Abstract
Firms frequently provide voluntary environmental, social, and governance (ESG) reports. Our study focuses on the effect of ESG disclosures on investment decisions. We compare the influence of disclosures containing only forward-looking ESG targets with those containing both targets and progress made toward those targets. Specifically, using responsible sourcing issues in chocolate production as a setting, we conduct a survey experiment to examine whether nonprofessional investors assign value to disclosures of ESG progress toward targets, relative to “target-only” disclosures. Based upon our analysis, although ESG disclosures lead participants in both groups to increase their investment allocation on average, we do not find evidence of a significant incremental effect of ESG progress reporting. As progress metrics are expected to enhance a disclosure’s relevance and representational faithfulness, our study draws attention to challenges in nonprofessional investors’ use of ESG disclosure information in their capital allocation choices. Our study also provides insight into how nonprofessional investors, who make up an increasing share of US equity trading activity, perceive ESG disclosures.
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Notes
For ease of exposition, we interchangeably use several closely related terms, i.e., environmental, social, and governance (ESG) reports, Corporate Social Responsibility (CSR) reports, and Sustainability reports—to refer to reports focused on firms’ “non-financial” activities (Ioannou and Serafeim 2017, Christensen et al. 2021). More specifically, ESG reporting refers to “the measurement, disclosure, and communication of information about [ESG]-related topics, including [ESG] activities, risks and policies (Christensen et al. 2021, p. 1182).
In a response letter to the IFRS Foundation’s consultation paper on sustainability reporting, CPA Canada (2020, p. 2) notes: “Regulatory environments do not always support the disclosure of forward-looking information and assurance of such information may be more challenging. Nevertheless, we think meeting the needs of users requires the reporting of forward-looking sustainability information such as plans to meet net zero and other targets”.
The ISSB Exposure Draft lays out the qualitative fundamental and enhancing characteristics that make information useful as outlined in the International Accounting Standards Board (IASB) Conceptual Framework for Financial Reporting (ISSB 2022).
There is an interrelationship between the predictive and confirmatory value of ESG information because information that has predictive value is more likely to have confirmatory value. As an example, the ISSB notes that “information for the current year about carbon emissions, which can be used as the basis for predicting such emissions in future years, can also be compared with predictions about carbon emissions for the current year that were made in past years. The results of those comparisons can help a user to correct and improve the processes that were used to make those previous predictions” (ISSB 2022, p. 44).
Martin (2019) conducts a review of 121 experimental studies on investor perceptions and concludes that “processing firm information is difficult, and there are many aspects to reporting that can help or hinder investors’ efforts to acquire, evaluate, and weight firm information” (p. 145).
These findings suggest that investors may not explicitly evaluate firms’ CSR disclosures. Guiral et al. (2020), however, find this to be the case only for reports of immaterial CSR activities, i.e., activities that are not integrated into a firm’s core business.
See Martin (2019) for a discussion of the effect of precision on disclosure credibility.
Mondelēz International’s brands include, among others, Cadbury, Oreo, Milka, and Toblerone.
The use of human subjects for our survey experiment was approved by the Institutional Review Board at the college.
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Acknowledgements
We thank Timothy Coville (editor), two anonymous reviewers, Andrea Peláez Martínez, Saghar Samimy, and seminar participants at Manhattan College for their helpful comments and suggestions. We also thank a group of former Manhattan College students who agreed to participate in our pilot survey and offer feedback. Amanda Sanseverino and Kelly Cwik gratefully acknowledge financial support from the Stephen G. Thieke ’69 Student Research Fellowship in Economics and Finance and The O’Malley School of Business.
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Sanseverino, A., González-Ramírez, J. & Cwik, K. Do ESG progress disclosures influence investment decisions?. Int J Discl Gov 21, 107–126 (2024). https://doi.org/10.1057/s41310-023-00198-0
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DOI: https://doi.org/10.1057/s41310-023-00198-0
Keywords
- Corporate social responsibility
- Environmental, social, and governance issues
- Investment decision-making
- Investor perceptions
- Sustainability
- Voluntary disclosures