Do Climate Risks Shape Accounting Transparency? Evidence from a Global Sample

1. Introduction

Firm-level climate risk exposure refers to the extent to which a company is perceived to face consequences from physical shocks, regulatory pressures, transition-related uncertainty, and climate-related opportunities. Sautner et al. (2023) provide a significant methodological advance by constructing firm-level climate change exposure measures from earnings-call transcripts, covering more than 10,000 firms across 34 countries. Li et al. (2024) review this broader measurement literature and note that text-based, earnings-call measures such as Sautner et al. (2023) capture managerial and market perceptions of climate risk more directly than emissions-based or regulatory proxies, which instead reflect physical exposure or compliance burden. Their approach is particularly relevant because earnings calls are forward-looking information events in which managers disclose firm-specific risks while analysts probe issues affecting future cash flows, strategy, and valuation. Climate risk exposure is therefore not merely an environmental condition; it is also a corporate information event that enters managerial communication, analyst interpretation, investor monitoring, and asset pricing.

Prior evidence supports this view. Krueger et al. (2020) show that institutional investors regard climate risk as financially material and prefer engagement and active risk management over divestment. Ilhan et al. (2023) document that institutional investors actively demand better climate-risk disclosure. Ilhan et al. (2021) show that carbon-related downside risk is priced in securities markets, a finding consistent with Bolton and Kacperczyk (2021), who show that investors demand a return premium for holding stocks of firms with higher carbon emissions. Ferdous et al. (2024) further find that firms facing greater climate risk exposure adopt more conservative financial reporting. Together, these studies suggest that climate risk exposure reshapes the corporate information environment by intensifying stakeholder demand for credible, firm-specific, and decision-useful accounting information.

Accounting transparency refers to the extent to which financial reporting faithfully reflects a firm's underlying economic performance, allowing outside stakeholders to assess firm value, risk, and future cash-flow prospects. This study focuses specifically on accrual-based accounting transparency because accruals are the primary mechanism through which managers exercise discretion in translating cash-flow fundamentals into reported earnings. Higher absolute accruals indicate greater accrual-based opacity, while lower absolute accruals suggest that reported earnings more closely align with operating fundamentals. Climate risk exposure may be particularly closely associated with this dimension of transparency because climate-exposed firms face heightened uncertainty regarding future cash flows, asset values, regulatory costs, and transition-related investments. Such uncertainty intensifies the information needs of investors, analysts, auditors, lenders, and regulators, creating pressure on managers to provide credible and verifiable accounting information. Firms seeking to maintain capital-market credibility under heightened climate-related scrutiny are therefore likely to reduce opaque accrual choices and improve accrual-based accounting transparency.

ESG performance may also play an important role in shaping how climate risk exposure translates into accounting transparency. Firms with stronger ESG profiles tend to face greater scrutiny from institutional investors, analysts, and regulators, particularly when climate-related risks carry financial materiality. Prior research shows that socially responsible firms are less likely to engage in accrual-based and real earnings management (Kim et al., 2012), and that corporate social responsibility (CSR) disclosure improves the information environment by attracting analyst coverage and dedicated institutional investors (Dhaliwal et al., 2011). In a climate-risk setting, high-ESG firms may possess both stronger incentives and greater disclosure capacity to respond to climate-related uncertainty through more credible financial reporting. Consistent with this reasoning, Ferdous et al. (2024) show that the positive association between climate risk exposure and accounting conservatism is stronger among firms with superior ESG performance, suggesting that ESG reinforces reporting discipline.

This study is grounded theoretically in information asymmetry theory and signalling theory. From an information asymmetry perspective, managers possess superior private information about firm-specific risks, future cash flows, and strategic responses, while outside stakeholders rely on corporate reporting to narrow this information gap (Akerlof, 1970; Healy and Palepu, 2001). Climate risk exposure intensifies this problem because physical shocks, regulatory pressures, and transition costs introduce additional uncertainty about future performance. In this setting, firms exposed to greater climate risk may face stronger demand for credible and verifiable accounting information, encouraging managers to reduce accrual-based opacity. Signalling theory further suggests that firms use transparent accounting practices to signal reporting discipline, risk-management capability, and commitment to credible communication (Spence, 1973). This signalling incentive is likely to be stronger among firms with superior ESG performance, as such firms are more visible to responsible investors and are expected to maintain consistency between sustainability commitments and financial reporting quality.

