Does environmental, social, and governance performance mitigate earnings management practices? Evidence from US commercial banks.

Environmental, social, and governance (ESG) performance has attracted debates of regulatory bodies and the academic community. Previous studies highlighted the relationship between corporate social responsibility (CSR) disclosure index and earnings management (EM) for non-financial firms. In this paper, we examine the relationship between the ESG performance and EM practices for a sample of US commercial banks over the period 2010-2019. We use two proxies for earnings management: abnormal loan loss provisions (ALLP) and EM to meet the threshold of reporting small positive profit or avoiding losses (SPOS). Consistent with the transparent financial reporting hypothesis, we find that banks reporting higher ESG performance are less likely engaged in income-increasing practice through ALLP. However, no evidence supports that ESG score mitigates EM through loss avoidance. Furthermore, we disaggregate the ESG score into its main three components: environmental, social, and governance. Our findings show that the governance pillar effectively mitigates EM practice under its two proxies. Specifically, the social pillar also seems to be an efficient constraint of banks' EM through income-increasing abnormal loan loss provisions and loss avoidance activity. However, no supporting evidence of a mitigating role for the environmental pillar is provided. Taken together, our results show that, except the environmental pillar, ESG performance score acts as an efficient mitigating tool for EM practices for US banks. Our findings provide a better understanding of banks' earnings management practices. Our findings are helpful for managers when undertaking long-term investment strategies in ESG reporting practices, regulators when issuing new standards, and banks' stakeholders when assessing both the financial and non-financial performance of such entities.

Exploring the performance of responsible companies in G20 during the COVID-19 outbreak.

An uphill question of whether Environmental, Social, and Governance (ESG) directly impact firms' financial performance (FP) continues to vacillate between two opponent streams. In the present study, we argue that COVID-19 is an extreme event where the effect of ESG sharply manifests. We rely on cross-sectional data in the context of G20 countries for the year 2020. To avoid biased results due to governments support, we integrate four novel metrics provided by the Oxford Coronavirus Government Response Tracker (OxCGRT). We run sequential regressions (OLS; and quartiles to account for the Ingrained Income Bias (IIB) and ESG scores). We also perform robustness tests and account for the interaction between ESG and cash level. Our models were subsequently replicated for each ESG pillar. Findings indicate that ESG is beneficial during COVID-19, but the reward appears to be closely tied up to specific aspects of ESG, income level, and firm-specific variables. Results contribute to the burgeoning literature on ESG during COVID-19 by reflecting on firms' key attributes and the preponderance of government support.

Sustainability reporting beyond the business case and its impact on sustainability performance: UK evidence.

We explore Landrum and Ohsowski (2018)'s development model, which positions each company's sustainability reporting with multiple worldviews of corporate sustainability. We investigate the impact of sustainability report communicative actions on corporate sustainability performance. We argue that companies that comply with the reporting guidelines and adopt the business case for corporate sustainability may not capture all sustainability aspects, and therefore may not have a real impact on sustainability performance. Employing a computer-based textual analysis on a sample of UK firms that published sustainability reports during the period 2014-2018, we find that sustainability reports that communicate the message that firms understand sustainability to mean maintaining production and consumption patterns within resources capacity of the planet and coexisting in harmony with nature are likely to have a positive effect on sustainability performance. On the other hand, communicating compliance and the business-centred approach as their understanding of sustainability will negatively affect sustainability performance. Our findings offer important implications for companies who need to change their approach towards sustainability reporting and shift from the business case approach to advance to the next stage of sustainability reporting which should guide corporate decisions and actions.