Environmental Disclosure Versus Environmental Performance: Implications for Corporate Financial Performance and Risk

Environmental considerations shape corporate strategy, risk management, and firm valuation. Yet, empirical evidence on the links between environmental performance, environmental disclosures and corporate financial performance is mixed and often omits risk implications. We develop a holistic framework to examine the endogenous inter-relations among corporate environmental performance (CEP), environmental disclosure (CED), financial performance, and risk. We then analyse the simultaneous links between CEP, CED, and both accounting- and market-based measures of performance and risk for a large panel of US listed firms. The findings reveal that environmental performance and environmental disclosure have fundamentally distinct economic implications. Environmental performance is associated with lower accounting profitability but higher market valuation and lower operating and market risk. These findings suggest that while substantive environmental initiatives may involve short-term costs, they enhance long-term value and organisational resilience. In contrast, environmental disclosure is associated with higher accounting profitability but lower market valuation and higher operating and market risk. This finding suggests that environmental communication may strengthen stakeholder relations while simultaneously increasing investor awareness of environmental exposures and sustainability-related uncertainties. We also find a strong positive association between environmental performance and environmental disclosure, suggesting that environmental reporting increasingly reflects underlying environmental actions rather than symbolic signalling alone. Overall, the results highlight the importance of distinguishing between environmental actions and environmental communication when evaluating corporate environmental strategy, firm value, and risk. Overall, the results carry implications for managers, investors, and regulators seeking to evaluate the role of corporate environmental strategy in corporate resilience, transparency, and value creation.