Disagreement in ESG ratings and restatements: Evidence of greenwashing among European Auditees

Prior studies have documented that ESG rating disagreement reflects difference in methodological approaches and information interpretation, which may lead to market uncertainty, but also provide additional monitoring pressure on firm’s disclosure practices. This study investigates the relationship between disagreements in environmental, social, and governance (ESG) ratings and corporate greenwashing. We use financial statement restatements as an indicator of misreporting among European listed companies. Drawing on a panel of 4,365 firm-year observations from 2010 to 2023, we combined ESG ratings from Refinitiv, MSCI, and Sustainalytics with restatement data from Audit Analytics and investigated whether rating divergence is associated with opportunistic sustainability disclosure. The results show that restatements are positively associated with greenwashing behaviour, consistent with firms using ESG claims to offset reputational damage from weak financial reporting. However, the interaction between ESG disagreement and restatements is negative. This suggests that high rating divergence acts as an external monitoring mechanism disciplining opportunistic disclosures. Additionally, governance characteristics, such as CEO tenure, board independence, auditor type, and institutional ownership, influence the strength of these relationships. Overall, the findings provide a nuanced understanding of how ESG rating disagreements interact with financial misreporting, offering insights for regulators, investors, and auditors concerned with the credibility of sustainability reporting in Europe.