Authors: Afroditi Papadaki, Olga-Chara Pavlopoulou-Lelaki

Title: The importance of ESG related audit quality for corporate performance

Abstract

Analyzing a global sample of listed firms from 38 markets during 2002-2018, this study offers empirical evidence of a negative association between the Environmental, Social, and Governance (ESG) performance of the firm and its profitability, irrespective of the accounting standards setting, a finding attributed to the short-term profitability strain resulting from the consumption of resources necessary for the implementation of related initiatives. The results indicate that this negative relationship is mitigated in firms of higher ESG – related audit quality where ESG initiatives implementation is likely to be more efficient. It is notable that financial analysts incorporate the implications of the ESG performance on corporate profitability in their forecasts of leading profitability, particularly in common law countries. Finally, the study considers how information transparency factors at both the micro level (business ethics policies) and the macro level (market transparency, national legal system) moderate the ESG – profitability association.

Keywords: ESG score; firm profitability; analyst forecasts; ESG audit quality; transparency