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Evidence from
Does environmental, social, and European ESG
governance performance affect companies

financial risk disclosure? Evidence

from European ESG companies
Jamel Chouaibi, Hayet Benmansour and Hanen Ben Fatma Received 22 July 2023
Revised 2 September 2023
Department of Accounting, Faculty of Economics and Management of Sfax, Accepted 1 October 2023
University of Sfax, Sfax, Tunisia, and
Rim Zouari-Hadiji
Department of Management, Faculty of Economics and Management of Sfax,
University of Sfax, Sfax, Tunisia

Abstract
Purpose – This study aims to investigate the effects of environmental, social and governance (ESG)
performance on financial risk disclosure of European companies. It analyzed the relationships between ESG
factors and financial risk disclosure between 2010 and 2020.
Design/methodology/approach – To test their hypotheses in this study, the authors used the
multivariate regression analysis on panel data using the Thomson Reuters ASSET4 database and the annual
reports of 154 European companies listed in the ESG index between 2010 and 2020.
Findings – Empirical evidence shows a positive association between European companies’ environmental
and governance performance with financial risk disclosure, whereas social performance does not influence
financial risk disclosure. Concerning the control variables, the findings demonstrate that firm size and
profitability are significant factors in changing the financial risk disclosure. Nevertheless, firms’ leverage is
insignificantly correlated with financial risk disclosure.
Originality/value – This study extends the stream of accounting literature by focusing on the financial
risk disclosure, a topic that has received little attention in previous research. Furthermore, to the best of the
authors’ knowledge, this study is one of the first that provides ESG companies with evidence of the effect of
ESG factors on financial risk disclosure in a developed market like Europe.
Keywords Financial risk disclosure, ESG performance, Environmental performance,
Social performance, Governance performance, European companies
Paper type Research paper

1. Introduction
The recent corporate scandals and financial crises have led to a deceleration of the global
economy and the failure of many companies (Fung, 2014) and generated a certain level of
mistrust toward companies by stakeholders (Madrigal et al., 2015), hence stakeholders’ demands
for more and better corporate information (Boesso and Kumar, 2007). In this vein, regulators and
policymakers have perceived that transparent information and comprehensive financial

Competitiveness Review: An
The authors thank the Editor and the two anonymous referees of the Competitiveness Review: An International Business Journal
International Business Journal for insightful comments that have greatly benefitted the paper. The © Emerald Publishing Limited
1059-5422
authors received no financial support for the research, authorship and/or publication of this article. DOI 10.1108/CR-07-2023-0181
CR reporting would help prevent future crises and increase stakeholders’ confidence, resulting in
reconsidering the foundations of the companies’ regulations (Aryani and Hussainey, 2017;
Ibrahim et al., 2019). Accordingly, risk disclosure has become an integral part of corporate
disclosure because it improves the information transparency and regains stakeholders’ confidence
in businesses by providing a clear explanation and more understanding of risk elements and the
complexity of the business environment to enable them to make informed decisions (Hassan, 2009;
Mousa and Elamir, 2014). Indeed, high-integrity financial statements require not only information
on accounting figures in financial reports but also other information, such as risk disclosure, that
can influence stakeholder considerations in the decision-making process (Meilani and Wiyadi,
2017). Risk disclosure is defined as information that describes firms’ major risks and their expected
economic impact on their current and future performance (Miihkinen, 2012). According to Agustin
et al. (2021), risk disclosure, especially financial risk disclosure, is useful for providing stakeholders
with information on how risks arise, how management handles them, and their impact.
Mandatory financial risk disclosure has been established under the International
Financial Reporting Standards (IFRS) 7, named financial instruments disclosure (Yang et al.,
2018). IFRS 7 states that companies are required to disclose financial information so that
shareholders can assess the type and level of a financial instrument risk (Herdjiono and
Yanti, 2023). There are two natures of financial information disclosure, namely, qualitative
and quantitative. The former means that companies are required to disclose risk exposure,
how risks arise, objectives, risk management policies and processes and ways to measure
them (Herdjiono and Yanti, 2023). However, the latter requires companies to disclose a
minimum of credit, liquidity and market risks, including conducting a sensitivity analysis of
each type of risk (Herdjiono and Yanti, 2023).
Several previous studies have focused on environmental, social and governance (ESG)
performance as a determinant of corporate financial risk (Shafer and Szado, 2018; Breedt
et al., 2019; Wamba et al., 2020; Suttipun, 2023); however, no studies have examined whether
ESG performance affects corporate financial risk disclosure. Indeed, most previous studies
on financial risk disclosure have examined the impact of corporate governance and/or firm
characteristics (Zango et al., 2016; Meilani and Wiyadi, 2017; Dey et al., 2018; Bufarwa et al.,
2020; Herdjiono and Yanti, 2023). To fill this gap in the literature, the present work provides
new insights into the fields of ESG and financial risk disclosure.
After the global financial crisis, companies focus more on ESG activities to recover their
reputation in the market by being socially responsible (Shakil et al., 2019). Thus, ESG
performance has become the benchmark for evaluating firms’ environmental and social
responsibility worldwide. Nowadays, investors are more concerned about firms’ sustainable
practices than their operational and financial gains (Shakil, 2021). Indeed, ESG performance
has an influential role in increasing firm transparency, reducing information asymmetry
and building trust and confidence between the firm and its investors (Benlemlih et al., 2018;
Shakil, 2021; Suttipun, 2023), which could thus affect corporate risk disclosure strategy.
This research aimed to explore the effects of ESG performance on financial risk
disclosure in European ESG companies. We used a sample of 154 non-financial companies
from four European countries listed on the ESG index from 2010 to 2020 via multivariate
regression analysis on panel data. We found that financial risk disclosure is higher when a
firm has better environmental and governance performance. However, social performance
has no significant effect on financial risk disclosure.
The paper contributes to the extant literature in several ways: First, this study extends the
existing literature by providing further evidence on financial risk disclosure in a developed
context, namely, Europe. Furthermore, it provides empirical evidence of how ESG performance
impacts financial risk disclosure, especially in ESG companies. More precisely, based on the
agency and legitimacy theories, this paper evidences the links between ESG activities and Evidence from
financial risk disclosure. Overall, the outcomes of this study underline the central role of European ESG
environmental and governance performance in improving financial risk disclosure. Finally, the
absence of time variation in company financial risk disclosure may be problematic. Indeed,
companies
identifying the consequences of implementing ESG requires considering the dynamic effect of
firm financial risk disclosure (the lagged dependent variable, at least). Thus, this paper
indicates that the financial risk disclosure at period t depends on the information about
financial risk disclosure at period t
1 and ESG. We explored this relationship using the
generalized method of moments (GMM) proposed by Arellano and Bond (1991).
The remainder of the article is organized as follows: Section 2 presents the literature
review and hypothesis development. Section 3 describes the research design. The empirical
results are presented and discussed in Section 4. Finally, the paper ends with some
concluding remarks in Section 5.

