Separate versus integrated financial and sustainability reports : the effects of presentation format on the cognitive effort of investors

Abstract

This study determines whether the three presentation format dimensions of Integrated Reporting (IR), namely placement, labelling, and linkage, reduce the cognitive effort required by non-professional investors in making investment decisions. IR is intended to simplify the process for investors who need to form a clear and integrated view of a firm’s value creation ability. People prefer to put in as little cognitive effort (in terms of time and attention) as possible. The time spent can be measured directly in minutes and seconds, but how much attention is paid cannot be observed directly. However, attention can be observed using eye-tracking technology. Therefore, using an independent 2 × 2 × 2 between-subjects eye-tracking experiment, this study investigates whether the IR strategies of presenting financial and climate-related information in one single report, labelling information as financially material, and linking information reduces the cognitive effort put in by non-professional investors. The evidence shows that all three format dimensions contribute to some extent to a reduction of the cognitive effort that investors must expend to make an investment decision. Placement is the main driver in decreasing the total amount of time that investors spend on reaching a decision. Labelling has a significant effect on reducing search effort and increasing visual attention to financially material information. Labelling is particularly relevant when financial and sustainability information are presented in separate reports or are not linked. The study contributes to the academic literature on presentation format in the context of sustainability information. The results may be of interest to standard setters such as the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG), because they enhance understanding of how presentation format can aid investment decision-making.