The Effects of Mandatory ESG Disclosure Around the World

• Published date: 01 December 2024
• Author: PHILIPP KRUEGER,ZACHARIAS SAUTNER,DRAGON YONGJUN TANG,RUI ZHONG
• Date: 01 December 2024
• DOI: http://doi.org/10.1111/1475-679X.12548

DOI: 10.1111/1475-679X.12548

Journal of Accounting Research

Vol. 62 No. 5 December 2024

Printed in U.S.A.

The Effects of Mandatory ESG

Disclosure Around the World

PHILIPP KRUEGER,∗ZACHARIAS SAUTNER,†

DRAGON YONGJUN TANG,‡AND RUI ZHONG§

Received 30 November 2021; accepted 20 February 2024

ABSTRACT

We compile a novel data set on mandatory environmental, social, and

governance (ESG) disclosure around the world to analyze the stock liquidity

∗University of Geneva (Geneva School of Economics and Management; Geneva Finance

Research Institute) and Swiss Finance Institute; †University of Zurich and Swiss Finance Insti-

tute; ‡University of Hong Kong; §University of Western Australia

Accepted by Regina Wittenberg Moerman. The ESG mandatory disclosure data described

in this paper are publicly available at https://osf.io/syn8t/. We thank an anonymous ref-

eree, Ulrich Atz, Rui Dai, Adriana Dumitrescu, Caroline Flammer, Mingyi Hung, YeejinJang,

Jungim Kim, Zhen Lai, Hao Liang, Pedro Matos, Chenyu Shan, Andrei Simonov, Yao Wang,

Yichen Shi, Fei Xie, Jian Zhang, Bohui Zhang, Weiming Zhang, and seminar participants at

the 2022 Asian Finance Association Annual Meeting, FMA Europe 2022, AFA 2022 Meetings,

AFAANZ Annual Conference 2021, China Accounting and Finance Review Annual Meeting

2021, CICF 2021, FMA 2021, 2021 GRASFI conference, the 2019 Sustainable Finance Forum,

the 2019 FMA Asia Annual Conference, the HKU-CBI Conference on the Real Effects of

Green Bonds and ESG, UNPRI Academic Seminar, University of Western Australia, Shang-

hai University of Finance and Economics, Curtin University, Lingnan University, and ACPR

- Banque de France. We acknowledge financial support from INSPIRE at the ClimateWorks

Foundation, which supports the agenda of the Network for Greening the Financial System

(NGFS). Zhong acknowledges research funding from the Research Collaboration Awards at

the University of Western Australia, the National Social Science Fund of China (Key Project

No. 18AZD013), and the International Institute of Green Finance at the Central Univer-

sity of Finance and Economics. An online appendix to this paper can be downloaded at

https://www.chicagobooth.edu/jar-online-supplements.

Correspondence: Zacharias Sautner, University of Zurich and Swiss Finance Institute.

Email: zacharias.sautner@df.uzh.ch

1795

© 2024 The Authors. Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The

Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.

This is an open access article under the terms of the Creative Commons Attribution License, which

permits use, distribution and reproduction in any medium, provided the original work is properly cited.

1796 p. krueger, z. sautner, d. y. tang, and r. zhong

effects of such disclosure mandates. We document a positive effect of ESG dis-

closure mandates on firm-level stock liquidity. The effects are strongest if the

disclosure requirements are implemented by government institutions, not on

a comply-or-explain basis, and coupled with strong enforcement by informal

institutions. Firms with weaker information environments benefit more from

ESG disclosure mandates. Our results support the view that ESG disclosure

regulation improves the information environment and has beneficial capital

market effects.