2. Literature review and hypothesis development

2.1 Theoretical framework
Different theories have been adopted by prior researchers to examine underlying factors
that affect firm risk disclosure. In the current study, the agency and legitimacy theories were
used to examine the effects of ESG performance on financial risk disclosure.
According to the agency theory, there is a contractual relationship between the principal
(shareholder) and the agent (manager), in which the principal acts as an employer by delegating
power to the agent to make the best decisions for the principal and the management (Jensen,
1993). However, this contractual relationship leads to a separation of ownership from control
among a company’s managers and shareholders, leading to conflicts of interest (Bauer et al.,
2018). Agency conflicts can arise when managers exhibit opportunistic behavior, prioritizing their
gains instead of working in alignment with the principal’s interest of maximizing profits
(Mahrani and Soewarno, 2018), and when managers know more about the internal information of
the company than the shareholders, hence the emergence of information asymmetry (Bergh et al.,
2019). In this vein, risk disclosure, including financial risk, may mitigate agency problems and
reduce information asymmetry between managers and shareholders (Watts and Zimmerman,
1983). According to Khaledi (2014), the main purpose of risk disclosure is to avoid information
asymmetry between the principal and the agent. Thus, management should practice risk
disclosure by providing reliable and relevant information to annual report users, indicating that
the agent’s actions are in the interests of the principal (Herdjiono and Yanti, 2023). The
information about the company risk provided by the management is needed by stakeholders,
especially investors, who will consider it before making investment decisions (Salem et al., 2019).
From the legitimacy theory perspective, there exists a social contract between corporations
and society (Cormier and Gordon, 2001). To satisfy the contractual requirements of this
relationship, corporations legitimize their actions and enhance legitimacy by disclosing their
risk information (Dowling and Pfeffer, 1975). According to the legitimacy theory, such
disclosure will help stakeholders evaluate potential litigation risks and reputation damages.
Thus, to maintain corporate reputation, a firm increases risk-related disclosure to signal
legitimacy (Oliveira et al., 2011). In this regard, corporations may justify their existence and
gain social acceptance by disclosing more risk information, such as financial risk (Unerman
and Deegan, 2011).

