The Driving Factors and Economic Impacts of Environmental, Social, and Governance (ESG) Reports Assurance

Abstract

With the adoption of the Paris Agreement at the 21st United Nations Climate Conference in 2015, the disclosure of Environmental, Social, and Governance (ESG) information has garnered unprecedented attention. Due to the increasing demand for ESG information from various stakeholders, the volume of ESG reports provided by enterprises has been expanding rapidly. However, in the absence of standardized reporting protocols, corporate managers possess significant discretion in ESG disclosure, leading to issues such as "greenwashing" in some enterprises. Against this backdrop, this study examines the external safeguard mechanism designed to mitigate the arbitrariness of ESG information — ESG report assurance, characterized by both direct and information spillover effects. Firstly, as a mechanism intended to enhance the trust of prospective users, ESG report assurance ensures the comparability and accuracy of ESG information, thereby stimulating positive stakeholder feedback. Secondly, ESG report assurance exerts a spillover effect on the financial information domain; it bridges the gap in assurance analysis of ESG elements within financial information, thereby enhancing the transparency of the overall corporate information system. This study aims to investigate the drivers behind ESG report assurance and its economic implications.

Most existing literature on ESG report assurance employs voluntary ESG disclosure setting as the research design. However, sample bias inherent in such voluntary disclosure setting obscures the true impact of ESG report assurance, thereby hindering accurate assessment. Against the backdrop of mandatory ESG report disclosure in the Hong Kong, China market, this research theorizes the driving mechanisms and economic utility of ESG report assurance, empirically testing these using a sample of listed companies in the Hong Kong, China market from 2016 to 2022. The findings indicate that peer effects and stakeholder demand for ESG information are primary drivers for firms adopting ESG report assurance. Secondly, ESG report assurance enhances the credibility of corporate ESG information and reduces the frequency of restatements; ISO 14001 certification serves as the specific mechanism for enhancing credibility. The impact of ESG report assurance on the credibility of ESG information varies across firms, with more pronounced effects in those with weak ESG governance, higher ESG risk, and inadequate disclosure guidelines. Furthermore, compared to accounting firms, professional ESG assurance organization excel in promoting the credibility of ESG information and preventing "greenwashing." Thirdly, ESG report assurance enhances the financial audit quality through information spillover effects; information exchange through audit committee and environmental accounting information serve as the specific mechanism for realizing the spillover effect. The positive relationship between ESG report assurance and financial audit quality is more pronounced in firms with weak ESG governance, high ESG risk, and inadequate reporting standards. Moreover, information spillovers are significantly enhanced when accounting firms provide joint ESG report assurance and financial report auditing services, compared to professional ESG assurance organization, albeit with increased audit fees. Fourthly, ESG report assurance positively impacts corporate valuation and stakeholders responses; while it does not enhance short-term corporate value, it significantly shapes long-term corporate value. Additionally, ESG report assurance positively influences social recognition, investor relations, and market evaluation.

Compared to existing literature, this paper makes innovative contributions in three key areas: Firstly, this study deeply analyzes the drivers behind corporate adoption of ESG report assurance and explores the positive impact of these mechanisms on enhancing ESG information credibility. By focusing on ESG report assurance, this study fills gaps in ESG governance research regarding its drivers and effects, expands the theoretical boundaries of ESG regulation, and proposes that ESG report assurance, as an emerging governance mechanism, offers a unique perspective for deepening ESG regulation and methodological innovation. Simultaneously, this study emphasizes the core role of external assurance in curbing corporate "greenwashing," providing valuable guidelines and references for academic research and practical application in the ESG field.

Secondly, this study injects new vitality and insight into the academic field concerning the interaction between non-financial and financial factors, highlighting the synergistic effect between ESG report assurance and financial report auditing. By exploring their intrinsic connection, this study reveals that the synergistic effect of ESG report assurance and financial report auditing is key to enhancing corporate external governance effectiveness. An in-depth discussion of their correlation is crucial for understanding the interaction mechanism between non-financial and financial factors, providing solid theoretical and practical support for sustainable enterprise development and capital market stabilization.

Third, this study seeks to extend and consolidate the existing academic framework concerning assurance service providers for ESG reporting. Academics have identified a lack of uniformity in findings when exploring ESG reporting assurance service provider selection strategies. This study finds that, although accounting firms maintain a foothold in the market due to their auditing expertise, professional ESG assurance providers possess more substantial professional advantages in the ESG domain. By systematically analyzing the core competencies of various ESG report assurance service providers, this study develops a structured and practical decision support system to assist companies in making informed decisions within the complex ESG report assurance service selection environment.

In addition to these theoretical contributions, this study also presents practical implications. This study deepens the understanding of the determinants and far-reaching consequences of ESG report assurance adoption by enterprises, emphasizes its importance in enhancing capital market transparency and investor protection, and provides innovative concepts for constructing an efficient and comprehensive regulatory system. Additionally, by analyzing in-depth ESG report assurance practices in the Hong Kong market, this study provides valuable references for implementing a mandatory ESG report framework in China's A-share market. This study clarifies that ESG report assurance, as a core green promotion mechanism, provides a strong empirical foundation and theoretical support for the concept of new quality productivity.

Date of Award	12 Dec 2024
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Yangxin YU (Supervisor), Xiangang XIN (Supervisor) & Gaoliang Tian (External Co-Supervisor)