Non‐financial disclosure regulation and environmental, social, and governance (ESG) performance: The case of EU and US firms

Abstract The aim of this article is to analyse the effect of non‐financial reporting regulation on firms' Environmental, Social, and Governance (ESG) performance, commitment and effectiveness. Specifically, we explore the implications of the European Non‐Financial Reporting Directive (NFRD) mandating disclosure on non‐financial and diversity information by certain large companies. To identify the effect of the EU disclosure regulation on firms' ESG scores, we performed a differences‐in‐differences estimation using a sample of EU firms as the treated group and a sample of US firms as the control group in the period 2015–2020. Overall, our findings suggest that regulatory efforts to increase the transparency of the social and environmental impacts of firms' activities on society are effective at improving disclosure commitment and effectiveness. Hence, regulation supports the adoption of ESG strategies to the benefit of the whole society. The study provides a fresh comparison between regulating or not the ESG information market, drawing suggestions for future policy.