2.2 Hypothesis development

2.2.1 Environmental performance and financial risk disclosure. Environmental performance
encompasses the measures a company takes to use resources responsibly, minimize the
CR environmental impact of its activities and improve the environment in which it operates
(Ifada et al., 2021). Both the agency theory and the legitimacy theory show the positive effect
of environmental performance on risk disclosure differently. From the agency theory
perspective, companies with superior environmental performance have incentives to
disclose more information about their environmental strategy to increase firm transparency
and reduce information asymmetry (Chang et al., 2021). In this way, environmental
performance could affect corporate risk disclosure positively. According to the legitimacy
theory, companies manage the environmental impacts of their activities to establish
credibility with internal and external stakeholders, which can reinforce their disclosure
strategies, including financial risk (Suchman, 1995).
Several studies have examined the association between environmental performance and
risk disclosure. Chang et al. (2021) showed that environmental performance has a positive
effect on risk disclosure, revealing that corporate environmental responsibility can reduce
the risk of future share price declines, and therefore, adequate environmental performance
could reduce the information uncertainty faced by financial analysts and investors through
increasing disclosure of risk. Similarly, Clarkson et al. (2008) claims that environmental
performance promotes risk disclosure and that companies with good environmental
performance experience an increase in market value; thus, to enhance investors’ confidence,
companies should disclose information about their risk. In the same vein, Giese et al. (2018)
and Parfitt (2020) assert that environmental performance is a risk assessment and
management process that can be applied to any profitable investment or business strategy,
which then makes it capable of positively influencing corporate behavior regarding risk
disclosure. Moreover, Lueg et al. (2019) and Shakil (2021) found that better corporate
environmental performance is linked to low share price volatility on the market and reduced
information asymmetry between the firm and its investors, which could then have positive
economic consequences on the process of disclosing information on attached risks.
Nevertheless, Malarvizhi and Matta (2016) have shown a negative relationship between
environmental performance and risk disclosure, and Hodkum and Chanruang (2017)
demonstrated no significant link. Based on the theoretical framework of the study and the
arguments of most prior studies above, it is suggested that companies with higher
environmental performance disclose more risk information, hence the following hypothesis:

H1. Environmental performance is positively related to financial risk disclosure.

2.2.2 Social performance and financial risk disclosure. Corporate social performance is a
configuration of the businesses of an organization based on the principles of social
responsibility, responsiveness processes, policies, programs and observable results related
to a company’s social actions (Wood, 1991). According to the agency theory, companies that
achieve good social performance tend to be more transparent to guarantee mutual trust
between the company and stakeholders and reduce agency conflicts, which leads to more
disclosure about firm activities and their related risks (Garcia et al., 2021). Besides, based on
the legitimacy theory, socially responsible companies receive more attention from the public
and, therefore, are under more pressure to disclose more information on CSR activities and
risk information to legitimize their activities (Hooghiemstra, 2000).
Most previous studies have found that social performance enhances risk disclosure.
Aboud and Diab (2018) reported a positive association between social performance and risk
disclosure and indicated that social activities increase firm value; thus, to maintain success
and gain shareholders’ confidence, companies will disclose information about their risk.
Benlemlih and Girerd-Potin (2017) and Chakraborty et al. (2019) assert that social
performance positively influences risk disclosure and that social performance improves
business efficiency, including reducing risks and creating opportunities to earn income or Evidence from
reduce operating expenses, which will incite companies to disclose information about their risk. European ESG
In the same vein, Elvira et al. (2016) and Wong et al. (2021) have demonstrated that good social
performance can decrease risk and enhance sustainable development, which encourages
companies
companies to disclose information about risks. Nevertheless, studies by Barnea and Rubin
(2010) and Di Donato and Izzo (2012) found a negative relationship between social performance
and risk disclosure. Based on what preceded, it is assumed that companies with better social
performance disclose more risk information. Thus, the following hypothesis:

H2. Social performance is positively related to financial risk disclosure.

