indeed, the peculiarities of SMEs may influence the magnitude of the costs and benefits of voluntary ESG disclosure that agency and stakeholder theory suggest. Thus, while benefits tend to outweigh costs in large firms, SMEs experience the opposite, as they enjoy fewer benefits and incur greater costs. Unlike large firms, SMEs' extensive reliance on bank financing usually delegates monitoring to financial intermediaries (Diamond, 1984), thus making the limit on managerial discretion posed by Non-financial information from Italian SMEs, trade-off between.. 3 nonfinancial disclosure unnecessary, or rather ineffective (Bushman & Smith, 2001; Hope & Thomas, 2008). The objective of the research is to find evidence in the literature of the actual convenience for SMEs to report on corporate ESG performance and to provide evidence of stakeholder engagement and satisfaction. In fact, it is established in the literature that for large companies, nonfinancial reporting reflects positively on financial performance. The cost incurred in preparing nonfinancial disclosures, both in terms of direct and indirect costs, is largely absorbed by the volume of business of large companies, including unlisted ones. Since the costs of implementing and integrating an ESG performance monitoring and reporting system are predominantly fixed, the ratio of costs incurred to total revenues is far lower for SMEs than for large companies and groups that are able to absorb these fixed costs and benefit from them in terms of profitability. From the analysis of existing literature, there is empirical evidence that direct costs, such as those related to the preparation and dissemination of information (Ng & Rezaee, 2015; Prencipe, 2004), and indirect costs, related to the disclosure of confidential information to the outside world, are largely justified from the perspective of large firms. Limitations of ESG disclosure, are related to the use of classical financing channels for use by SMEs, in fact if companies have the costs but do not reap the benefits. In addition, the limited diversification of SMEs reduces the discretion of the preparer and increases the possibility that sensitive information containing clues to competitive advantage will be disclosed, increasing indirect costs (Torugsa et al., 2012). In fact, as information asymmetries are reduced, there is a greater likelihood of the release of proprietary information and an increased risk for SMEs of imitation by competitors