Essays on ESG disclosure, performance and assurance

Abstract

In this dissertation, economic implications of ESG disclosure, performance and assurance are examined in three essays. It is evident in the recent developments that the need for a sustainable and responsible investments is beyond discussion and becoming inevitable. An integral element required to make such investments is ESG information. The role and importance of ESG, especially to investment decisions, is attracting regulators’ interest in approaching the provision of ESG information through mandatory disclosure. Moreover, credit rating agencies are showing interest into the implications of ESG to credit risks. The purpose of this thesis is, therefore, to examine the reception of the mandatory EU ESG disclosure, and to examine the potential monitoring and signaling roles of third-party ESG assurance. The overall results of the thesis are three-fold. First, in examining the perception of investors towards EU directive on mandatory ESG disclosure, essay one shows a negative stock market reaction which indicates investors’ assessment of the directive as costly. The costs may include administrative and reporting costs of complying the mandate and potential proprietary and political costs following the reporting. Second, using sample firms from EU, essay two shows a higher ESG performance for firms that assure their ESG reports than firms that do not assure ESG reports. The results confirm the signaling role of an independent third-party assurance to differentiate between ESG performances. Firms with higher ESG performance has the incentive to use third-party ESG assurance to differentiate themselves from counterparts with an inferior ESG performance, otherwise both types of firms could be pooled together. Third, in line with monitoring theory of assurance and risk mitigation role of ESG to credit risks, essay three shows a mediated role of third-party ESG assurance on credit ratings. The results shows that the third-party ESG assurance indirectly leads to a reduced credit risk transferred through an enhanced ESG performance.