2.2.3 Governance performance and financial risk disclosure. Corporate governance has been
defined as a set of agreements or institutional rules that represent the organization’s code of
conduct to ensure that board members and executives discharge their accountability to all
stakeholders and act in a socially responsible way in all areas of the organization’s business
activities (Solomon and Solomon, 2004). In other words, the scope of corporate governance
encompasses business ethics, disclosure and accountability (Aboud and Diab, 2018). Thus,
nowadays, companies set diverse codes of conduct on financial and non-financial disclosure and
disclose more information to increase the stakeholders’ confidence in the company’s operations
(Kaymak and Bektas, 2017). Prior studies showed a strong relationship between the company
and its stakeholders with good corporate governance (GCG) (Aboud and Diab, 2018). Indeed, the
implementation of GCG leads to effective monitoring of management and encourages
transparency toward shareholders and all stakeholders (Kurniasari et al., 2017; Worokinasih and
Zaini, 2020). In this vein, previous studies by Carmona et al. (2016), Rizki and Jasmine (2018) and
Raimo et al. (2022) found that GCG affects corporate risk disclosure positively, revealing that
companies with high governance performance tend to be more efficient in controlling and
monitoring managers’ operations and that this leads to more disclosure from corporations.
Similarly, Agustin et al. (2021) showed that there is a positive and significant association between
GCG and financial risk disclosure and that GCG may act as an efficient system of supervision
and control that presses management to provide information about the business risks to
investors in annual reports, hence more risk disclosure by companies. According to the agency
theory, GCG implementation can mitigate conflicts between managers and principals by serving
as an oversight mechanism for management performance, which ensures that management
operates effectively to generate benefits for the principal and assures investors that they will
receive comprehensive information regarding firm-related risks (Al-Maghzom et al., 2016).
Moreover, based on the legitimacy theory, good governance intends to ensure the social position
of the company by satisfying the demands and interests of its stakeholders; thus, GCG may
enhance corporate accountability in terms of risk disclosure (Gill, 2008). However, some studies
found a negative relationship between good governance and risk disclosure (Mutmainah, 2015;
Ben Amar et al., 2017; Kilic and Kuzey, 2018). Based on the study’s theoretical framework and the
findings of most prior studies, it is assumed that companies with good governance disclose more
information about their risks. Thus, the following hypothesis:

H3. Governance performance is positively related to financial risk disclosure.

3. Research methodology
3.1 Sample selection and data collection
The initial sample consisted of 519 European companies in the Thomson Reuters Eikon
ASSET 4 database belonging to the ESG index between 2010 and 2020. Thomson Reuters
CR Eikon ASSET 4 is the most popular database of ESG data worldwide. It provides objective
ESG information to professional investors interested in integrating social responsibility
features into their investment decisions. Data on ESG performance and control variables
were collected from the Thomson Reuters Eikon ASSET4 database, whereas data on
financial risk disclosure were collected from companies’ annual reports. Companies with
missing and unavailable data were excluded from the sample (339). Financial firms were
also excluded as their financial statements have a different form and their financial risks can
be considered real operational risks (26). Our final sample consisted of 154 companies, i.e.
1,694 firm-year observations. Table 1 depicts the sample selection procedure. Panel A
describes the sample selection, Panel B provides the sample distribution by country and
Panel C presents the sample distribution by industry.

3.2 Variable measurement

3.2.1 Dependent variable: financial risk disclosure. Following previous studies (Meilani and
Wiyadi, 2017; Dey et al., 2018; Bufarwa et al., 2020; Ferri et al., 2023), we applied a content
analysis approach to measure the level of financial risk disclosure (FRD). The study
analyzed the presence or absence of information categories related to financial risk
disclosure in annual reports of European companies. A dichotomous approach was used to
give a value of one if the information on an item is disclosed and zero otherwise. To
construct a disclosure index for each company, the study used a checklist developed based
on categories required by IFRS 7 and IFRS 9 and identified by Ntim et al. (2013) and Elamer
et al. (2019). A total of 54 disclosure items are identified and included in this checklist that
contains three types of financial risk reporting, namely, credit risk (22 items), liquidity risk
(17 items) and market risk (15 items) (Appendix).
Following previous studies (Meilani and Wiyadi, 2017; Dey et al., 2018; Agustin et al., 2021;
Herdjiono and Yanti, 2023), we calculated a composite FRD index for each company as follows:
Xn
xi
FRD ¼ l¼1
n

where: xi ¼ a value of 1 if information on an item is disclosed by a company and 0 otherwise,

