Investor Perceptions of the Adoption of Mandatory Sustainability Reporting Standards

This study examines stock market reactions to events associated with the development and adoption of the European Sustainability Reporting Standards (ESRS). ESRS represent the first major attempt to mandate detailed sustainability reporting standards across a large economic bloc, intended to promote convergence and limit greenwashing. On average, we find a positive market reaction to ESRS-related events, suggesting that investors expect the future benefits of these new standards to exceed costs. Companies with lower sustainability disclosure quality and less comparable sustainability reporting practices before the mandate exhibit a stronger positive reaction. These results suggest that investors may anticipate sustainability reporting laggards to gain more from standardization. Conversely, firms with poor environmental performance and weak sustainability governance experience less pronounced positive reactions. We also find weaker reactions for firms whose sustainability disclosure appears high relative to their underlying sustainability performance. Overall, our findings contribute to the global debate on the costs and benefits of mandated sustainability reporting standards.