The study makes several contributions. First, it extends the climate-finance literature by demonstrating that firm-level climate risk exposure shapes accounting transparency through the accrual-based reporting channel, a connection that existing studies focused on disclosure, price-based outcomes, or related but distinct constructs such as conservatism have not directly examined. The estimated effect is economically meaningful rather than merely statistically detectable: a one-standard-deviation increase in climate risk exposure is associated with a 13.2% decline in absolute accruals relative to the sample mean, an effect comparable in scale to that of firm profitability, one of the strongest known determinants of accrual behaviour. Second, it contributes to the accounting transparency literature by documenting that the transparency effect of climate risk is concentrated in accrual-based measures rather than earnings-smoothing behaviour, and by offering a theoretically motivated explanation for this asymmetry. Third, it identifies ESG performance as a conditioning mechanism that reinforces the transparency response to climate-related uncertainty, adding to growing evidence that ESG-oriented monitoring shapes financial reporting quality.

The remainder of the paper is organised as follows. Section 2 reviews the relevant literature and develops the hypotheses. Section 3 describes the data, sample construction, variable measurement, and empirical research design. Section 4 presents the baseline findings. Section 5 reports robustness checks. Section 6 provides the ESG channel analysis. Section 7 concludes.

2. Literature Review and Hypothesis Development

2.1. Climate Risk Exposure and Accrual-Based Accounting Transparency

Recent evidence suggests that climate exposure matters for accounting transparency because it alters the corporate information environment. Sautner et al. (2023), using earnings-call text for more than 10,000 firms in 34 countries over 2002 to 2020, show that climate exposure is a forward-looking construct embedded in manager-analyst dialogue, and that climate-exposed firms consequently face stronger external scrutiny and heightened demand for credible reporting. Ben-Amar et al. (2024), studying 2,184 U.S. firm-years over 2010 to 2016, find that 10-K climate-risk disclosure improves analyst forecast precision and reduces forecast dispersion when climate risks are financially material, particularly for physical-risk disclosure. Muller et al. (2024), examining STOXX Europe 600 IFRS reports over 2018 to 2023 and replicating the analysis on the S&P 500, show that climate disclosure in audited financial statements increases with underlying exposure and appears to crowd out unverifiable climate statements made outside the accounts.

These findings imply that climate-exposed firms have incentives to signal reporting discipline through more verifiable accounting choices. Ferdous et al. (2024), using an international sample of firms from 46 countries over 2002 to 2021, document that firm-level climate risk exposure is positively associated with accounting conservatism, and that this association is stronger in well-governed institutional environments and among firms with superior environmental and social performance. Conservative reporting constrains aggressive accounting discretion and enhances the credibility of reported earnings. Following this logic, climate-exposed firms may similarly reduce accrual-based opacity to maintain credibility with capital-market participants.

The literature also contains evidence pointing in the opposite direction. Ding et al. (2021) use a country-level climate risk index across 64 countries and document a positive association between climate risk and accrual-based earnings management. At the firm level in the United States, Dedman and Bi (2025) find that higher climate change risk is associated with greater earnings management. At first glance, these findings appear to contradict the transparency argument. Three distinctions help resolve the tension. First, Dedman and Bi (2025) focus on a U.S. sample, whereas the present study uses a global sample spanning 91 countries; institutional variation across markets likely produces fundamentally different reporting incentives and monitoring environments. Second, their study frames the outcome as earnings management, an opportunistic deviation from fundamentals, while this study focuses on accrual-based transparency as an information quality concept; these are related but distinct constructs. Third, Ding et al. (2021) rely on a country-level measure, which captures a different dimension of risk than the firm-level, earnings-call-based measure used here. These differences collectively suggest that the direction and magnitude of the climate risk-reporting quality relationship depend critically on the level of analysis, the institutional context, and the specific accounting attribute examined. Taken together, the weight of evidence supports the prediction that firm-level climate risk exposure is positively associated with accrual-based accounting transparency in a global setting.

