Can Lenders Identify Heterogeneity in the Voluntary Assurance of Sustainability Reports? International Evidence

This paper examines whether lenders are capable of discerning heterogeneity in the voluntary assurance of sustainability reports and how this capability influences corporate debt financing costs. Leveraging an international dataset between 2010 and 2019, we find that assurance only reduces debt financing costs for firms that exhibit above‐industry‐average sustainability performance, whereas firms with weak sustainability performance gain no such benefit. Lenders effectively penalize greenwashing by discounting cosmetic assurance but reward substantive verification for genuinely sustainable firms. This assurance premium is particularly strong amid high levels of ESG (environmental, social, and governance) rating disagreement, when third‐party data is unreliable. Moreover, lenders incorporate a valuation premium for high‐quality assurance engagements, particularly when the services are provided by accounting firms (particularly Big 4 firms), cover a broader scope, or involve deeper process rigour or more comprehensive statements. Further analyses demonstrate that the heterogeneity in the debt financing cost reduction effect of assurance, conditional on sustainability performance, tends not to be immediate but gradual. Over time, lenders learn to distinguish between credible assurance and symbolic efforts, adjusting pricing accordingly. Our study highlights the nuanced role of assurance in debt markets and underscores the importance of performance‐aligned sustainability disclosure.