Global evidence on the association between environmental, social, and governance disclosures and future earnings risk

Abstract

AbstractMotivated by growing stakeholder demands for environmental, social and governance (ESG) disclosures and enhanced information transparency, this study investigates the relationship between ESG disclosures and future earnings risk in a globally diverse sample of firms. Using fixed‐effects panel regression models and endogeneity controls, we show that ESG disclosures exhibit a substantial negative impact on earnings risk. The sub‐dimensions, except governance, of ESG disclosures also reveal a negative impact on earnings risk. Notably, the social dimension's impact is economically more pronounced than the other ESG disclosure dimensions, indicating that social issues carry more value in reducing the uncertainty surrounding the future earnings risk of a firm. Besides, higher ESG reporting firms benefit more from reducing future earnings risk than low‐reporting firms. Our findings suggest that enhancing information transparency can help alleviate the agency problem arising from information asymmetry between corporate managers and shareholders. Moreover, higher disclosure in various ESG dimensions can address stakeholders' concerns regarding firm's social and environmental impacts.