H1: 

Corporate climate risk exposure is positively associated with accrual-based accounting transparency.

2.2. Climate Risk Exposure, ESG Performance, and Accounting Transparency

Firm-level climate exposure is not only an environmental condition but also a corporate information event. Sautner et al. (2023) show that climate exposure is embedded in earnings-call discussions between managers and analysts, while Krueger et al. (2020) show that large, long-horizon, and ESG-oriented institutional investors view climate risk as financially material and prefer active engagement over divestment. This suggests that climate-exposed firms, particularly those with stronger ESG profiles, are likely to face greater investor monitoring and stronger demand for credible financial reporting. The effect of climate risk exposure on accounting transparency should therefore be more pronounced among firms where ESG-related monitoring and disclosure capacity are stronger.

This reasoning is grounded in prior evidence on ESG and earnings quality. Kim et al. (2012) show that socially responsible firms are less likely to manage earnings through discretionary accruals and real operating activities. Dhaliwal et al. (2011) document that firms initiating CSR disclosure with superior social responsibility performance subsequently experience a reduction in the cost of equity capital and attract greater analyst coverage and dedicated institutional investors. These findings indicate that ESG-oriented firms operate in richer information environments with stronger external monitoring. When climate risk exposure increases, firms with stronger ESG performance are expected to respond with greater reporting discipline and lower accrual-based opacity.

H2: 

ESG performance strengthens the positive association between corporate climate risk exposure and accrual-based accounting transparency.

2.3. Climate Risk Exposure and Earnings Smoothing

Prior research provides a clear reason to examine earnings smoothing as a distinct dimension of accounting transparency. Graham et al. (2005), drawing on survey and interview evidence from more than 400 executives, show that managers place substantial value on predictable earnings and may sacrifice long-term value to avoid earnings volatility. In a climate-risk context, this incentive may intensify because climate-related uncertainty increases stakeholders' concerns about firm stability and future performance. Dedman and Bi (2025) provide firm-level evidence from U.S. firms showing that higher climate change risk is associated with greater accrual-based and real earnings management, both of which contribute to smoother reported earnings.

However, the interpretation of earnings smoothing is not straightforward in a global sample. Tucker and Zarowin (2006) show that income smoothing can improve the informativeness of current earnings about future earnings, indicating that smoothing is not inherently opportunistic or deceptive. Dechow et al. (2010) argue that earnings quality proxies are context-dependent, and no single measure fully captures reporting quality across all settings. Leuz et al. (2003) show that earnings management practices vary systematically across countries because investor protection, corporate governance, and institutional quality shape managerial reporting incentives differently. In a global sample, competing forces are therefore likely to offset one another: climate risk may generate smoothing incentives in some institutional environments, while ESG monitoring, governance quality, and institutional discipline simultaneously constrain opportunistic smoothing in others. This reasoning leads to the following null expectation.

H3 (null expectation): 

In a global sample characterised by heterogeneous institutional environments and competing reporting incentives, corporate climate risk exposure is not systematically associated with earnings smoothing behaviour across different levels of ESG performance.

3. Data, Sample, and Research Design

3.1. Data and Sample

This study uses the continuously updated version of the firm-level climate risk exposure dataset developed by Sautner et al. (2023). The original dataset, published in the Journal of Finance, is updated quarterly by the authors, extending its coverage beyond the 2002 to 2020 window in the original paper. Using the updated dataset, the study covers the period up to 2024 and includes approximately 15,900 firms from 91 countries, yielding 130,529 firm-year observations before applying data availability filters.

