Strict ESG reporting requirements reduce the risk of negative ESG incidents and decrease the probability of stock price crashes by 18%, researchers have concluded.
The findings were presented in a study on whether mandatory disclosure rules are associated with beneficial real outcomes for companies, and improvements in the quality and availability of ESG data.
The study found that ESG controversies declined both in magnitude and severity after mandatory ESG disclosure regulations were introduced. Researchers suggested that this could be due to regulations making it “less likely that firms can hide ESG incidents”, which in turn reduced managerial misconduct on ESG issues.
As a result of this dynamic, the probability of stock price crashes - which can occur as a result of major ESG controversies or through the accumulation of bad ESG news - declined by 18% with the enactment of mandatory disclosure, said the researchers. Reporting firms may …