The Link Between ESG Performance and Earnings Quality

Abstract

The field of study pertaining to environmental, social, and governance (ESG) concerns has gained significant interest in recent years, primarily driven by increasing worldwide concern about climate change and environmental challenges. Prior research has examined corporate social responsibility (CSR) and environmental, social, and governance (ESG) initiatives as actions that may be susceptible to opportunistic conduct by managers, which may be observed via earnings management. This research aims to investigate different perspectives of earnings quality (EQ) by examining the determinants of EQ described as inherent operating environment and risk of the industry business process (innate factors of EQ) and management reporting decision (manager’s discretion of EQ). Separating the components of EQ determinants individually is considered an advantage by the previous researcher. Using fixed effect panel data, this study demonstrates that ESG performance is positively associated with discretionary accruals and negatively related to innate earnings quality. This phenomenon might perhaps be attributed to the challenges posed by the sector, characterized by rapid digital transformation and unexpected digital development in the markets. This observation suggests that over time, the utilization of symbolic ESG business practices, which are susceptible to greenwashing, would have a detrimental effect on the fundamental earnings quality influenced by the operational context and the risk of uncertainty associated with the organization.