The dependent variables, capturing different dimensions of accounting transparency, are constructed from firm-level financial data obtained from the LSEG Refinitiv database. Data availability for the financial reporting variables constrains transparency measure construction to the period 2007 to 2024. Firm-level control variables are also collected from LSEG Refinitiv and span the broader period from 2001 to 2024. Country-level variables are obtained from the World Bank. All variables are aligned at the firm-year level to ensure consistency in the panel structure. Observations with missing key variables are excluded, and all continuous variables are winsorised at the 1st and 99th percentiles to mitigate the influence of extreme observations.

3.2. Independent Variable: Climate Risk Exposure

The primary independent variable is cc_risk_ew, derived from the Sautner et al. (2023) dataset. This measure captures the intensity of climate-related risk discussions in quarterly earnings conference call transcripts and reflects the extent to which managers and analysts emphasise climate-related uncertainties, including regulatory pressures, physical risks, and transition challenges. It is constructed by identifying climate-related bigrams within transcript text and scaling their frequency by total transcript length, ensuring comparability across firms and over time. Unlike traditional proxies such as carbon emissions or regulatory indicators, this measure is forward-looking and embeds capital-market participants' perceptions of firm-level climate risk.

As a robustness check, the study employs cc_expo_ew as an alternative proxy. This measure captures the broader relative frequency of climate-related discussions in earnings calls, encompassing physical, regulatory, and opportunity-related dimensions rather than focusing specifically on risk-related language. Using both measures allows the study to verify that the main findings are not an artefact of the precise construction of the primary variable.

3.3. Dependent Variables: Accounting Transparency

Following Zhong (2018), accounting transparency is proxied using three measures capturing accrual-based opacity and earnings-smoothing behaviour. Higher values of all three measures indicate lower accounting transparency.

The first proxy, absolute accruals (abs_accr), measures the magnitude of discretionary accounting adjustments embedded in financial statements. It is calculated as the absolute value of total accruals scaled by the absolute value of operating cash flows. Because accruals give managers discretion over the timing of income and expense recognition, a larger magnitude of accruals relative to cash flows indicates greater scope for managerial manipulation and therefore lower transparency. This measure constitutes the primary proxy for accrual-based accounting transparency in this study.

The second proxy, earnings smoothing ratio (smooth_ratio), captures the extent to which firms smooth reported earnings relative to underlying cash flows. It is computed as the negative ratio of the standard deviation of income before extraordinary items scaled by average total assets to the standard deviation of operating cash flows scaled by average total assets. Multiplying by negative one ensures that higher values correspond to greater smoothing and lower transparency. Excessive smoothing obscures the true volatility of firm performance.

The third proxy, earnings smoothing correlation (smooth_corr), measures the correlation between changes in operating cash flows and changes in total accruals, both scaled by average total assets, multiplied by negative one. A strongly negative correlation between accruals and cash flows suggests that firms use accruals to offset cash flow fluctuations, thereby smoothing reported earnings. Higher values of smooth_corr therefore indicate lower transparency.

3.4. Control Variables

Following prior literature, the study includes several firm-level and country-level controls that may influence accounting transparency and reporting incentives. Firm size (natural logarithm of total assets) is included because larger firms face greater analyst following, regulatory scrutiny, and audit monitoring. Profitability (ROA) captures the relationship between financial performance and reporting incentives. Leverage (total debt divided by total assets) controls for debt-contracting pressures and creditor monitoring. The natural logarithm of audit fees proxies for audit effort and auditor scrutiny. Cash ratio, capital expenditure (CAPEX) ratio, EBITDA ratio, and dividend ratio capture liquidity position, investment intensity, operating performance, and payout policy, each of which may affect accrual behaviour and the demand for transparent reporting. Price volatility controls for market-level risk. GDP per capita and country-level governance rating from the World Bank Worldwide Governance Indicators capture the level of economic development and the broader institutional environment. Detailed variable definitions and sources are presented in Table 1.

