Sustainability Meets Substance: Evaluating ESG Reports in the Context of 10-Ks and Firm Performance

Abstract

We use widely adopted voluntary ESG disclosure standards and leading machine learning techniques to quantify and compare the ESG content across a comprehensive sample of public firms’ ESG reports and their 10-Ks. ESG information in both documents is financially material, and the amount of material information has increased over time. While both documents feature financially material ESG information, ESG reports uniquely offer additional material insights not found in the 10-K. Studying the market reaction around the public disclosure of ESG reports, we find the release of reports and the intensity of material information in the reports do not predict changes in returns in the short run. Studying the long term implications, we find that reports with novel material information are related to decreased downside firm risks in subsequent years. Overall, our study underscores the unique value of ESG report data and sheds light on its practical relevance for investors.

Keywords: ESG Reports, Annual Reports, Financial Materiality, SASB, Textual Analysis

JEL Classification: M14, M40