Circular Economy, Corporate Sustainability Reporting, and Equity Risk: Evidence from European Markets

Abstract

As a response to a growing demand for sustainability-related information, companies are expanding and improving their non-financial disclosure. Moreover, both investors and regulators are becoming increasingly aware of how relevant the circular economy (CE) is to deliver on sustainable development goals; hence, the market for circular assets is growing rapidly. Given these dynamics, we investigate the relationship between a company’s degree of circularity, sustainability-related disclosure, and market-based equity risk. By using a sample made of 644 entities, listed in EU-15 markets plus Switzerland, and operating in 17 different industries (mostly manufacturing), we look at sustainability-related data over a 2018-19 timespan, and market data over 2019-20. Via a two-step research methodology, we test the following hypotheses at company level: (1) the intensity of non-financial information disclosure positively contributes to the degree of circularity; (2) “core” circularity - i.e., net of the disclosure component - is negatively associated with equity risk; (3) the intensity of non-financial information disclosure is negatively associated with equity risk. Our results lend strong support Hp. 1, corroborating the so-called ‘stakeholder theory’. Besides, we find a negative association between circularity, once cleared of its disclosure component, and measures of both total and systematic risk: hence, the CE is confirmed as a powerful de-risking factor even in absence of high-quality non-financial disclosure. Additional analyses reveal that, although not exerting any relevant influence on systematic risk, corporate sustainability reporting does enable circularity to trigger de-risking, thereby acting as a powerful “mediator”. Our findings would suggest managers to actively engage in the transition toward more circular business models and practices, as well as recommend investors to boost the circularity of their portfolios.