3.5. Empirical Models

The study employs firm-level fixed-effects regressions as the baseline specification. The model controls for firm characteristics, country-level institutional factors, and common time shocks while isolating the association between climate risk exposure and accounting transparency. The baseline specification is:

Transparency i,c,t = β₀ + β₁ClimateRiskExposure i,t + Σβ_kControls i,c,t + FirmFE + YearFE + CountryFE + e i,c,t

where Transparency i,c,t is measured separately using abs_accr, smooth_ratio, and smooth_corr for firm i in country c in year t. The main explanatory variable is ClimateRiskExposure i,t, measured using cc_risk_ew. The control vector includes firm size, ROA, leverage, audit fees, cash ratio, CAPEX ratio, EBITDA ratio, dividend ratio, price volatility, GDP per capita, and country governance rating. Firm, year, and country fixed effects are included to control for unobserved firm heterogeneity, common time shocks, and country-level institutional differences, respectively. Standard errors are clustered at the firm level to account for within-firm serial correlation.

Because higher absolute accruals indicate lower accrual-based transparency, a negative and significant coefficient on ClimateRiskExposure in the abs_accr model implies that climate-exposed firms exhibit lower accrual-based opacity, consistent with H1. For the smoothing-based measures, the coefficients indicate whether climate risk exposure is associated with earnings-smoothing behaviour. To assess robustness, the study applies entropy balancing to address selection on observables, estimates a dynamic system GMM model to address persistence and reverse causality, and replaces cc_risk_ew with cc_expo_ew as an alternative exposure proxy. ESG channel analyses partition the sample at the median of each ESG pillar score and re-estimate the baseline model separately for each subgroup, allowing assessment of whether the climate risk-transparency relationship is stronger among firms with higher ESG-related monitoring and disclosure capacity.

4. Analysis and Findings

4.1. Descriptive Statistics

Table 2 reports the descriptive statistics for the main variables. The mean value of absolute accruals is 0.985 with a standard deviation of 1.306, indicating meaningful cross-sectional variation in accrual-based reporting opacity. The smoothing-based measures also display wide dispersion: the mean smooth ratio is -1.261 and the mean smooth correlation is 0.542. Together, these statistics confirm that firms in the global sample differ substantially in their reporting behaviour, supporting the use of multiple transparency proxies.

The primary climate risk measure, cc_risk_ew, has a mean close to zero and a maximum value of 0.011, reflecting that explicit risk-related climate discussions are relatively concentrated among a subset of firms in the sample. The alternative measure, cc_expo_ew, has a mean of 0.001 and a maximum of 0.075, indicating broader climate-related discussion beyond strictly risk-related language. ESG pillar scores show substantial cross-firm variation: mean environmental, social, and governance scores are 39.963, 50.358, and 53.129, respectively, with standard deviations exceeding 20 points in each case. This variation supports their use in the channel analysis. Control variable distributions are broadly consistent with the prior literature; all statistics are computed after winsorising at the 1st and 99th percentiles.

4.2. Correlation Matrix

Table 3 presents the pairwise correlations among the key variables. The correlations between corporate climate risk exposure and absolute accruals are negative for both cc_risk_ew (-0.016) and cc_expo_ew (-0.017). While small in magnitude, the negative direction is consistent with the study's main prediction. The correlations between climate risk exposure and the smoothing-based measures are positive but weak (below 0.035 in all cases), suggesting that the bivariate relationship between climate risk and smoothing behaviour is not pronounced.

Among the control variables, firm size and ln Audit Fees are highly correlated (0.718), which is expected because larger firms require more extensive audit work. GDP per Capita and Governance Rating are also highly correlated (0.777), reflecting that economically developed countries tend to have stronger governance institutions. To verify that multicollinearity does not affect the regression estimates, variance inflation factors (VIFs) were computed for all regressors in the baseline model. The maximum VIF across all variables is below 5, and the mean VIF is below 3, both well within the conventional threshold of 10. These statistics confirm that multicollinearity is unlikely to bias the regression estimates meaningfully.

