As the relevancy of environmental, social, and governance (ESG) factors grows, institutional investors are increasingly utilizing ESG for investment decisions. However, this information is often not easily available or clear enough to be useful. In an effort to address this issue, several countries have initiated mandatory ESG disclosures which compels firms to submit details about ESG issues in traditional financial disclosures or specialized reports. It was unclear if these disclosures were beneficial to either investors or the firms. Thus, researchers examined how firm-level outcomes may have been impacted by mandatory ESG regulations.
It was discovered mandatory ESG disclosure does increase the availability and quality of reporting. It also yields benefits for the firm, which can have more accurate earnings forecasts and fewer negative ESG incidents. Authors concluded as a result of this study that mandatory disclosure of ESG has benefits that span from more thorough information to a better state for the company.
Researchers assembled a dataset of mandatory ESG disclosure regulations. These were taken from 25 different countries who introduced mandatory disclosures during 2000 and 2017. They then analyzed this impact on the number of reports filed in investor databases, as well as on stock price crash risk.
Insights & Implications
— Mandatory ESG disclosure increased the availability and quality of reporting.
— Mandatory ESG disclosure increased the accuracy of analysts’ earnings forecasts and lowered forecast dispersion.
— ESG reporting also led to beneficial real outcomes, including reducing negative ESG incidents and decreasing the chance of stock price decline.
Krueger, Philipp and Sautner, Zacharias and Tang, Dragon Yongjun and Zhong, Rui, The Effects of Mandatory ESG Disclosure Around the World (May 11, 2021). European Corporate Governance Institute – Finance Working Paper No. 754/2021, Swiss Finance Institute Research Paper No. 21-44
Location of Article
This article is available online at: http://dx.doi.org/10.2139/ssrn.3832745