Impact of information asymmetry, innovation and intregrated reportingon the association between environment, social and governance disclosure and competitive advantage

Abstract

Demand for transparency, particularly concerning environment, social and governance (ESG) issues has been growing. However, the lacking clarity of disclosure of the ESG activities can create information gaps for responsible investors and financiers when making evaluations about a company. The literature has investigated the important question of whether ESG disclosure would bring advantages for businesses and create value for companies. The impact of ESG disclosure on a company's competitive advantage is still inconclusive due to mixed results. Additionally, empirical evidence on the relationship between ESG disclosure and information asymmetry, innovation, and integrated reporting is still mixed results. This study aims to examine the association between ESG disclosure and competitive advantage, by referring to stakeholder theory, agency theory, and dynamic capabilities theory. This study also examines the mechanism through which ESG disclosure could influence competitive advantage, i.e., the mediating role of information asymmetry and innovation on the relationship. Additionally, this study investigates whether integrated reporting (IR) framework adoption could influence the association between ESG disclosure, information asymmetry, and a company’s innovation. The data for this study were gathered from two data sources, namely the Bloomberg database and the IIRC database. Using multivariate regression on a population of 187 international companies that voluntarily adopted an IR framework from 2009 to 2019, this study found that ESG disclosure has a positive influence on the competitive advantage at the company level. This study also found evidence that information asymmetry and innovation partially mediate the association between ESG disclosure and competitive advantage. The empirical results indicate that the adoption of an IR framework strengthens the association between ESG disclosure and information asymmetry as well as the adoption of an IR framework strengthens the association between ESG disclosure and innovation. Users understand that the sustainability agenda is systematically embedded in the business model, thus increasing their support for it, which can improve companies’ competitive advantage. The current study explores the impact of information asymmetry and innovation as mediator variables and the IR as moderating variable on the relationship between ESG disclosure and a company’s competitive advantage. Reasonably, the outcomes advocate managers and policymakers to exploit the benefits of integrating ESG disclosure, adopting IR, and promoting innovation in companies. Managers should take advantage of the IR framework in reporting ESG matters and aligning these matters with value-creation activities. Through these efforts, the companies can achieve an increase in competitive advantage.