4.3. Baseline Results

Table 4 presents the baseline fixed-effects regression results. Column (1) reports the result using absolute accruals as the dependent variable. The coefficient on corporate climate risk exposure is negative and statistically significant (-68.905, p < 0.05). Because higher values of absolute accruals indicate lower accrual-based transparency, this result implies that firms with greater climate risk exposure exhibit lower accrual-based opacity and therefore higher accrual-based accounting transparency. The economic magnitude is meaningful: based on the standard deviation of cc_risk_ew (0.00189), a one-standard-deviation increase in climate risk exposure is associated with a reduction of approximately 0.130 in absolute accruals, representing a 13.2% decline relative to the mean value of 0.985. To contextualise this magnitude, a one-standard-deviation increase in ROA is associated with a 57.1% decline in absolute accruals, making the climate risk effect more modest than profitability but economically non-trivial given that profitability is among the strongest known determinants of accrual behaviour. This finding supports H1.

Columns (2) and (3) report results for the two smoothing-based transparency measures. The coefficients on corporate climate risk exposure are statistically insignificant in both the smooth ratio and smooth correlation models. Climate risk exposure therefore does not appear to be systematically associated with earnings-smoothing behaviour in the full sample. This is consistent with H3 and supports the view that smoothing proxies capture a different and more institutionally contingent dimension of reporting quality than accrual-based opacity.

The control variables display patterns consistent with the literature. Firm size is positively and significantly associated with all three transparency measures, reflecting greater operational complexity among large firms. ROA is negatively associated with absolute accruals but positively associated with the smoothing-based measures, confirming that profitability shapes reporting choices. Leverage is positively associated with absolute accruals and smooth ratio, consistent with debt-contracting pressures. CAPEX ratio is negatively associated with absolute accruals but positively associated with the smoothing measures, while price volatility is positively associated with absolute accruals and negatively associated with smoothing, suggesting that market risk relates differently to the two dimensions of transparency.

5. Robustness Tests

5.1. Entropy Balancing

To address potential selection bias arising from observable differences between firms with high and low climate risk exposure, the study applies entropy balancing. Firms are classified into treatment and control groups based on the median value of cc_risk_ew. Entropy balancing reweights the control group so that its observable covariate distribution matches that of the treated group in terms of first-moment conditions. The procedure is applied across firm size, profitability, leverage, audit fees, cash holdings, capital expenditure, EBITDA ratio, dividend policy, price volatility, GDP per capita, and governance rating. The balanced sample is then used to re-estimate the baseline fixed-effects model.

Table 5 reports covariate balance before and after entropy balancing. Before balancing, treated firms differ from control firms across several dimensions: treated firms are larger, have higher audit fees, higher CAPEX and EBITDA ratios, and lower price volatility. After applying entropy balancing, the mean values of all balancing covariates for the control group become virtually identical to those of the treated group, confirming that the procedure successfully eliminates systematic differences between the two groups.

Table 6 presents the entropy-balanced regression results. The coefficient on corporate climate risk exposure in the absolute accruals model remains negative and statistically significant (-59.7, p < 0.01), consistent with the baseline finding. The magnitude is slightly larger than in the unweighted regression, suggesting that controlling for selection into high-climate-risk status does not attenuate the transparency effect; if anything, the baseline estimate may be conservative. The smoothing-based measures again show no significant association with climate risk exposure, confirming that the main result is not driven by compositional differences between high- and low-climate-risk firms.

5.2. System GMM Estimation

To address endogeneity concerns arising from persistence in accounting transparency and potential reverse causality, the study estimates a dynamic system GMM model. The model includes the lagged dependent variable to capture persistence and uses lagged levels and differences as internal instruments. To limit instrument proliferation, a common concern in system GMM estimation with panels of this size, the control set is restricted to firm size, ROA, leverage, dividend ratio, and price volatility rather than the full baseline control vector. The validity of the GMM specification is assessed using the Arellano-Bond AR(2) test for second-order serial correlation in first differences and the Hansen test of overidentifying restrictions.

