ESG Disclosure and Corporate Governance: A Review of Financial Performance and Market Reactions

Abstract

Environmental, Social and Governance (ESG) disclosure has gradually evolved from a voluntary practice – where it is easier to say it, but harder to prove – into an expected routine by regulatory framework over the last decade; but other than this shift empirical evidence about financial impact of ESG disclosure is still fragmented and contradictory. This systematic review outlines the evidence from recent peer-reviewed studies examining ESG disclosure, corporate governance and firm financial performance. Review findings show that the direction and size of this effect depend on industry, region (institutional framework), corporate governance quality and firm characteristics. Corporate governance also emerges not only as a driver of firm value but also as an important moderator that determines the effect of firm values on ESG transparency. Crucially, this review establishes a non-linear role of governance: it is a complement at moderate levels of governance: it accentuates the positive impact of ESG disclosure, but turns into substitution when governance is exceptionally good, as disclosing more information beyond governance quality becomes less marginal informational and is subject to information redundancy by signaling. This role distinction resolves apparent contradictions in the previous literature. By specifically stressing the mediating role of governance quality in translating ESG disclosure to financial value, our review establishes an agenda for future research, with a stress on standardized measurement, causal identification and also greater focus on emerging markets and governance elements.