and n ¼ the total number of 54 items of financial risk disclosure. To calculate an individual
FRD index for each company, the sum of items disclosed is divided by the total number of
possible items.
3.2.2 Independent variables. The independent variables used in this study were
environmental performance (ENV_SCO), social performance (SOC_SCO) and governance
performance (GOV_SCO). Following previous studies (Shakil et al., 2019; Velte, 2019; Chouaibi
et al., 2022), we measured these variables based on ESG scores developed and calculated by the
agency rating ASSET4 to ensure comparability between companies. The ASSET4 database
provides a score for each ESG dimension based on a defined set of weighted data points
ranging from 0 to 100 for each ESG dimension according to their importance.
3.2.3 Control variables. Financial risk disclosure can be influenced by other variables
that have to be controlled. Thus, following prior research work, we included several control
variables linked to the characteristics of the company in our empirical model. More
specifically, we incorporated variables that measure the company’s size (LNSIZE) (Meilani
and Wiyadi, 2017; Dey et al., 2018), leverage (LVG) (Meilani and Wiyadi, 2017; Dey et al.,
2018) and profitability (ROE) (Meilani and Wiyadi, 2017).
All the model variables are defined in Table 2.
Sample No. of firms No. of observations
Evidence from
European ESG
Panel A: Sample selection companies
Initial sample 519 5,709
-Firms with missing data (339) (3,729)
-Banks and financial institutions (26) (286)
Final sample 154 1,694
Country No. of firms %
Panel B: Sample distribution by country
France 66 42.85
Germany 47 30.51
Denmark 18 11.68
Spain 23 14.93
Total 154 100
Industry
Panel C: Sample distribution by industry
Pharmaceuticals and biotechnology 12 7.7
Industrial transportation 10 6.4
Alternative energy 1 0.6
Medical equipment and services 6 3.8
Beverages 2 1.2
Personal goods 8 5.2
Construction and materials 10 6.4
Electronic and electrical equipment 7 4.5
Leisure goods 2 1.2
Industrial support services 5 3.2
Industrial engineering 4 2.5
Industrial materials 1 0.6
Media 10 6.4
Oil, gas and coal 4 2.5
Industrial metals and mining 6 3.8
Travel and leisure 5 3.2
Software and computer services 7 4.5
Food producers 3 1.9
Aerospace and defense 4 2.5
Chemicals 8 5.1
Technology hardware and equipment 4 2.5
Electricity 2 1.2
Gas, water and multi-utilities 4 2.6
Telecommunications service providers 2 1.2
Automobiles and parts 8 5.1
Personal care, drug and grocery stores 5 3.2
Household goods and home construction 2 1.2
Telecommunications equipment 2 1.2
Waste and disposal services 3 1.9
General industrials 2 1.2
Health care providers 3 1.9
Retailers 2 1.2
Total 154 100
Table 1.
Notes: Panel A describes the sample selection, Panel B provides the distributional properties of the full
sample by country and Panel C presents the sample distribution by industry. Observations are the total Sample selection and
firm-year observations by country and industry breakdown by
Source: Authors’ own work country and industry
CR Variables Codename Measurement Source

Financial risk disclosure
Environmental performance
Social performance
Governance performance
Firm size
Firm leverage
Firm Profitability
Table 2.
Variables description Note: This table reports the definitions of the variables used in our study
and measures Source: Authors’ own work
FRD The ratio between the total Annual reports
number of financial risk
disclosure items provided by a
company and the total number
of financial risk disclosure items
ENV_SCO A score consisting of a series of Thomson Reuters
items that count the company’s ASSET4 (Datastream)
performance in environmental
practices developed by ASSET4
SOC_ SCO A score developed by ASSET4 Thomson Reuters
and consisting of a series of ASSET4 (Datastream)
items that count the CSR
practices of companies
GOV_ SCO A score determined and Thomson Reuters
calculated by the rating agency ASSET4 (Datastream)
ASSET4 to ensure
comparability between
companies
LNSIZE Natural logarithm of total assets Thomson Reuters
ASSET4 (Datastream)
LVG Total debt to market value of Thomson Reuters
equity ASSET4 (Datastream)
ROE Net income to shareholders’ Thomson Reuters
equity ASSET4 (Datastream)

3.3 Model specification

To empirically test our hypotheses concerning the impact of ESG performance on financial
risk disclosure, we opted for panel regression analysis (using Stata 15 software). The panel
regression equation was developed as follows:

FRDi;t ¼ b0 þ b1 ENV_SCOi;t þ b2 SOC_SCOi;t þ b3 GOV_SCOi;t þ b4 LNSIZEi;t

X
18 X
51
þ b5 LVGi;t þ b6 ROEi;t þ bl YEARi;t þ bj INDUSTRYi;t þ «i;t
l¼7 j¼19

(Model 1)

where all variable definitions and measurements are presented in Table 2. YEARit and
INDUSTRYit represent year and industry fixed effects; «it is the random error term; and b0
is the constant. The indices i and t correspond to the firm and period of the study.

