Does consistent management of accounting and non-accounting information on environmental risks improve the relevance of environmental performance for investors?

Purpose The purpose of this paper is to provide a richer theory-based description of why and when environmental performance (EP) affects firms’ market performance (MP). Focusing on the indirect path of the EP–MP relationship, we aim to show that it is mediated by financial performance (FP) and varies in strength or sign under two moderating conditions: different combinations of accounting and non-accounting information on environmental risks disclosed by companies and the firm size. Design/methodology/approach For the measurement of FP, in a holistic approach, we construct a score by applying the Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) to a set of financial ratios. As for environmental risks, we consider four combinations of financial statement environmental provisions and environmental controversies, ranking them from low to medium-low, medium-high and high investor-perceived risk. We then use Hayes' PROCESS macro to estimate three traditional mediated moderation models based on 10,000 bootstrapped samples with 95% bias-corrected confidence intervals. We conduct the empirical analysis on a sample of 247 European nonfinancial listed companies covering the years 2015–2022. Findings Our analysis shows that a weak link between EP and MP exists, but it can be significantly improved by a consistent company disclosure of accounting and non-accounting information on environmental risks. The study also shows that, as firm size increases, environmental risk information loses relevance for investors in exchange for a greater consideration of financial performance. Practical implications Our research shows that when the financial and nonfinancial information on environmental risks is consistent, the environmental risk perceived by investors is lower, and this in turn leads to positive effects on MP. Then, managers should consider that to identify pathways that can lead to better investor ratings, it is necessary to manage environmental risk disclosure policies appropriately, as this can bring significant benefits in terms of lower perceived environmental risks by investors, which translates into higher MP. Originality/value By responding to the literature’s call for a better understanding of the EP–MP relationship through more complex models that include mediating/moderating variables, the study contributes significantly to the questions of why and when EP affects MP. In addition, it is the first study that adds to the literature on the value relevance of environmental risks by considering investors’ assessments of the reliability and appropriateness of accounting and non-accounting information about these risks in association with FP and company size.