Introduction

This article examines whether ESG frameworks serve as measurable signals of corporate internal discipline. Using data from 2,386 U.S.-listed firms from 2016 to 2021 (p.7), the study leverages the Business Roundtable’s 2019 Statement on the Purpose of a Corporation (“BRT Statement”) as an exogenous shock to test whether higher ESG scores lead to fewer financial statement restatements. The Macy’s accounting scandal — in which a single employee concealed $151 million in delivery expenses (p.4) — illustrates the governance risks associated with weaker ESG oversight.

The ESG debate: A contested investment landscape

ESG criteria provide a framework for assessing environmental stewardship, social responsibility, and corporate governance. By early 2020, global sustainable investment had surged to $35.3 trillion, a 15% increase from 2018 and a 55% rise from 2016 (p.10). Investor expenditure on ESG ratings rose from $200 million to $500 million between 2014 and 2018 (p.10).

The debate is contested across mandatory vs. voluntary disclosure, anti-ESG legislation, and whether ESG metrics indicate genuine performance or serve as public relations tools. Several U.S. states have introduced anti-ESG laws restricting public funds from considering ESG factors, though courts have begun striking some down.

The BRT statement and ESG: An inflection point

The 2019 BRT Statement, endorsed by the CEOs of nearly 200 leading U.S. companies (p.14), marked a shift from shareholder primacy toward a stakeholder-inclusive model. The authors use this as a quasi-natural experiment to establish causal rather than merely correlational relationships between ESG performance and reporting quality.

ESG and financial reporting quality

Financial disclosure underpins corporate governance by reducing information asymmetry. Prior literature on the relationship between ESG metrics and reporting quality yields mixed results: some studies find ESG engagement fosters transparency, while others suggest ESG activities may mask poor performance. These gaps, and the literature’s reliance on associations rather than causal evidence, motivate the authors’ approach.

The empirical test

The study uses MSCI ESG ratings and restatement data from the SEC’s EDGAR system, covering 2,386 U.S.-listed companies across 9,715 firm-year observations from 2016 to 2021 (p.22). Financial statement restatements serve as an objective, externally verified proxy for reporting quality.

Mean ESG scores rose from 4.049 in 2016 to 4.815 in 2021 (p.24). Comparing pre-BRT Statement to post-BRT Statement periods, the mean ESG score increased by 0.4380, statistically significant at the 1% level (p.24). The Pearson correlation between ESG scores and restatements turned negative in 2020 and 2021 (–0.04282 and –0.04291 respectively) (p.26), indicating that firms with higher ESG scores were measurably less likely to file restatements in the post-BRT period.

Policy implications: The promise of ESG

For investors and companies, ESG scores serve as reliable signals of financial reporting quality. Investing in ESG reduces the probability of restatements, maintaining long-term investor trust among those less focused on sustainability.

For regulators, a hybrid approach is recommended: mandatory baseline ESG disclosures focused on material, quantifiable metrics, complemented by flexible voluntary enhancements. Regulators should increase enforcement focus on firms with poor ESG performance. For legislators and courts, the causal link between ESG performance and reporting quality challenges the premise that ESG is purely ideological, providing grounds to interpret ESG factors as material to long-term risk management.

Conclusion

The study establishes a firm-level causal link between improved ESG performance and more reliable financial disclosures. The findings challenge anti-ESG narratives, positioning ESG as a rational, data-driven risk management strategy that extends beyond sustainability to enhance financial transparency.