ESG Disclosures and Company Value: What Every Business Needs to Know

ESG Disclosures

ESG disclosures detail a company’s environmental, social, and governance practices. These can include achievements (ESG strengths) or shortcomings (ESG weaknesses). Examples of ESG strengths are: sustainable supply chain practices, high employee satisfaction, ethical business conduct, while examples of ESG weaknesses are: failure to address climate risks, poor labor conditions and weak board oversight. ESG reporting frameworks have existed since 1997, with the introduction of the Global Reporting Initiative (GRI). However, the scope and depth of these disclosures have evolved significantly with the most recent inclusion of double materiality in CSRD, this refers to the impact a company has on the environment and society and the impact of the environment and society on the company.

Types of ESG Disclosures and Their Impact

Research shows that ESG strengths positively impact firm valuation, while ESG weaknesses have the opposite effect. For example, Fatemi et al. (2017) in “ESG performance and firm value: The moderating role of disclosure”, and Krüger (2014) in “Corporate goodness and shareholder wealth” found that disclosing positive ESG practices increases firm value by building stakeholder trust, whereas negative ESG disclosures harm a company’s reputation and reduce valuation1. Think of Volkswagen’s (VW) emissions scandal in 2015, when the regulator discovered that the software installed on millions of cars was cheating on the emissions tests. Their stock price was €245 on its highest point in March of 2015 and has never recovered since. Currently, as of the beginning of February 2025, their stock price is around €95.

The Amsterdam Exchange (AEX) Futureproof Index has designed a methodology that goes beyond traditional valuation methods, incorporating sustainability and long-term resilience. This way they manage to capture value for a broader range of stakeholders and not only shareholders. Based on their methodology, to calculate a company’s integrated value, the sum of financial value (market capitalization plus net debt), plus the quantification of social value (consumer wellbeing, employment wellbeing, health & safety, etc.) and environmental value (GHG emissions, water usage, pollution, biodiversity loss, etc.) is considered.

The AEX Futureproof Index aims to capture the net value creation of companies and takes into consideration for each euro of financial value creation how much value it created or destroyed for society at large. For example, in the resources sector (Futureproof ratio of -2.7), for every euro in value creation they destroy €3.7 for society. So even the euro in financial value they had created they end up destroying it, mainly due to their environmental impact (GHG emissions, air pollution and water pollution). Other sectors have a positive value creation, or Futureproof ratio, for example the Services sector has the highest score (Futureproof ratio of 1.6) followed by the Technology sector (Futureproof ratio of 1.3).

Having said this, a lot of factors can influence a company’s value, and there are additional aspects to consider in the relationship between ESG strengths and firm value, such as geographic context and the degree of disclosure.

Geographic Context Matters

The impact of ESG disclosures varies by region. In countries with weaker market institutions, Corporate Social Responsibility disclosures tend to enhance firm value more significantly. Ghoul et al. (2017) in “Country-level institutions, firm value, and the role of corporate social responsibility initiatives” suggest that international standards make company activities more transparent, leading to lower financing costs and increased investment. Another advantage in countries with weaker market institutions is that they gain legitimacy by adopting better governance practices through stronger internal controls, independent boards, and inclusive business practices. ESG disclosures can be seen as a way of enhancing credibility, reassuring investors and stakeholders about the company’s activities and commitments.

Optimal Level of Disclosure

The extent of the disclosure also plays a crucial role. While high levels of negative disclosure can diminish adverse effects—possibly by demonstrating a company’s commitment to improvement, excessive or misleading ESG disclosures, often referred to as greenwashing, can backfire by eroding stakeholder trust if companies are perceived as exaggerating or misrepresenting their sustainability efforts. So, as important as it is to take ESG matters into practice, it is equally as important the way in which these are communicated, as this can directly affect the company’s value.

Category-Specific Effects

In addition to the level of disclosure, the type of ESG disclosure matters:

• Environmental: Disclosures of environmental strengths enhance valuation, while weaknesses reduce it (Fatemi et al., 2017, ESG performance and firm value: The moderating role of disclosure).

