Does Uncertainty in Annual Reports Affect ESG Score?

Abstract

This study examines whether uncertainty in the wording of annual reports (10-K) affects Environmental, Social, and Governance (ESG) performance for 72 US public firms. Findings show a negative relation between uncertain words and ESG performance, indicating that greater use of ambiguous words in firms' financial statements negatively affects firms' ESG scores. This finding shows that market participants may notice that firms may deploy vagueness or ambiguity to disguise their poor performance or negative impact on the environment (i.e., Greenwashing). Findings from this study could provide some insights to investors, managers, and regulators in the capital market by recommending that public firms use more transparent and clear language in their 10-K reports.

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