Earnings management and ESG performance : evidence from Finnish listed firms

Environmental, Social, and Governance (ESG) performance has become an important factor of how companies are assessed. It indicates how firms handle environmental responsibilities, how they treat stakeholders, and also maintain good governance practices. Earnings management continues to be a key issue in accounting, as it affects the reliability of financial reporting. While prior studies often suggest that companies with better ESG performance engage less in earnings manipulation, still, it’s not clear whether this relationship also applies in countries with strong institutional environments such as Finland. This study explores the relationship between ESG performance and accrual-based earnings management in Finnish listed firms.

The analysis is based on firm-level data from the LSEG Refinitiv database which cover the period 2015–2024. For measuring earnings management, discretionary accruals are used, while ESG scores are used to capture sustainability performance. The research also indicates the presence of financial leverage and profitability on this relationship. The findings indicate that ESG performance is not a major factor affecting the earnings management in Finnish context. This implies that ESG itself might not be enough to mitigate managerial discretion in financial reporting where there are already strong governance systems and regulations. However, financial leverage is discovered to minimize earnings management, which means that monitoring by creditors is a significant factor. Moreover, profitability undermines the association between ESG and earnings management, and this implies that ESG is not as effective as a constraint in more profitable companies. Overall, the results indicate that in Finland, the traditional financial monitoring mechanisms are more crucial than the ESG performance in restricting earnings management. The paper highlights the significance of institutional context and firm-specific factors in the assessment of the role of ESG in financial reporting.