Does ESG Reporting Matter for Shareholder Value?—Evidence on Mandatory ESG Regulations in India

ABSTRACT In 2012, India's market regulator, the Securities and Exchange Board of India, began mandating (Environmental, Social, and Governance) ESG disclosures for listed firms based on their market capitalization. By 2021, there had been five related announcements. This study employs these five regulatory events from 2012 to 2021 to investigate whether mandatory ESG reporting creates shareholder value. Our event study employs a regression discontinuity design to understand the causal impact of the mandates on shareholder value. We find that over the course of five events, relative to the non‐mandated firms, the stock prices for the mandated firms dropped approximately 7%–8%. We then examine cross‐sectional variation across polluting, financial, and high rent‐seeking industries, where ESG information is material and competitive. We find an approximately 5%–9% increase in stock prices for the mandated firms relative to the non‐mandated firms in these industries over the course of five events. Market‐wide, we find no evidence of long‐term value creation for the mandated firms in the years following the implementation of regulations requiring mandatory ESG reporting. We carry out a battery of robustness tests to validate the results. Our results have important policy implications. Regulations that arbitrarily mandate ESG reporting for firms based on market capitalization destroy the shareholder value of those firms. By contrast, a targeted mandate based on industry materiality can create shareholder value for the firms.