(The) effect of mandatory ESG disclosure on firms’ reputational risk

Abstract

Recently, the number of countries adopting mandatory ESG disclosure is increasing, but there are still countries that have adopted voluntary ESG disclosure, Prior research has shown that investors are sensitive to negative ESG issues in firms. In particular, negative ESG disclosures through media channels have a negative impact on stock prices. In addition, the market impact of negative news related to ESG was found to be greater than positive news. Therefore, in countries adopting voluntary ESG disclosure, there is ample incentive to hide negative ESG news. In this paper, we empirically verified that a firm’s reputational risk increases when a country that adopts a voluntary ESG disclosure policy adopts a mandatory ESG disclosure policy. We confirmed an increase in individual negative ESG issues such as fraud, products (health and environmental issues), and violation of national legislation.