The moderating effect of IR framework adoption on the relationship between environmental, social, and governance (ESG) disclosure and a firm's competitive advantage

Integrated reporting (IR) is a corporate reporting framework that integrates resources or capital as input, business models as a process, and outcomes into a value creation process for all stakeholders. There is skepticism regarding whether the IR framework can have real consequences; therefore, firms have been very slow in voluntarily adopting it. This study examines whether IR framework adoption can affect the association between environmental, social, and governance (ESG) disclosure and a firm’s competitive advantage. Using multivariate regression on a population of 187 international firms that voluntarily adopted an IR framework from 2009 to 2019, this study found that ESG disclosure has a positive influence on competitive advantage at the firm level. This study also found evidence that the adoption of an IR framework strengthens the association between ESG disclosure and a firm's competitive advantage. Different from the majority of the prior literature, this study uses cognitive cost theory to hypothesize that the IR format could help stakeholders understand the connection between sustainability practices and firm value creation activities. Users understand that the sustainability agenda are systematically embedded in the business model, thus increasing their support for it, which can improve firms’ competitive advantage. Practically, managers should take advantage of the IR framework in reporting ESG practices and aligning those practices with value creation activities.