The role of environmental, social, and governance (ESG) in accounting conservatism: Evidence from Brazil

This study investigates whether there is an association between environmental, social, and corporate governance (ESG) performance and the demand for accounting conservatism in companies listed on the Brazilian Stock Exchange. Recognizing that conservative accounting practices often arise from stakeholders’ concerns about earnings management and information asymmetry - conditions that differ from those of socially responsible companies - this paper explores the relationship between ESG performance and accounting conservatism. This study examines accounting conservatism as a principle of information quality, particularly within the framework of mechanisms such as ESG performance that mitigate information asymmetry. Despite Brazil’s weak enforcement profile, limited general credit availability, and high ownership concentration, the country is globally recognized for its adoption of Sustainability Accounting Standards Board (SASB) reporting standards. These conditions reinforce our assumption and highlight the significance of this study. There is a notable paucity of research investigating the correlation between ESG performance and accounting conservatism in Brazil, especially given the country’s unique regulatory and economic landscape. This study addresses this gap by providing a critical perspective on the interplay between ESG and accounting conservatism. Our findings have substantial practical, social, and environmental implications. Effective disclosure of ESG practices not only enhances the quality of reported information but also increases stakeholder credibility, enabling investors and other stakeholders to make more informed and assertive decisions. We estimate conservatism according to the model proposed by Ball and Shivakumar (2005), and in the main analyses, we use ordinary least squares (OLS) regression and quantile regression methods with robust standard errors and fixed effects for industry and years. Our research indicates that higher ESG performance leads to increased conditional accounting conservatism in the following year. This finding suggests that robust ESG reporting enhances the quality of information available for decision-making, thereby reducing information asymmetry between the company and its stakeholders while bolstering its reputation.