Goa Institute of Management Study Finds ESG Disclosures Reduce Earnings Manipulation in Banks

The study shows sustainability reporting strengthens transparency and financial reporting quality in the banking sector

GoaKhabar: A study conducted by researcher from Goa Institute of Management (GIM) has revealed that banks with strong Environmental, Social and Governance (ESG) disclosures are less likely to engage in earnings manipulation. This insight suggests that contrary to the prior belief that sustainability reporting being a public relation practice, it can serve as a governance mechanism.

In the global finance landscape, this study answers a critical question of do ESG disclosures actually improve transparency and accountability or is it a tool to mask financial practices.

By analysing data from 376 listed banks across 19 countries over the period 2009–2022, the study, Dr. Mayank Gupta, Assistant Professor, GIM, finds that in banking sector, ESG reporting is associated with higher-quality earnings and more reliable financial reporting.

Using Bloomberg ESG disclosure scores, Dr. Gupta found a negative relationship between ESG reporting and earnings management, indicating that banks providing comprehensive ESG disclosures tend to report earnings more transparently. The study found that this relationship is driven by environmental and governance disclosures.

Speaking about the research methodology, Dr. Mayank Gupta, said, “With managers having substantial discretion over accounting numbers, banks are considered as one of the most opaque institutions globally. Hence, investors and other stakeholders often can’t tell whether that discretion is being exercised responsibly. That’s exactly why this question matters so much for banking. If ESG reporting can inhibit managerial discretion and improve transparency anywhere, the study suggests, it is in the banking sector.”

The findings of this study have been published in the prestigious Business Strategy and the Environment journal.

The study also challenges assumptions about the role of ESG reporting across different institutional settings. The results have shown that the chances of having a positive relation between ESG disclosures and earnings quality are weak in developed countries and economies where strong investor frameworks are in place. On the other side, ESG reporting is stronger in countries where formal oversight mechanisms are limited, which helps banks in reducing managerial discretions.

The research also explored how major global developments, such as the Paris Agreement and the COVID-19 pandemic, influenced banks’ ESG reporting behaviour.

Speaking about the significance of the study, Dr. Gupta said, “The study is particularly significant because it fills an important gap in the existing literature. While prior research has largely focused on ESG performance and its impact on firm outcomes such as profitability, risk, and financing costs, this study is among the first to examine the relationship between ESG reporting and earnings management specifically in the banking sector.”

The findings of this study are specifically relevant for –

·       regulators and policymakers

·       markets with weaker regulatory frameworks

·       investors

·       sustainability commitments

The study concludes that sustainability reporting can play a critical role in improving the integrity of financial reporting in banks, reinforcing the value of ESG disclosures as a governance tool in the global banking industry.