Firms that demonstrate a strong commitment to environmental, social, and governance (ESG) best practices have performed better than their peers since stricter accounting standards were introduced.
That’s according to a new study published by researchers at Nagoya University in Japan, who investigated the link between increased audit transparency requirements and corporate sustainability.
The researchers analyzed the performance of more than 1,000 companies in Japan, for whom more stringent rules requiring disclosure of ‘key audit matters’ (KAMs) were made mandatory in 2020.
They identified a positive association between ESG scores and market performance in the years following mandatory implementation of the new rules.
In other words, companies with established, strong ESG credentials benefitted the most from increased auditing transparency requirements.
Another key finding was that firms with higher ESG scores were more likely to voluntarily adopt the new accounting transparency measures before they became mandatory and that these first-movers also benefited from lower audit fees.
“The market appears to view ESG practices and KAMs reporting as a sort of two-factor authentication,” explained Hu Dan Semba, Associate Professor at Nagoya University’s Graduate School of Economics and co-author of the study.
“When companies with authentic sustainability practices invest heavily in transparent auditing, investors interpret it as a credible signal of organizational strength.”
The study, published in Managerial Auditing Journal, adds to existing research suggesting that ESG and financial performance are positively linked.
For example, a meta-analysis over more than 1,000 studies conducted by NYU Stern Center for Sustainable Business found that corporate sustainability initiatives appear to drive better financial performance and that improved financial performance due to ESG becomes more marked over time.
Highlighting links between ESG performance and financial returns is important in encouraging more publicly traded companies to embrace sustainable business practices.
