Comparing Auditors’ and Users’ Materiality Judgments for ESG and Traditional Financial Disclosures: The Roles of Disclosure Form, Valence, and Assurance Level

Abstract

As corporate ESG disclosures continue to grow in prominence and regulators begin to require assurance over ESG information, understanding the factors that influence ESG materiality assessments can help auditors provide more effective assurance over ESG information. We use an experiment to compare professional assurance providers’ and users’ materiality assessments of ESG disclosures and traditional financial disclosures. Not only do ESG disclosures serve different informational purposes than financial disclosures, they also include relatively more positive and qualitative information. Our results indicate that the decision context associated with ESG disclosures as well as information valence and form contribute to less effective auditor materiality assessments. Specifically, we document that the auditor-user materiality gap widens for qualitative and positive disclosures of traditional financial information as well as ESG disclosures in general. Additionally, in contrast to users’ normative materiality assessments, we find that auditors view disclosures that receive limited assurance as less material than those that are reasonably assured, which further widens the materiality gap. While current ESG disclosure guidelines focus on topical materiality, this study documents evidence of other important theory-based disclosure features that influence materiality judgments and can be used to improve the dissemination and attestation of ESG disclosures.

Keywords: ESG, Disclosure, Materiality, Audit, Assurance, Investing, Qualitative

JEL Classification: M41, M42, M48, G11, Q56