The Signaling Role of Science-Based Targets

The growing significance of ESG disclosure for investors means that the problem of asymmetry of ESG information between firms and investors is becoming more pronounced. Firms can potentially use ESG disclosure initiatives to reduce information asymmetry with investors, thereby reducing the perceived risk and improving firm valuation. This study aims to determine whether science-based targets are a type of ESG disclosure which can reduce information asymmetry, by analysing the effect that science-based targets adoption, as well as target achievement and difficulty, have on a firm’s market- based financial performance. The theoretical framework of signaling theory is applied, which draws on concepts such as signal honesty and signal cost to determine the necessary elements of a good signaling strategy. This research sheds light on the signaling effect of ESG disclosure and helps to determine whether targets are a useful medium for signaling.

The study uses a quantitative research design, using both financial and non-financial data from publicly-listed firms around the world. Data from the Science-Based Targets initiative (SBTi) is used to formulate the independent and moderating variables. The cross-industry multi-year panel data is analysed using regression analysis, while considering firm-effects and using control variables to account for the influence of other financial and non-financial indicators. Next to the overall sample, further samples are studied which are characterized by the level of industry emission intensity, the ambition level of targets, and the number of firm-year observations. The analysis is moderately constrained by the lack of longitudinal data and the premature nature of existing science-based targets. Finally, to support the quantitative analysis, a number of expert interviews are conducted to deepen the understanding of the observed phenomena.