International heterogeneity in ESG information disclosure
As investors have increasingly integrated environmental, social, and governance (ESG) factors into their portfolio allocation process, transparent and reliable ESG data disclosure becomes an important aspect for the responsible investing approach.
The amount and quality of a firm’s ESG disclosure may vary according to its size, financial performance or sector. On regard to that, finance scholars have showed that large and well performing companies tend to have greater ESG information because they can afford higher disclosure costs. They also suggest that companies in extractive industries sectors (as the energy, oil or mining) increase ESG disclosure to legitimize their actions.
However, countries’ specific characteristics might also influence, through different channels, firms’ decision to disclosure ESG information. One could argue that companies operating in environments with poor investor protection, weak legal enforcement, high levels of corruption, lack of civil liberty and political rights would be under greater pressure to disclose ESG information to enhance their social and sustainable image in order to attract foreign investment or increase reputation.
According to this view, ESG disclosure could help mitigating deficiencies in existing institutional environments.
Another perspective is that developed countries or those with strong legal rights would compel companies to act in more sustainable ways and to be more transparent on ESG reporting. Following the same perspective, it is also possible to argue that consumers and investors in affluent countries are better informed and therefore demand better environmentally and socially responsible performance and disclosure from firms.Regardless of a country’s contribution to improve ESG disclosure, the new scenario of capital markets’ global integration may also influence companies to meet global securities regulations and stronger environmental, social, and governance standards.
The graph below illustrates the average 1 ESG Disclosure Score from listed companies in the capital markets of the world’s largest economies by Gross Domestic Product (GDP) in 2022 2.
In a scale that the ESG Disclosure Scores may range from 0 to 100, the lowest average score is from Vietnam (23.74) followed by Egypt (26.54). The top five highest average score are observed in Spain (50.71), Hong Kong (50.02), Russia (49.53), Thailand (49.47) and Italy (49.26).
These figures might either suggest that companies from developed countries are required to adopt stronger ESG practices and disclosure’s rule and also that firms from emerging economies (as the case of Hong Kong, Russia and Thailand) might disclosure ESG information to signal good reputation and reduce concerns on a country’s institutional risk.
The United States and China, world’s leader economies in terms of GDP and world’s largest stock markets, score respectively 38.37 and 35.05.