4. Result analysis and discussion

4.1 Descriptive statistics
Table 3 illustrates the descriptive statistics of the dependent, independent and control
variables. Financial risk disclosure (FRD) has a mean value of 0.501, ranging from a
minimum of 0.092 to a maximum of 0.722, indicating that companies in our sample have a
low level of financial risk disclosure. Environmental performance (ENV_SCO) has a mean Evidence from
value of 0.649 with a relatively small standard deviation (0.228), corresponding to an European ESG
acceptable level of environmental transparency for ESG firms in Europe. Social performance companies
(SOC_SCO) ranges between 0.001 and 0.986, implying a high divergence in the social
performance of our sample companies. The average SOC_SCO value (0.680) indicates that
most companies in our sample are socially responsible. Governance performance
(GOV_SCO) has a mean value of 0.534, ranging from 0.008 to 0.973, which implies that
corporate governance varies widely across countries and firms. With regard to the control
variables, the average size of the company (LNSIZE) is 16.08, the average leverage ratio
(LEV) is 25.4% and the average profitability (ROE) is 11.32%.

4.2 Correlation analysis

Table 4 reports Pearson’s correlation matrix and the variance inflation factor (VIF) among
all the explanatory variables to investigate the multicollinearity problem in our study. Yoon
et al. (2021) indicate that when the correlation between the variables is less than 0.7, there is
no risk of a multicollinearity problem. As can be seen from Table 4, Pearson correlations
among explanatory variables are, in general, weak. The highest coefficient among the
explanatory variables is 0.671 between SOC_SCO and ENV_SCO, proving that the
multicollinearity problem is not a concern here. Moreover, the same table shows that all
VIFs do not exceed the value of 10, confirming the absence of any multicollinearity problem
in this study.

Variables Obs. Mean SD Min. Max.

FRD 1,694 0.501 0.100 0.092 0.722

ENV_ SCO 1,694 0.649 0.228 0.001 0.991
SOC_ SCO 1,694 0.680 0.218 0.004 0.986
GOV_ SCO 1,694 0.534 0. 222 0.008 0.973
LNSIZE 1,694 16.080 1.775 10.913 19.996
LVG 1,694 0. 254 0. 155 0 1.028
ROE 1,694 0.113 0.216
1.884 2.659

Notes: This table reports descriptive statistics. Variables’ definitions are provided in Table 2 Table 3.
Source: Authors’ own work Descriptive statistics

Variables 1 2 3 4 5 6 VIF

1. ENV_SCO 1 2.05
2. SOC_SCO 0.671 1 1.28
3. GOV_SCO 0.364 0.435 1 2.02
4. LNSIZE 0.451 0.400 0.314 1 1.33
5. LVG 0.194 0.146 0.139 0.106 1 1.06
6. ROE
0.101 0.026
0.027 0.059
0.162 1 1.07

Notes: This table presents the correlations coefficients for the variables used in the study. Variables Table 4.
definitions are outlined in Table 2 Correlation matrix
Source: Authors’ own work and VIF values
CR 4.3 Multivariate analysis
4.3.1 Regression analysis. Table 5 presents the results of the regression analysis. Here, we
used multivariate regression analysis on panel data to empirically test our hypotheses on
the association between ESG performance and financial risk disclosure. Accordingly, we
started by running a normality test to test whether the residuals in the regression model
have a normal distribution using the Kolmogorov test (Soelton et al., 2020). This test shows
an Asymp Sig (two-tailed) value higher than 5%, being 0.146; thus, we cannot reject the null
hypothesis that the data is normally distributed, and we can thus conclude that the residual
data from the independent variables and the dependent variable are normally distributed.
Then, we conducted a specification panel test using the Beck (2001) test to search for the
homogeneity or heterogeneity of the panel data. The homogeneity test shows a probability
lower than 1%; thus, we should reject the null hypothesis of homogeneity among
individuals, which led us to conclude the sample heterogeneity and then test the existence or
not of individual effects. Therefore, we run a fixed-effects model on the one hand and a
random effect on the other. We compared the two methods via the Hausman (1978) test to
determine the most suitable model. The results of this test demonstrate that the fixed-effects
model is better than the random-effects one. To verify whether or not the residuals from the
fixed effects estimation of the regression model are spatially independent, a cross-sectional
dependence (CD) test, namely Pesaran’s (2004) CD test, was conducted. The null hypothesis
of the CD test states that the residuals are cross-sectionally uncorrelated. Correspondingly,
the test’s alternative hypothesis asserts that spatial dependence is present. In this study,
Pesaran’s (2004) CD test shows a probability lower than 1%, which indicates the rejection of
the null hypothesis of spatial independence; thus, our model of fixed effects produces
regression residuals that are cross-sectionally dependent. The Fisher test proves significant
at the 1% threshold, confirming the individual fixed effects (Hausman, 1978). The

