The Real Impact of Voluntary ESG Disclosure Standards

Despite the dramatic increase in corporate-sustainability disclosure in recent years, the absence of uniform reporting standards has prompted concern among investors and companies and led to inconsistent disclosure practices, deceptive green marketing, and a lack of useful information. To better understand the role of reporting standards, we examine companies’ voluntary adoption of sustainability standards of the Sustainability Accounting Standards Board (SASB).[1]Specifically, in a new paper, we examine what factors prompt companies to adopt SASB standards and whether standards adoption is associated with real effects on fundamental ESG performance.

Our interest in voluntary adoption of SASB standards stems from SASB’s approach of building on evidence-based research and broad stakeholder participation. SASB standards identify sustainability issues that are likely to have a material impact on a firm’s operating performance and financial condition, thus serving the needs of investors among the diverse audiences for sustainability reporting. SASB standards are industry-specific and offer detailed disclosure guidance. The standards identify the most relevant sustainability issues for each industry and provide explicit metrics for sustainability reporting. For instance, the standards include greenhouse gas emissions as a material sustainability disclosure topic for airline companies and data privacy as a material disclosure topic for e-commerce companies. Moreover, the use of SASB standards has been increasing significantly, and some large institutional investors have expressed strong support for sustainability reporting following SASB standards (e.g., BlackRock, Bank of America, Fidelity, the Maple 8).

Examining the period of 2015-2020, we find that over 400 publicly traded U.S. companies communicated externally about their sustainability activities by using SASB standards. In analyzing characteristics that could help explain why a company adopted those standards, we find that sustainability-focused institutional ownership and industry peers (that is, SASB standards adoption by peer firms), each had an effect. This demonstrates that adopting sustainability standards in the absence of a regulatory mandate is market driven in at least two ways – first, it is a response to what investors are asking for and, second, it reflects a growing consensus among industry peers on how and what to report in their sustainability communications.

Of course, voluntary adoption of a set of disclosure standards need not have any actual effect on corporate behavior, so we next investigate the impact of companies’ voluntary adoption of SASB standards on their day-to-day sustainability activities and outcomes. We argue that commitment to disclosure standards can translate into real action through increased use and scrutiny of sustainability information by investors. In other words, SASB standards could improve investors’ ability to monitor company performance to the extent investors can observe and rely on sustainability information. In addition to the increased investor scrutiny, the adoption of SASB standards can facilitate performance evaluation among peer firms by, for example, helping managers uncover inefficiencies or identify areas for potential improvement.

In our study, we focus on four different ESG outcomes to examine the impact of SASB standards adoption on companies’ real sustainability actions: changes in the prevalence of negative ESG incidents, changes in pollution levels, changes in work-related injuries, and changes in companies’ ESG ratings. We do not primarily focus on what companies say they are doing, but rather look for other data to measure what they are doing. Using different empirical designs, we find consistent evidence that, compared with other companies, adopters of SASB standards have fewer negative ESG incidents, lower pollution levels, fewer work-related injuries, and higher ESG ratings in years following the standards adoption. Importantly, our results for pollution levels and workplace safety are more pronounced in industries for which these issues were identified as material by SASB. This demonstrates that the sustainability reporting standard helps drive performance changes. Collectively, we interpret these findings as evidence that what gets voluntarily disclosed gets managed. That is, companies’ adoption of sustainability standards likely changes their day-to-day sustainability activities.

ENDNOTE

[1] On August 1, 2022, the IFRS Foundation completed the consolidation of the Value Reporting Foundation (VRF) and its SASB Standards. SASB Standards would serve as a key starting point for efforts of IFRS to develop a comprehensive global baseline of sustainability disclosure standards for the capital markets.

This post comes to us from Khrystyna Bochkay and Seungju Choi at the University of Miami and Jeffrey Hales at the University of Texas at Austin. It is based on their recent article, “‘Mere Puffery’ or Credible Disclosure? The Real Effects of Adopting Voluntary ESG Disclosure Standards,” available here. Hales is a member of the International Sustainability Standards Board (ISSB), and Bochkay is an academic fellow at the ISSB. The ISSB has had responsibility for the SASB Standards since August 1, 2022, when the Value Reporting Foundation was consolidated into the IFRS Foundation. The views expressed here are those of the authors and not necessarily those of the IFRS Foundation, the ISSB, or the IASB.

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