Stock Market Reaction to Mandatory ESG Disclosure

Abstract

Employing an event-study approach, we examine stock markets’ reaction to the enactment of the ESG (Environmental, Social and Governance) Disclosure Simplification Act of 2021 by the United States House of Representatives. The Act mandates disclosure of standardized ESG metrics among American public companies. A significantly negative reaction of -1.1% is documented across all firms, which does not recover until the fifth day. Carbon-intensive firms and industries are more vulnerable to the negative market reaction. We also find that investors incorporate ESG performance in making decision, as the negative reaction attenuates among firms with higher ESG scores.

Keywords: event study, ESG disclosure, nonfinancial disclosure, climate-related financial risks, mandatory disclosure