• Social and Governance: Unlike environmental factors, disclosing strengths in these areas often does not increase firm value. However, weaknesses in social or governance practices negatively impact valuation (Fatemi et al., 2017, ESG performance and firm value: The moderating role of disclosure).

Additional Benefits of ESG Practices

Beyond direct valuation effects, ESG disclosures can positively influence firm value through other value creating mechanisms such as:

• Attracting Talent: Companies committed to ESG initiatives attract more qualified employees (Fatemi et al., 2015, Valuation effects of corporate social responsibility) as these type of companies are seen as more attractive opportunities, employees also report greater job satisfaction and there is less turnover.

• Customer Loyalty: ESG-conscious practices foster a loyal customer base (Fatemi et al., 2015, Valuation effects of corporate social responsibility) as through transparency they promote trust. Additionally, there is an upward trend in consumers preferring sustainable companies.

• Investor Sentiment: Transparent CSR disclosures improve investor confidence, enhancing firm value (Fauziah et al., 2020, Corporate social responsibility disclosure towards firm value).

• Seizing New Opportunities: By considering the interests of all stakeholders, socially responsible behavior in companies helps build trust through open communication and engagement. This, in turn, strengthens relationships with suppliers and unlocks new opportunities for future growth.

Tony’s Chocolonely exemplifies how integrating sustainability into a business strategy goes beyond mere compliance and disclosure requirements; it drives meaningful impact and financial success. After identifying the main critical issues in the cocoa sector: low farmers income, child labor, and deforestation, they changed their approach to tackle this including paying up to 44% more to farmers, implementing a child labor identification process and ensuring their cocoa is not sourced from protected areas, among other initiatives. As a result, in February 2025 they reported an increase of 33% on their revenues, reaching  €200 million.

Where are we headed?

The evolving regulatory landscape and shifting global priorities present an opportunity for businesses that proactively integrate ESG principles. While the geopolitical climate remains complex, especially with varying approaches to sustainability in different regions (ISSB, CSRD), companies that embrace ESG reporting and align with international frameworks are positioning themselves for long-term success.

The adoption of double materiality in CSRD, although requiring more extensive disclosures, offers a significant advantage. Companies that fully engage with this approach can unlock deeper insights, enabling them to mitigate risks more effectively, to drive innovation, and enhance resilience. By understanding not only how sustainability issues affect them but also how their actions impact, businesses can be forward looking, build trust, strengthen stakeholder relationships, and with this secure a competitive advantage.

While some concerns remain regarding the potential for costs of ESG initiatives, historical trends suggest that companies taking proactive steps in sustainability outperform their peers over time. Benefits outweigh the challenges, e.g. short term adaptation costs. By integrating ESG into their core strategy, businesses can future-proof their operations, capitalize on emerging opportunities, and contribute to a more sustainable global economy. Despite this, the global pressure remains. A perfect example is the omnibus package in Europe, published this week, which reduces the scope of companies required to comply with CSRD and Corporate Sustainability Due Diligence Directive (CSDDD), while also delaying its implementation. Striking the right balance is key, ensuring the benefits of ESG reporting don’t outweigh the costs.

Beyond compliance, ESG integration is becoming a key differentiator in global markets and this is becoming increasingly recognized. Despite the United States (US) leaving the Paris Agreement, other countries like Switzerland, New Zealand and the UK have increased their climate goals, reinforcing the importance of sustainability-driven business models. Companies that proactively align with these trends are likely to attract investment, foster customer loyalty and strengthen employee relations. Furthermore, as consumer preferences increasingly favor ethical and sustainable businesses, organizations that prioritize ESG will gain value by enhancing their brand reputation and market position.

The future of ESG is not just about regulatory compliance, it’s about leveraging sustainability to drive value creation, growth, resilience, and innovation. Companies that embrace this perspective will be well-positioned to lead in an increasingly conscious and sustainability-focused world. At RiskSphere we can help you with expert guidance, strategic insights and tailored solutions to integrate ESG principles into your business model.