Assurance and ESG rating divergence limit the informational value of sustainability disclosure mandates

In the modern financial world, a company's environmental and social record is no longer just a matter of public relations; it is a critical piece of data that investors use to decide where to put their money. The prevailing belief among regulators and policymakers has long been that if companies are forced to write more about their sustainability efforts, the market will automatically become smarter. The logic is straightforward: more information means less uncertainty, which allows investors to price risks accurately and direct capital toward the most responsible firms. This idea underpins a massive global push for mandatory reporting, a movement so significant that the United Nations counts the number of companies publishing these reports as a primary measure of progress toward its global development goals.

However, a new conceptual paper challenges the very foundation of this belief. The authors argue that simply increasing the volume of reports does not guarantee better information. They suggest that for a report to be useful, it must be credible, and credibility is not something a company can create on its own. It depends on a chain of events that happens after the report is written: first, an independent expert must verify the numbers, and second, a rating agency must translate those numbers into a score that investors can understand. If either of these steps fails, the flood of new data becomes noise rather than signal. The researchers propose that we have been measuring the wrong thing. Instead of counting how many pages of reports are filed, we should be measuring the gap between what companies say and what investors can actually trust.

The paper introduces a concept called the "credibility wedge" to describe this gap. Imagine a company discloses a vast amount of data about its carbon emissions or labor practices. If that data has not been rigorously checked by an independent auditor, or if different rating agencies interpret that data in wildly different ways, the investor cannot rely on it. The "wedge" is the distance between the sheer quantity of information released and the small fraction of that information that an investor feels confident enough to use for decision-making. The authors argue that when this wedge is wide, adding more disclosure actually makes things worse. It creates an illusion of transparency while leaving the underlying uncertainty untouched, or even increasing it by giving rating agencies more conflicting data to argue over.

To understand why this happens, the researchers break down the process of turning a corporate report into an investment decision into three distinct layers. The first layer is the company itself, the preparer. Here, the risk is that a company might choose to highlight its successes while hiding its failures, or use vague language that sounds impressive but means little. The second layer is the assurer, the independent party hired to check the work. In many current systems, these checks are often "limited," meaning the checker only looks for obvious errors rather than confirming the entire story is true. This is a much weaker guarantee than the full audits required for financial statements. The third layer is the rater, the commercial agency that takes the verified (or unverified) data and turns it into a single score. The authors point out a troubling finding: when companies disclose more, rating agencies often disagree more, not less. This is because different agencies use different methods to calculate their scores, and more data gives them more room to apply those different methods.

The paper synthesizes evidence from various fields to show that these three layers often fail in specific ways. When a government mandates that companies must report more, but does not simultaneously build a strong system for checking that data, the result is a surge in paperwork that adds no value. The researchers map out four different regulatory environments existing as of 2026 to illustrate this. The European Union, for instance, has recently narrowed the number of companies required to report but kept the requirement for independent checks, effectively choosing depth over breadth. In contrast, the United States has moved to cancel its climate disclosure rules, creating a vacuum of information. India, meanwhile, has adopted a very strict standard requiring high-level verification for its largest companies, but it faces a shortage of qualified professionals to perform those checks. This unique situation in India offers a rare opportunity to study what happens when a strict rule is applied before the necessary infrastructure is fully ready.

The core finding of the paper is that the relationship between disclosure and investment behavior is not linear. In a system where verification is weak and rating agencies disagree, expanding the scope of disclosure does not lower the cost of capital for good companies or raise it for bad ones. Instead, the market treats the information as ambiguous, demanding a higher return for the uncertainty. The authors suggest that the current global strategy of counting reports as a measure of progress is fundamentally flawed. If the goal is to redirect money toward sustainable development, the priority must shift from writing more reports to building the institutions that verify them.

The researchers propose that for disclosure mandates to work, the infrastructure of trust must be built before the scope of reporting is widened. This means ensuring that independent auditors are available and that rating agencies are transparent about how they calculate their scores. Without these steps, the "credibility wedge" remains wide, and the capital markets fail to reward the companies that are genuinely improving their environmental and social performance. The paper concludes that the path to a sustainable economy does not lie in the volume of text companies produce, but in the reliability of the numbers behind that text. Until the gap between what is disclosed and what is believed is closed, the promise of using financial markets to solve environmental challenges will remain unfulfilled.