۱- Introduction

۲- Literature review and hypothesis development

۳- Research design

۴- Results

۵- Sensitivity test

۶- Robustness tests

۷- Conclusion and limitations

References

Abstract

Using a large cross-sectional dataset comprising of FTSE 350 listed firms, this study investigates whether superior environmental, social and corporate governance (ESG) disclosure affects firm value. We find a positive association between ESG disclosure level and firm value, suggesting that improved transparency and accountability and enhanced stakeholder trust play a role in boosting firm value. We also report that higher CEO power enhances the ESG disclosure effect on firm value, indicating that stakeholders associate ESG disclosure from firms with higher CEO power with greater commitment to ESG practice. This evidence is strong and consistent for three different measures of ESG-related disclosure: the ESG, environmental and social disclosure scores. The results are robust to the use of an instrumental variable approach, and the Heckman two-stage estimation procedure.

Introduction

In the last decade, the growing attention paid to issues of ‘sustainability’ has led to a boom in firms’ information disclosure on environmental, social and governance (ESG) practices. According to the United Nations (UN) Sustainable Stock Exchange (SSE) initiative, all big companies are expected to report their impact from environmental and social practice by 2030 at the latest (SSE, 2015). Evidence also shows that market interest in the transparency of firms’ ESG performance and practice is large and growing (Eccles, Serafeim & Krzus, 2011). Despite this heightened attention, a prudent question remains unexplored: whether or not ESG information disclosure prompts value creation. And, if it does, what are the drivers? The existing literature fails to give a definitive answer (Cho, Patten & Roberts, 2006; Garay & Font, 2012; Madsen & Rodgers, 2015). Our goal for this paper is to use a comprehensive proxy for ESG disclosure and a relatively large sample size to demonstrate this relationship. In addition, we attempt to examine the underlying drivers of the relationship by investigating the role of the chief executive officer (CEO) in ESG disclosure. In pursuit of this goal, we propose to extend earlier applications of stakeholder theory to explain how firms generate financial value from ESG information disclosure. By focusing on the firms’ key decision-making party, the CEO, we provide empirical evidence of whether ESG disclosure is more value enhancing for firms whose CEOs have greater power. In the traditional view, the maximisation of shareholders’ wealth is the ultimate goal of a company. However, from a stakeholder perspective, it is argued that other parties are also involved in the nexus, employees, suppliers, customers, communities, banks, regulatory agents, etc. Analysis of the association between firm profitability and the satisfaction of diverse stakeholders using survey data implies that major stakeholders can be regarded as a community of interests and their benefits are conjoint (Preston & Sapienza, 1990). Therefore, we argue that firms with better ESG disclosure could be more attractive to both financial investors and other major stakeholders, and that the resulting improved relationship between firms and their multiple stakeholders will financially benefit the former in the long run.