The Evolution of ESG Disclosure: More Words, Less Meaning?

In the business world, Environmental, Social, and Governance (ESG) issues have evolved from being a niche concern to a mainstream obsession. As investors increasingly demand transparency on how companies impact the environment and society, companies have responded with a flood of ESG disclosures in their annual reports. But what exactly is being disclosed? And, more importantly, is it useful?

Our recent study delves into these questions by analysing over 210,000 annual reports from 24,271 public firms across 30 countries, spanning two decades from 2001 to 2020. Using a natural language processing technique called word embedding, we created an ESG dictionary to track trends in how companies communicate their environmental and social (E&S) impacts. The results might make you rethink how much faith to put in those glossy sustainability sections.

The Rise of ESG Disclosure: A Good Thing?

The first thing we noticed is that companies are definitely talking more about ESG. The length of E&S disclosures in annual reports has grown dramatically—by more than six times since 2001. By 2020, the median company was dedicating over 1,700 words to discuss their environmental and social practices, up from just a few hundred words two decades ago, which might suggest more transparency.

However, the bulk of this increase comes from what we affectionately call "boilerplate" language—generic, often recycled phrases that sound good but say little. Think of the kind of corporate-speak that can be summed up as "We care about the planet and our people," but without any concrete details. In fact, the use of boilerplate language in E&S sections has tripled over our study period, from 3.6% to over 12.5%. It fills space, but does it mean anything?

Specificity Declines as Disclosure Increases

You might argue that more disclosure, even if generic, is still a step in the right direction. After all, companies are acknowledging the importance of ESG, which could push them to act more responsibly. But what we show is that as the volume of disclosure has increased, its specificity has decreased.

Specificity is important because it indicates how much a company is willing to share about its actual practices and impacts. Specific disclosures provide concrete data—think "Our carbon emissions reduced by 5% this year" rather than "We are committed to reducing our environmental footprint." Unfortunately, our study found that the proportion of specific information in E&S disclosures has slightly dropped over the years, suggesting that while companies are saying more, they’re not necessarily saying more that’s meaningful.

The Role of Voluntary Frameworks and Mandates

To see what’s driving these trends, we looked at the role that voluntary ESG reporting frameworks (like the Global Reporting Initiative) and mandatory disclosure regulations have played. Interestingly, voluntary frameworks seem to improve the quality of disclosures—companies that adopt these frameworks tend to use less boilerplate language and provide more specific, sticky (i.e., consistent year-over-year) disclosures, although we recognize the possibility that these voluntary adopters might be firms that were hoping to get better at ESG disclosure.

On the flip side, when ESG disclosure becomes mandatory, the quality tends to drop. This makes sense if you think about it: companies that are forced to disclose might do so grudgingly, sticking to the minimum required and recycling old content. 

The Changing Landscape of ESG Topics

Another interesting trend is the shift in focus within ESG topics. Early in our study period, companies talked a lot about issues like product quality and customer service under the social disclosure umbrella. But as we moved into the 2010s, discussions about human capital (think workforce diversity and employee well-being) and climate change started to dominate. Words like "greenhouse gas" and "carbon" have become increasingly frequent in recent years, reflecting the growing concern over climate change.

Meanwhile, some topics have faded into the background. Mentions of product quality, for example, have decreased significantly, which might be a sign that companies feel the pressure to focus on what’s currently trending in the public discourse.

Global Trends: Who’s Leading, Who’s Lagging?

Finally, we ranked countries by the average length of E&S disclosure over time. Unsurprisingly, developed countries in Europe often rank near the top, while many Asian countries started lower but have climbed the rankings significantly. For example, firms in China, Hong Kong, and Japan have seen some of the most dramatic increases in disclosure length, reflecting growing awareness and regulatory pressure in these regions. But as with the global trend, keep in mind that longer disclosures don’t necessarily mean better disclosures.

Overall, at least on the surface, the explosion of ESG disclosure in annual reports might seem like a victory for transparency and accountability. But dig a little deeper, and it becomes clear that more disclosure isn’t always better disclosure. The rise in boilerplate language and the decline in specificity suggest that much of this newfound transparency might be more about checking boxes than providing investors and stakeholders with the information they need.

As regulators and standard-setters continue to push for greater ESG disclosure, it’s crucial to focus not just on the quantity of information, but on its quality. Otherwise, we risk drowning in a sea of words that say a lot but mean very little.

_______________

By Yan Lin (University of Macau), Rui Shen (The Chinese University of Hong Kong, Shenzhen - School of Management and Economics; Shenzhen Finance Institute), Jasmine Wang (University of Virginia), and Y. Julia Yu (University of Virginia)

The ECGI does not, consistent with its constitutional purpose, have a view or opinion. If you wish to respond to this article, you can submit a blog article or 'letter to the editor' by clicking here.