ESG Regulation Across the Globe: Does ESG Regulation Pay Off?

A growing number of investors and other stakeholders are demanding greater transparency about companies’ sustainability performance. Countries around the world are responding with mandatory environmental, social and governance (ESG) disclosure regulations. On the one hand, this has led to a fragmented regulatory landscape. On the other hand, there is little empirical evidence on how these mandatory ESG disclosure requirements affect reporting companies. This paper addresses the gap through a three-part approach. First, it examines the evolution and status quo of global ESG regulation. Second, it provides a comprehensive literature review on the impact of such regulation on affected firms. Finally, it applies a difference-in-difference analysis to assess whether the EU’s Non-Financial Disclosure Directive (NFRD), an unprecedented supranational ESG disclosure regime, has led to the adoption of more sustainable business practices. The results show a stronger increase in ESG scores for regulated EU companies compared with a control group of non-regulated US companies. This finding has practical relevance not only for the EU, but also for other legislators considering the introduction or expansion of ESG reporting requirements. Keywords: disclosure; ESG regulation; NFRD; reporting; sustainability