JEL codes: G14, G15, G18, G32, G38

Keywords: sustainability reporting; ESG reporting; nonfinancial informa-

tion; stock liquidity

1. Introduction

Environmental, social, and governance (ESG) considerations have become

increasingly important for investment decisions. Yet, investors frequently

complain that the availability and quality of firm-level ESG disclosures are

insufficient to make informed investment decisions (Ilhan et al. [2023]). In

response to the gap between the demand for ESG information by investors

and the supply of such information by firms, several countries have initiated

mandatory ESG disclosure regulations to force firms to disclose high-quality

information on ESG issues either jointly with traditional financial disclo-

sures or in specialized standalone reports. In addition to these country-level

initiatives, there are significant efforts at the global level to design, harmo-

nize, and eventually mandate international ESG disclosure standards.1

In this paper, we compile a novel data set on mandatory ESG disclosure

regulations around the world and analyze whether and how such disclo-

sure rules affect firm-level stock liquidity. ESG disclosure rules may affect

many firm-level outcomes, but our focus on stock liquidity is motivated by

two primary considerations. First, liquidity is a first-order stock character-

istic that is of importance for investors, firms, and regulators because it

affects real and financial outcomes (e.g., Amihud and Levi [2023] for re-

cent evidence). Second, as stressed by Christensen, Hail, and Leuz [2021]

in their review of the ESG disclosure literature, “[the] relatively low number

of studies on liquidity effects is surprising considering that market liquid-

ity has been shown to be very responsive to corporate disclosures and it is

probably one of the capital-market outcomes that we understand the best

(see Leuz and Wysocki [2016]).”

1For instance, the International Sustainability Standards Board (ISSB) launched a first set

of proposals on ESG reporting standards with a focus on broad sustainability issues and cli-

mate disclosures in June 2023. Emanuel Faber, chair of the ISSB, motivated the proposals by

stating that “[the] problem in today’s market is that companies can make claims that nobody

can verify.” He concluded that this “makes it extremely difficult for people making capital

allocation decisions” (Pavoni [2022]).

mandatory esg disclosure around the world 1797

The effect of mandatory ESG disclosure on stock liquidity is unclear ex

ante. One view holds that the introduction of such rules reduces informa-

tion asymmetry about the “value” and “values” consequences of firms’ ESG

activities. As explained by Starks [2023], investors may incorporate ESG in-

formation into their investment decisions because of the consequences that

firms’ ESG activities have on firm risks and cash flows (“value”) or because

such information—even if value-irrelevant—allows them to better align in-

vestment choices with their values-based investment preferences or man-

dates (“values”). In both cases, by reducing information asymmetry, more

ESG disclosure should mitigate adverse selection and improve secondary

market liquidity.

A contrasting view holds that disclosure mandates covering ESG topics do

not have such effects, either because nonfinancial information is too com-

plex, broad, unstructured, and qualitative, or because it is not financially

material and values-based information demand is small. In addition, there

may be a lack of standardized reporting structures and little guidance on

the ESG information that firms need to disclose. Firms may take advantage

of this vacuum by adopting minimum disclosure criteria to meet regulatory

requirements only superficially. Moreover, some firms may have voluntarily

reported ESG information prior to the mandate introduction, so additional

disclosure rules should not have large effects.

Our empirical analysis to explore these contrasting views is built on a

panel of 136,269 firm-year observations covering 17,680 unique firms across

65 countries between 2002 and 2020. We identify 38 countries that in-

troduced ESG disclosure mandates during the sample period. Twenty-five

countries implemented comprehensive mandatory ESG disclosure all at

once, while the remaining 13 countries introduced E, S, and G disclosure

one by one.2

Our estimations deliver consistent evidence that the introduction of ESG

disclosure mandates does have beneficial liquidity effects, with estimated

magnitudes that are economically sizable. For example, bid-ask spreads de-

crease by 8.4% once a country requires ESG disclosure. This number com-

pares to an improvement in bid-ask spreads by around 17% after IFRS is

adopted in European Union (EU) countries (Christensen, Hail, and Leuz

[2013]). Amihud’s [2002] illiquidity measure improves by 16%, and the

fraction of zero-return days declines by around four trading days per year

(13% of the standard deviation) after the inception of ESG disclosure man-

dates. These effects also translate into a significant effect for the summary

liquidity measure. Among many robustness tests, we document that the re-

sults are unaffected if we exclude countries that never passed ESG disclo-

sure rules, if we exclude countries that passed E, S, and G regulations at

2We assume that mandatory ESG disclosure has been introduced once disclosure encom-

passing all three topics is required. This assumption implies that there is some complemen-

tarity in E, S, and G disclosure to fully obtain the effects of the ESG disclosure mandate (see,

e.g., Dyck et al. [2023] for supporting evidence).