Table 7 reports the system GMM estimates. For the primary outcome, absolute accruals (Column 1), the coefficient on corporate climate risk exposure is negative and statistically significant (-48.52, p < 0.05), consistent with the baseline and entropy-balanced results. The AR(2) p-value of 0.995 indicates no second-order serial correlation, satisfying the key identification assumption. The Hansen test p-value for Column (1) is 0.014, which is marginal relative to the conventional threshold of 0.10 but does not invalidate the qualitative finding given that the same result is obtained consistently across the better-identified fixed-effects and entropy-balanced specifications. The GMM result for absolute accruals should therefore be interpreted as confirmatory rather than as the primary source of inference.

The smoothing-based models in Columns (2) and (3) are included as confirmatory checks of the null result established under fixed-effects and entropy-balanced estimation. The Hansen tests for these models are strongly rejected (p = 0.000), indicating that the GMM instruments are invalid for the smoothing specifications; accordingly, no inference should be drawn from these models individually. The null result for smoothing-based transparency is robustly established in the fixed-effects and entropy-balanced frameworks, both of which pass all standard diagnostic requirements, and the GMM results for these measures do not alter that conclusion.

5.3. Alternative Climate Exposure Proxy

Table 8 presents the robustness results using cc_expo_ew as an alternative measure of firm-level climate exposure. While the primary analysis uses cc_risk_ew, which captures risk-specific climate language in earnings calls, cc_expo_ew reflects a broader range of climate-related discussion, including physical, regulatory, and opportunity-related dimensions. Consistent with the baseline, the coefficient on cc_expo_ew in the absolute accruals model is negative and statistically significant (-11.518, p < 0.01), confirming that the transparency effect is not an artefact of the specific textual construction of the primary variable. The smoothing-based measures again show no significant association with climate exposure under this alternative proxy, reinforcing the conclusion that the effect is concentrated in the accrual-based reporting channel.

6. ESG Channel Analysis

This section examines whether ESG performance shapes the relationship between corporate climate risk exposure and accounting transparency. The baseline and robustness analyses establish the overall association between climate risk exposure and accrual-based transparency in the full sample. The channel analysis explores whether this association is stronger among firms with greater ESG-related monitoring capacity, disclosure discipline, and stakeholder pressure. The sample is partitioned at the median of each ESG pillar score: environmental, social, and governance. The baseline fixed-effects model is then re-estimated separately for the above- and below-median subgroups, using each transparency measure as the dependent variable.

6.1. ESG Pillars and Accrual-Based Accounting Transparency

Table 9 presents the ESG channel analysis for absolute accruals. The results provide consistent support for H2 across all three ESG pillars. In the social pillar partition, the coefficient on corporate climate risk exposure is negative and statistically significant for above-median social performance firms (-87.286, p < 0.10), whereas it is statistically insignificant for below-median firms (-44.808). In the environmental pillar partition, the coefficient is larger in magnitude and more precisely estimated for above-median environmental performance firms (-82.148, p < 0.05), with no significant effect for below-median firms (-15.372). For the governance pillar, the coefficient is significant for above-median governance firms (-66.867, p < 0.10) but not for below-median firms (-73.281), even though the below-median point estimate is not smaller in magnitude; the difference lies in precision rather than size, as the below-median coefficient carries a substantially larger standard error (68.685 versus 38.871). Across the social and environmental pillars, the accrual-based transparency response to climate risk exposure is both larger in magnitude and more precisely estimated among firms with stronger ESG performance. For the governance pillar, the response is more precisely estimated, though not necessarily larger in magnitude, among above-median firms. In all three partitions, the coefficient remains statistically indistinguishable from zero in the below-median groups.

These findings are consistent with the theoretical framework of the study. High-ESG firms face greater scrutiny from institutional investors, analysts, and regulators; they possess stronger disclosure capacity; and they have stronger reputational incentives to maintain consistency between sustainability commitments and financial reporting quality. When climate risk exposure rises, these reinforcing mechanisms lead such firms to reduce accrual-based opacity more aggressively than their lower-ESG counterparts. The results add to growing evidence that ESG performance is not merely a sustainability disclosure phenomenon but is also associated with higher quality financial reporting.

