Does the Interaction of Informativeness, Readability, and Sentiment within Company’s Sustainability Disclosure Shape an Entity’s ESG Score? – Evidence from Germany

Abstract

The integration of ESG practices in sustainability disclosure as well as the increasingly evolving regulations in the European Union and Germany signify a transformative shift in individual behaviors and corporate dynamics. Thus, the focus on sustainability disclosure by German companies has increased, along with the evaluation of ESG performance through rating agencies. Since sustainability disclosure emphasizes qualitative information, it is not surprising that both, management and analysts, prioritize the textual content of such reports. This leads to the question of how textual elements of a company’s sustainability disclosure are related to analysts’ ESG scores. To address this research question, we analyze sustainability disclosure of companies listed in the German Prime Standard for financial years from 2017 to 2022 in terms of informativeness, readability, and sentiment by using OLS panel regression analyses. Our research contributes to the growing sustainability disclosure literature by referring to companies within the German regulatory framework, utilizing state-of-the-art LLMs FinBERT and FinBERT-ESG, applying various methods for textual analysis. The results of our study suggest that a high level of transparency, precision, and comprehensibility of language are important factors in achieving a superior ESG score.

Keywords: Sustainability Reporting, Voluntary Disclosure, ESG Disclosure, Textual Analysis, Natural Language Processing

JEL Classification: M41, M42, M48