What sustainability assurance services do institutional investors demand and what value do they give them?

Abstract

PurposeThe purpose of this study is to analyse the role played by institutional investors in a firm’s decision to hire sustainability assurance services and to determine the benefits of sustainability assurance for the functioning of the capital market. This analysis is complemented by examining the quality of the sustainability assurance service that institutional investors demand.Design/methodology/approachThe authors selected a sample of 1,564 multinational firms from 2002 to 2017. Panel data logit and generalised method of moments (GMM) regressions were estimated to consider decisions about hiring sustainability assurance services or not, and the assurance quality indexes constructed by a checklist based on the academic literature, respectively.FindingsInstitutional pressures associated with the environmental and social impacts of a firm’s activities lead to the convergence of institutional investor attitudes towards corporate sustainability, so that, regardless of their investment horizon, they promote the hiring of sustainability assurance services by corporate boards, which favours analyst precision and a reduction in the cost of capital. Long-term (LT) institutional investors exert influence through a selection mechanism, whereas short-term (ST) institutional investors exert influence through their presence on the board. Once the company has decided to provide assurance about its sustainability report, both types of institutional investors promote a higher quality of such service, although this is not well valued by the stock market.Research limitations/implicationsThis paper extends research on the monitoring role of institutional investors into the sustainability assurance context. Researchers may benefit from this paper’s findings when they examine the factors that drive the hiring of sustainability assurance services and their characteristics. This paper also shows that sustainability assurance services are a significant weakness due to the lack of standardisation in comparison with financial auditing, which complicates the assessment of their quality by stock market participants, thereby penalising those companies that provide more complete sustainability assurance reports.Practical implicationsConsidering this paper’s findings, it seems advisable that regulators establish a normative framework to standardise sustainability assurance processes. The results can also be used as an orientation for both companies, to design their sustainability disclosure policies and regulators, to improve the running of the capital market.Social implicationsSustainability assurance services have a positive effect on the running of the capital market and improve external stakeholder decision-making by providing more reliable information, which, in turn, will favour the implementation of more sustainable actions that contribute to the attainment of sustainable development goals.Originality/valueThis is one of the first papers to analyse the effect of institutional ownership on a firm’s decision to hire sustainability assurance services and consider the effect of the institutional investors’ investment horizon – LT versus ST – and the channel – selection methods and/or active engagement – used by them to exert their influence. The authors also propose several measures of sustainability assurance quality to demonstrate the relevance of the contents of the assurance statement for the capital market in general and the institutional investors in particular.