Mandatory ESG Disclosure and its Effect on Firm Performance

Abstract

With the intention to reach a more sustainable future, the EU implemented Directive 2014/95/EU in 2014, mandating large and public firms to start disclosing ESG information. The resulting changes are however first noticeable in the annual reports for 2017. As there is ambiguity of whether there are costs associated with mandated ESG disclosure, this thesis explores whether the implemented mandate has affected the concerned European firms’ financial performance, measured by ROA, ROE and Tobin’s Q. The research is conducted on a sample from 2014 to 2019, consisting of treatment firms from the EU and benchmark firms from the US. A difference-in-difference research design is utilized on a propensity score matched sample consisting of firms with available ESG-scores for the full time period, i.e. firms which are already disclosing prior to the directive. The results show negative and significant coefficients for firm performance, meaning that firm performance is indeed affected by the implementation of the directive. It is found that even though the concerned firms previously disclosed ESG information, firm performance is still negatively affected by the mandated disclosure. Thus showcasing that the negative impact is not unique to previously non-disclosing firms as found by earlier research.