Do ESG reporting guidelines and verifications enhance firms' information disclosure?

Environment, social, and governance (ESG) reporting guidelines are institutional rules that can enhance the credibility of firms' publicly disclosed information related to ESG. Reporting is often voluntary and global ESG reporting guidelines typically rely on process-focused third party verification. However, in developing its reporting guidelines, the Japanese government gave firms the unusual option of pursuing either process- or content-focused verification. This paper draws on the unique Japanese setting to examine whether firms that use ESG reporting guidelines increase their quantity of disclosed sustainability information. Furthermore, it assesses whether, given the option, (1) firms tend to pursue process- or content-focused verification, and (2) which type of verification leads to greater information disclosure. We show that firms that follow ESG guidelines disclose 39% more sustainability information compared to firms that publish sustainability reports but do not follow ESG reporting guidelines. Content-focused verification leads to greater information disclosure than process-focused verification in that firms publish 23% more text in their sustainability reports. Moreover, given the option, firms prefer to use content- over process-focused verification. However, most global ESG reporting guidelines endorse process-focused verification and this verification is less effective than content-focused verification at encouraging firms' information disclosure. Our findings raise a timely and relevant question about the movement by global ESG standard developers to promote process- rather than content-focused verification. They also suggest that firms that wish to create sustainability distinction by way of ESG reporting may benefit by advocating for more robust forms of verification.