Does Audit Improve the Quality of ESG Scores? Evidence from Corporate Misconduct

Abstract

One of the main controversial aspects of sustainability metrics relies on the accuracy, transparency, and reliability of the information at the basis of environmental, social and governance (ESG) scores. This paper investigates whether firms that have their ESG reporting audited by independent firms exhibit a higher quality of ESG scores. We performed an analysis investigating the change in ESG scores following the unveiling of a corporate misconduct. We documented that, overall, no significant ESG score adjustment occurs after the scandal becomes public, thus, implying that rating agencies provide an accurate interpretation of the firm’s sustainability. However, our results differed when we distinguished between audited and unaudited reports. Firms whose reports are audited by third parties did not exhibit significant changes in their scores after a scandal, whereas for companies whose reports are not audited, we detected a worsening of the ESG scores that are statistically significant. Our findings were also confirmed in a multivariate analysis. Overall, our results suggest that the reliability of ESG scores can benefit from the auditing of sustainability reporting by third parties, which has an assurance effect on the quality of the company’s ESG information.

Does ESG Affect the Stability of Dividend Policies in Europe?

“…These ratings objectively measure a firm's relative ESG performance and are available on over 7000 publicly listed firms (more than 2900 in North America and 1200 in Europe), with data going back at least to 2002 for smaller firms [46]. The ESG score is a commonly used measure of corporate sustainability in academic empirical research (e.g., [47][48][49][50]), although several other measures are available and used in academic research [51].…”

Global Drivers for ESG Performance: The Body of Knowledge

“…There are many individual research contributions revealing ESG performance is influenced by a variety of aspects. For example, ESG outcomes are influenced by firm size [17], auditing [18], strategy choices [19], board composition [20], stock exchange innovation [21], investors [22,23] and whether the company belongs to an industry which is more sensitive to ESG issues [24]. However, the collection of findings is disorganised and does not easily lead to coherent insights on how to achieve better ESG results.…”

The sustainable development of transport enterprises in the context of macroeconomic conditions. The case of Central and Eastern European countries

“…2). What is more, researchers often link this concept with terms of: "corporate sustainability," "sustainability-driven entrepreneurship," or "sustainable-minded entrepreneurship" (Majid et al 2012;Gagnon 2012;Del Giudice et al 2020). According to the International Institute for Sustainable Development, it "means adopting business strategies and activities that meet the needs of the enterprise and its stakeholders today while protecting, sustaining and enhancing the human and natural resources that will be needed in the future."…”