Enhancing Market Valuation of ESG Performance: Is Integrated Reporting Keeping its Promise?

Abstract

This paper studies the effectiveness of a firm’s strategy to report on its ESG activities with regard to the extent and direction in which the firm’s ESG performance gets valued by capital market investors. It is the first to disentangle the moderating effects of different types of ESG reports on market valuation of ESG performance and to analyze whether following the current integrated reporting trend is worth the effort. Results indicate that ESG performance gets valued more strongly and in the (desired) positive direction when firms publish an ESG report, irrespective of its type (stand-alone or integrated). Furthermore, integrated reporting is associated with superior outcomes compared to a stand-alone report for composite ESG and corporate governance performance. Our findings are important for corporate managers as they help to understand market valuation of ESG performance in dependence of the reporting type and provide guidance for formulating and evaluating the reporting strategy.

Keywords: market valuation, value-relevance, non-financial reporting, sustainability reporting, integrated reporting, ESG performance

JEL Classification: M14, M41, Q56, G11, G12