Does audit improve the quality of ESG scores? Evidence from corporate misconduct

Abstract

One of the main controversial aspects of sustainability metrics relies on the accuracy, transparency, and reliability of the information at the basis of environmental, social and governance (ESG) scores. This paper investigates whether firms that have their ESG reporting audited by independent firms exhibit a higher quality of ESG scores. We performed an analysis investigating the change in ESG scores following the unveiling of a corporate misconduct. We documented that, overall, no significant ESG score adjustment occurs after the scandal becomes public, thus, implying that rating agencies provide an accurate interpretation of the firm's sustainability. However, our results differed when we distinguished between audited and unaudited reports. Firms whose reports are audited by third parties did not exhibit significant changes in their scores after a scandal, whereas for companies whose reports are not audited, we detected a worsening of the ESG scores that are statistically significant. Our findings were also confirmed in a multivariate analysis. Overall, our results suggest that the reliability of ESG scores can benefit from the auditing of sustainability reporting by third parties, which has an assurance effect on the quality of the company's ESG information.