The Opaque Scorecard: Environmental, Social and Financial Information during Covid-19

We show that firms with higher environmental and social (ES) capital display lower financial reporting quality (FRQ) during the Covid-19 crisis. We conjecture that this substitution, which did not exist pre-Covid-19, is driven by firm reliance on the signaling value of ES information to stakeholders, and the muted signaling value of FRQ during the pandemic uncertainty. The result is robust to using ES scores or (social) media sentiment, and it holds estimating standard and synthetic difference-in-differences. Consistent with our predictions, the ES - FRQ substitution is stronger in countries with more government intervention through income support and debt relief, especially if those countries are richer or have weaker legal rights. At the firm level, the result is stronger for firms with worse governance or management practices, when the CEO pay is not linked to shareholder returns or that of senior executives to sustainability objectives, and with lower strategic or institutional ownership. Last, we uncover that higher ES firms display higher variability in depreciation and amortization expenses, intangible assets, R&D expenses, inventories, and labor costs during Covid-19.