The Limits of ESG Disclosure: Nonlinear Effects and Diminishing Returns in Corporate Sustainability

ABSTRACT The rapid expansion of environmental, social, and governance (ESG) disclosure has transformed how firms communicate sustainability commitments, yet whether progressively greater disclosure remains equally associated with stronger environmental outcomes is unclear. This study examines whether the association between ESG disclosure and environmental performance is linear or characterized by diminishing marginal returns. Using a global panel of 1320 publicly listed firms and 12,480 firm‐year observations from 2010 to 2023, the analysis employs fixed effects, correlated random effects (CRE/Mundlak), quadratic, threshold, and spline models. The results reveal a concave association: ESG disclosure is associated with environmental performance at low and moderate disclosure levels, but the marginal association weakens as disclosure expands. The quadratic turning point and independently estimated threshold are both located around 61 points on the 0–100 disclosure scale, identifying a common region in which the positive disclosure association weakens substantially, although the alternative nonlinear specifications differ in their characterization of the relationship beyond that region. The weakening occurs earlier under weaker institutional and internal governance conditions, although subgroup differences are interpreted cautiously and supported by formal cross‐group tests. The findings are robust to alternative environmental outcomes, richer fixed‐effects structures, lagged specifications, alternative outlier treatments, and sectoral exclusions. Overall, the evidence supports diminishing marginal association, with threshold and spline estimates indicating broad saturation while the quadratic specification permits reversal only at very high disclosure levels. The study challenges the constant marginal‐effect assumption and highlights the importance of disclosure quality, materiality, credibility, and verification as reporting becomes more extensive.