Variables Coefficient Z Probability

Constant 0.538*** 23.93 0.000

ENV_SCO 0.041*** 3.41 0.001
SOC_SCO 0.011 0.70 0.483
GOV_SCO 0.053*** 3.64 0.000
LNSIZE 0.111*** 3.99 0.000
LVG
0.022
1.44 0.151
ROE
0.131***
2.03 0.005
Year fixed effect Yes
Industry fixed effect Yes
Observations 1,694
R2 0.3029
Fisher 42.98
Fisher (p-value) (0.000)
Kolmogorov test [Asymp Sig (two-tailed) value] 0.122 (0.146)
Homogeneity test (p-value) 85.51 (0.000)
Hausman test (p-value) 18.25 (0.013)
Pesaran CD test (p-value) 53.40 (0.000)
Heteroscedasticity test (p-value) 436.53 (0.000)

Notes: Table 5 presents the regression results estimation that includes fixed effects for the fiscal year and
industry. Year and industry indicators are included in our models, but their coefficients are not shown in
Table 5. this Table. *** indicate statistical significance at the level of 1%
Regression results Source: Authors’ own work
assumption of homoscedasticity was also verified in the present study. Thus, the Wald test Evidence from
performed on the study model shows a probability lower than 1%, attesting that the model European ESG
is heteroscedastic. As a result, the heteroscedasticity problem was corrected following the
Wald test to have unbiased results.
companies
Table 5 also shows that the F statistic is 42.98 (p ¼ 0.000). This result indicates that the
estimated model is statistically significant. The R2 is 0.3029, i.e. the independent and control
variables explain 30.29% of financial risk disclosure variability.
4.3.2 Discussion results. The regression results (Table 5) show that environmental
performance is positively and significantly related to financial risk disclosure at the 1%
threshold (b ¼ 0.041, z ¼ 3.41). This finding confirms H1 and implies that European
companies with higher environmental performance have a high financial risk disclosure.
This result is consistent with the findings of Clarkson et al. (2008), Giese et al. (2018) and
Parfitt (2020) that environmental performance can reduce the risks and uncertainties
associated with falling stock prices and increase the firm’s market value, which would
positively influence corporate behavior regarding financial risk disclosure. This finding
supports the agency theory and the legitimacy theory perspectives and, therefore, is
compatible with the opinion that environmental performance reduces agency conflicts and
improves a firm’s legitimacy, which can enhance the firm’s financial risk disclosure.
Social performance has a positive and non-significant effect on financial risk disclosure.
This finding implies that superior social performance does not lead to better financial risk
disclosure. Thus, H2 is rejected. This result contradicts the agency and legitimacy theories
that postulate that social performance resolves the information asymmetry between
managers and shareholders and strengthens the organization’s legitimacy by disclosing
more information about the company, including those related to financial risks.
Governance performance is positively and significantly associated with financial risk
disclosure at the 1% threshold (b ¼ 0.053, z ¼ 3.64). This finding supports H3 and indicates
that European companies with good governance have a high financial risk disclosure. This
finding is in line with earlier studies, which have shown that companies with good
governance tend to have higher corporate values and are motivated to improve
transparency and disclose all types of information, particularly those related to financial
risks (Rizki and Jasmine, 2018; Agustin et al., 2021; Raimo et al., 2022). This finding
corroborates the postulates of the agency and legitimacy theories, implying that good
governance ensures effective monitoring of management and preserves the legitimacy of the
firm, which enhances the company’s transparency and reinforces its disclosure strategy,
thus enhancing the firm’s financial risk disclosure.
Concerning the control variables, the company size is positively and significantly
associated with financial risk disclosure at the 1% threshold (b 5 0.111, z ¼ 3.99). This
finding is consistent with the findings of Sobhani et al. (2009), Meilani and Wiyadi (2017)
and Dey et al. (2018) that the large size of the company increases the financial risk disclosure.
Indeed, large firms are more complex and have more varied business activities, implying
that they have higher risk levels, which translate into higher information asymmetry among
investors; thus, large companies tend to disclose more information about their risks to
reduce agency costs and information asymmetry between managers and shareholders.
Moreover, our findings indicate a negative and non-significant relationship between a
firm’s leverage and financial risk disclosure. This result confirms those of Meilani and
Wiyadi (2017) and Dey et al. (2018), who document that the level of leverage cannot influence
corporate financial risk disclosure.
Finally, we found that a firm’s profitability is negatively and significantly related to
financial risk disclosure at the 1% threshold (b 5 20.131, z ¼ 22.03). This finding is
CR consistent with prior studies (Oliveira et al., 2011; Meilani and Wiyadi, 2017) and
demonstrates that firms with low profitability tend to experience high risk, which pushes
managers to disclose more information about a firm’s financial risk to demonstrate
corporate accountability to investors and meet stakeholder needs.

