We provide the first large-sample evidence on third-party verification of firms’ environmental and social metrics in ESG reports (ESG assurance) in the United States. Focusing on the S&P 500 from 2010–2020, we document a striking increase in not only the number of firms with ESG assurance—in 2020 (2010), 76% (38%) of the S&P 500 had an ESG report and 46% (16%) involved assurance—but also the number of metrics assured. Unlike financial audits, ESG assurance varies widely in form and substance, including the choice of metrics assured, the level of assurance, and assuror identity. We show that firms’ decision to obtain ESG assurance is primarily driven by their adoption of ESG reporting frameworks and peer effects, with firm characteristics documented in prior literature playing only a minor role. Assurance is associated with improvements in ESG disclosure, ESG ratings, and the number of institutional investors holding the firm’s stock

Firms increasingly borrow via sustainability-linked loans (SLLs), contractually tying spreads to their ESG performance. SLLs vary widely in transparency of disclosure regarding sustainability-related contract details and tend to be issued to borrowers with superior ESG profiles. While high-transparency SLL borrowers maintain this performance, low-transparency SLL borrowers exhibit significantly deteriorating ESG performance after issuance. Both high- and low-transparency borrowers pay substantial fees to obtain SLLs. The results are consistent with high-transparency borrowers using SLLs to “certify” their preexisting ESG commitments, but low-transparency borrowers “greenwashing” with empty SLL labels. Evidence on drawdowns, renegotiations, and stock market reactions further supports these interpretations

This study examines the effects of environmental, social, and governance (ESG) performance on bond return volatility. After controlling for bond characteristics and firm fundamentals, we find a robust positive relationship between ESG performance and bond return volatility. The empirical results demonstrate that the impact on bond return volatility is primarily driven by ESG strengths rather than concerns. The results are robust to alternative measures, sample periods, and endogeneity controls. Furthermore, the effect of ESG performance is more pronounced for firms with opportunistic managers and poor information environments

This paper examines whether capital structure is irrelevant for enterprise value and investment when investors care about environmental, social, and governance issues, which we refer to as “ESG-Modigliani-Miller” (ESG-MM). Theoretically, we show that ESG-MM holds with linear pricing and additive ESG. ESG-MM means that issuing low-yielding green bonds does not lower the overall cost of capital because it makes the issuer’s other securities browner. Hence, a firm’s incentive to make a green investment does not depend on its financing choice. We provide suggestive evidence of failure of ESG-MM, implying that firms and governments can exploit inconsistent ESG attribution or segmented markets

In this study, we examine whether environmental, social, and governance (ESG) funds' investment decisions are sensitive to the existence and extent of firms' voluntary environmental disclosures. We create our measures of voluntary environmental disclosure using bigrams extracted from the Global Reporting Initiative standards. We provide robust evidence that voluntary environmental disclosure in conference calls is associated with greater ESG fund ownership in the subsequent period, incremental to firms' ESG ratings. We also provide evidence that fund managers' reliance on environmental disclosure is concentrated in water, waste, emissions, and compliance disclosures. ESG fund ownership increases with environmental disclosure that is more positive and specific. Our primary finding persists both when we rely on the sustainability report as an alternative proxy for environmental disclosure and when we use fund‐level tests. Overall, our evidence is consistent with ESG funds relying on firms' disclosures when making investing decisions and inconsistent with recent regulatory concerns that ESG fund managers are not following through on their stated investing strategies

Using a novel measure that captures negative ESG incidents at both listed and private suppliers, we provide large-scale evidence on the value implications of supply chain ESG. We find that firms with fewer supply chain ESG incidents exhibit higher future accounting performance and that this effect is stronger in the presence of more conscious customers and vulnerable supply chains. We also find that firms with robust supply chain ESG exhibit higher future stock returns and that this effect is more pronounced when information frictions are higher, which suggests that it takes time for the market to understand the value implications of supply chain ESG. Overall, we highlight the benefits of managing supply chain ESG and the decision usefulness of the related information

We provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers. We find very little evidence that ESG ratings are related to global stock returns between 2001 and 2020. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies. We further find little empirical support for prominent hypotheses from the literature on the role of ESG uncertainty and of country-level ESG social norms, ESG disclosure standards, and ESG regulations in shaping the relation between ESG and global stock returns. Overall, our results suggest that ESG investing did not systematically affect investment performance during the past two decades

We compare the ESG ratings of MSCI, a global rater, with those of SINO, a local Chinese rater, to evaluate their effectiveness in capturing ESG risks within the Chinese context. Using ESG issues revealed in negative incidents as a proxy for ESG risk, we find that the ratings from the two raters often diverge, with SINO generally outperforming MSCI in predicting ESG risks in China. This divergence is more pronounced for firms with extensive ESG disclosures and when there are significant differences in how the raters define and measure ESG issues. Distance-based information asymmetry does not appear to play a significant role in explaining the performance gap. The advantage of local raters likely stems from their flexibility in tailoring methodologies to reflect country-specific nuances. In contrast, global raters adopt consistent methodologies to meet investor demand for comparability, but this approach may inadvertently reduce their relevance for capturing localized ESG risks. Data Availability: Data are available from sources identified in the text

This paper examines the impact of environmental, social, and governance (ESG) disclosure on firm investment. The analysis characterizes the optimal precision of ESG disclosure that channels investors’ tastes for ESG into firm investment. Although it is tempting to think that the optimal ESG disclosure becomes more precise when investors care more about ESG, I show this intuition is incomplete because it overlooks the fact that stronger tastes for ESG change how investors use information. Applying the analysis to a large economy, I show that mandating more precise climate disclosure than would be voluntarily provided motivates self-interested firms to act on common interests in reducing emissions. That is, a regulator can leverage market forces and a disclosure mandate to achieve a similar result as a Pigovian tax in motivating firms to internalize the externalities created by their climate-related investments

We collect a novel dataset on images in Environmental, Social, and Governance (ESG) reports using deep learning and artificial intelligence (AI), to test hypotheses arising from experimental literature that visual impression management enhances audience perception. We further combine AI and manual methods to contrast images that lack information content (“generic images” evoking broad ESG themes) against images with information content (“specific images” depicting firm-specific ESG activities). We hypothesize and find that firms (1) operating in socially problematic industries (e.g., “sinful”, polluting, or controversial industries), (2) issuing less extensive textual ESG disclosures, and (3) experiencing poor ESG performance tend to use more images, especially generic images, consistent with strategic motivations. We then examine the impact of image usage on stakeholders, observing unduly enhanced perception in retail traders but seldom in institutional investors. We observe that ESG award committees reward specific images and penalize generic images. Our results show that ESG report visual impression management affects stakeholders in the real world, though its impact can be overcome by attention and expertise