From Paris to Profits: How Transparent ESG Reporting Drives Analyst Forecasts and Recommendations

Abstract

In recent years, stricter regulations and governance frameworks around Environmental, Social, and Governance (ESG) factors have gained prominence. This thesis investigates the impact of ESG reporting on analyst forecasts and recommendations. This is done both as a stand alone phenomenon and within the broader context of more strict regulation, such as those prompted by the Paris Agreement. ESG reporting is quantified using a keyword frequency measure derived from natural language processing applied to firms’ earnings call transcripts. Using panel regression models, the analysis provides evidence that increased ESG reporting influences analysts’ forecasts and recommendations with clear significant findings of sales forecast estimations being positively impacted. Conversely, the results indicate a significant negative effect on gross margin forecasts, potentially reflecting analysts’ perceptions of less efficient resource allocation, higher operational costs, and increased competition post Paris Agreement associated with firms providing enhanced ESG reporting. Nevertheless, the cumulative effects appear to have a minimal impact on analyst recommendations in total, with only a modest and statistically significant shift towards "buy" recommendations.