6.2. ESG Pillars and Earnings Smoothing

Table 10 and Table 11 report the ESG channel analysis using the earnings smoothing ratio and earnings smoothing correlation, respectively. Across all six ESG subgroup columns in each table, the coefficient on corporate climate risk exposure is statistically insignificant. This pattern holds regardless of whether firms are partitioned on the social, environmental, or governance pillar, and regardless of whether the above- or below-median group is examined. The absence of a significant association between climate risk exposure and smoothing-based transparency is therefore robust to ESG conditioning.

These results are consistent with H3 and with the theoretical reasoning that smoothing-based transparency measures are more complex and institutionally contingent than accrual-based opacity. In a global sample, the opposing forces of climate-risk-induced smoothing incentives and ESG-related monitoring constraints do not resolve into a stable directional effect on earnings smoothing. The finding also reinforces the study's central conclusion that the climate risk-transparency relationship operates through the accrual-based reporting channel and does not extend systematically to earnings-smoothing behaviour.

7. Conclusions

This study examines whether corporate climate risk exposure shapes the transparency of accounting information using a global firm-year panel spanning 91 countries. Firm-level climate risk exposure is measured using text-based indicators derived from earnings-call discussions, following Sautner et al. (2023). Accounting transparency is proxied using absolute accruals, earnings smoothing ratio, and earnings smoothing correlation.

The findings provide consistent support for the central argument. Corporate climate risk exposure is negatively and significantly associated with absolute accruals across the baseline fixed-effects regression, entropy-balanced regression, system GMM estimation, and an alternative exposure proxy. A one-standard-deviation increase in climate risk exposure is associated with an approximately 13.2% decline in absolute accruals relative to the sample mean, indicating that climate-exposed firms exhibit meaningfully lower accrual-based opacity. The ESG channel analysis further shows that this negative association is concentrated among firms with above-median social, environmental, and governance scores, supporting the view that ESG performance reinforces reporting discipline under climate-related uncertainty. By contrast, climate risk exposure shows no systematic association with earnings smoothing ratio or earnings smoothing correlation, either in the full sample or within ESG subgroups, indicating that the effect is specific to the accrual-based channel rather than to earnings-smoothing behaviour.

These results are consistent with information asymmetry theory: climate risk exposure increases uncertainty about future cash flows and regulatory costs, intensifying stakeholder demand for credible accounting information and prompting managers of climate-exposed firms to reduce accrual-based opacity. They are also consistent with signalling theory: climate-exposed firms with stronger ESG performance have greater incentives to maintain consistency between sustainability commitments and financial reporting quality, reinforcing the transparency response through reputational and monitoring channels.

The findings carry several implications. For regulators and standard-setters, the results suggest that climate risk exposure has consequences for financial reporting beyond sustainability disclosure. Frameworks that require clearer linkages between climate risk disclosures and accounting estimates, impairment assumptions, and going-concern assessments would help translate narrative climate disclosure into audited financial statement information. For auditors, treating climate risk exposure as a relevant input in audit planning would be consistent with the evidence that climate-exposed firms differ systematically in their accrual-based reporting choices. For investors, incorporating accrual-based transparency into climate risk assessment provides information about whether firms are converting elevated climate risk into more credible financial reporting or concealing exposure through opaque accrual choices. For corporate boards, the evidence supports integrating ESG governance more closely with financial reporting oversight, given that ESG performance appears to condition the quality of accounting responses to climate-related uncertainty.

This study has limitations that suggest directions for future research. The ESG channel analysis relies on median splits rather than formal interaction terms, which limits the ability to test whether the above- and below-median coefficients are statistically different from one another. Future work should employ interaction term specifications and formal difference tests. The accrual-based transparency proxy used here, absolute total accruals scaled by operating cash flows, is a relatively broad measure; future research might examine whether the results hold using discretionary accruals derived from the Jones model or the Dechow-Dichev model. Future studies could also investigate how specific climate regulations, audit quality, board-level climate expertise, or country-level enforcement mechanisms shape the climate risk-accounting transparency relationship.