ESG compensation policy and assurance over sustainability reports: global evidence

Purpose Motivated by the surge of sustainability reporting and the heated debate about the credibility of these reports, this study aims to explore the influence of sustainability-linked compensation policies on the adoption of external assurance for sustainability reports. Additionally, it seeks to understand how governance factors at the corporate and country levels impact this relationship. The findings provide insights for corporate boards, investors and regulators on designing effective compensation policies to enhance the credibility of sustainability reporting. Design/methodology/approach This study utilizes a comprehensive international dataset of publicly listed firms issuing sustainability reports. It applies empirical analysis (i.e. logistic regressions) to investigate the relationship between compensation policy that is linked to sustainability performance and the likelihood of firms engaging external assurance for their sustainability reports. The study further examines the moderating effects of corporate- and country-level governance on this relationship. Findings The study finds that firms with environmental, social and governance (ESG) and/or sustainability-linked compensation policies are more likely to use external assurance for their sustainability reports. However, strong corporate- and country-level governance reduce this likelihood, even with ESG-linked compensation in place. Additionally, compensation tied to total shareholder return weakens the positive impact of ESG-linked policies on assurance practices, highlighting the complex role of governance and compensation in sustainability assurance decisions. Originality/value This study contributes to the growing literature on sustainability assurance and corporate governance by highlighting the role of compensation policies in influencing assurance decisions. It provides recommendations for policymakers, corporate boards and investors on aligning compensation strategies to enhance sustainability reporting credibility. The research highlights the need for harmonized compensation policies to ensure consistency and effectiveness in adopting sustainability practices.