No. 185: Strategic Presentation of Mandatory ESG Disclosures

The disclosure of environmental, social and governance (ESG) information has gained increasing importance in the last years and so far, firms had considerable degrees of freedom how to present this information to the public. While new regulations such as the EU’s Sustainability Reporting Standards will increase and standardize sustainability reporting requirements, especially with respect to hard and verifiable information such as carbon emissions, information on other aspects of ESG is often soft and therefore, the way in which this information is presented will affect the market’s perception of it. Managers might thus have incentives to strategically choose how soft ESG information is presented in order to maximize firm price, for instance by selecting the tone with which the information is communicated. We study the strategic use of tone in ESG disclosures in a multi-period context. We find that the manager’s tone choice depends on the soft information the manager receives, the market’s reaction to a biased tone choice in previous periods, the manager’s ESG-related compensation, and the strength of internal controls. Strong ESG incentives and weak internal controls can lead to the choice of extremely biased tone for soft ESG information.