Do Variations in Institutional Characteristics Across Countries Affect ESG Reporting Ratings?

We study how the institutional environment of a country affects firms' motivations to engage in ESG reporting. Drawing from the institutional theory (North, 1990), we argue that firms that are incorporated in countries with weaker institutions (defined by transparency, legality, anti-self-dealing enforcement measures) are more likely to report higher ESG scores dueto low oversight. We also argue that greenwashing (as opposed to signaling) is an important motivation behind ESG reporting in countries with weaker institutions. We test our hypotheses using data from 2,354 companies across 38 different countries. We employ OLS models for our empirical analyses and find support for some of our hypotheses. Our study advances the literature on responsible investing by demonstrating that institutional differences across nations not only shape the quality of ESG reporting but also influence firms' underlying motivations, revealing the extent to which greenwashing may distort ESG assessments. Our study cautions managers and global investors against taking ESG ratings at face value, as high ESG scores do not necessarily indicate better ESG practices, particularly in low-transparency environments. Just as with financial reporting standards, stronger international reporting standards and oversight are needed to enhance the reliability of reported ESG data.