4.4 Robustness test

To ensure the robustness of the results, we conducted the robustness check by considering
the dynamic effect to deal with the possible endogeneity problem that can appear when
studying the relationship between ESG performance and financial risk disclosure. The
dynamic panel data modeling is best suited to capture the endogeneity issues (Albertini,
2013; Tzouvanas et al., 2020) that may arise due to omitted variables or reverse causality
(Atif and Ali, 2021). Previous literature suggests that there could be an unobserved variable
that influences the relationship between ESG performance and firm risk (Al-Tuwaijri et al.,
2004; Clarkson et al., 2008; Roy and Saurabh, 2022). Thus, not all the variables can be
controlled (Roy and Saurabh, 2022); hence, without correcting for potential endogeneity, our
results could be biased. In this regard, we used the generalized method of moment (GMM)
system estimation suggested by Arellano and Bond (1991), as this estimation considers the
dynamic structure between the dependent and independent variables (Baltagi, 1995) and
controls for missing or unobserved variables and relationships (Arellano and Bond, 1991).
This technique allows the explanatory variable (i.e. ESG performance) to be determined
based on past and present financial risk disclosures but not future ones. Moreover, this
method uses the lagged value of financial risk disclosure as an explanatory variable by
taking the first difference to remove firm-specific fixed effects. Thus, we revised our initial
model by testing the continuity effect of the exercises on financial risk disclosure. It can be
expressed in the following dynamic specification model, consisting of establishing a
relationship between firms’ financial risk disclosure at period t, denoted Y, and its one-year
lagged values (Lag FRD), the ESG performance and the set of control variables (X):

Yi;t ¼ b1 Lag Yi þ b2 ENV_SCOi;t þ b3 SOC_SCOi;t þ b4 GOV_SCOi;t þ b5 Xi;t þ mt þ «i;t

(Model 2)

The results of introducing the delayed effect in our research model are illustrated in Table 6.
These results appear to be substantially similar to those of the main analysis (Table 5).
Indeed, it is essential to test the validity of the instruments via two tests:
(1) First, the Hansen test is used to check the condition of exogeneity of the
instruments (delayed variables); and
(2) Second, Arellano–Bond (AR) autocorrelation tests (AR1 and AR2) check the non-
correlation of instruments with the error terms.

Estimates were conducted using the Stata 15 software from the Xtabond2 command
developed by Roodman (2009).
As presented in Table 6, the Hansen test shows a p-value higher than 5%; therefore, the
null hypothesis of the validity of the lagged and differential variables as instruments should
not be rejected. Besides, AR1 and AR2 tests validate the non-rejection of the null hypothesis
of the autocorrelation of first-order residual and lack of second-order autocorrelation of
errors, respectively. It is then possible to conclude that the residuals are not correlated and
that the condition on the moments is correctly specified. Finally, the level of significance and
the value of the coefficients of the delayed variable of financial risk disclosure (Lag FRD)
Variables Coefficient Z Probability
Evidence from
European ESG
Constant 0.425*** 19.22 0.000 companies
Lag FRD 0.172*** 5.06 0.000
ENV_SCO 0.035*** 3.33 0.002
SOC_SCO 0.009 0.60 0.552
GOV_SCO 0.068*** 3.80 0.000
LNSIZE 0.124*** 4.69 0.000
LVG
0.020
1.41 0.154
ROE
0.136***
2.10 0.001
Year fixed effect Yes
Industry fixed effect Yes
Number of observations 1,694
R2 0.2887
Arellano Bond AR (1)
2.940
(z, p-value) (0.003)
Arellano Bond AR (2)
1.310
(z, p-value) (0.298)
Sargan test 227.73
(Chi-square, p-value) (0.000)
Hansen test 39.64
(Chi-square, p-value) (0.220) Table 6.
Robustness check
Notes: The table presents results of the GMM system regressions of firm financial risk disclosure. Lag
FRD is the one-year lagged value of the firm financial risk disclosure. Variables definitions are outlined in results on dynamic
Table 2; ***significance at p < 0.01 estimation of panel
Source: Authors’ own work data

provide a new justification for the dynamic specification of the model and confirm the need to
include these effects. Indeed, the results (Table 6) indicate that the financial risk disclosure at
period t
1 is positively and significantly correlated with that in (t) at the 1% threshold (b ¼
0.172, p < 0.01). This finding highlights that the financial risk disclosure level depends strongly
on its lagged variables. Considering the dynamic temporal nature between the financial risk
disclosure level and its one-year lagged level, we can clarify the results obtained previously
and, thus, confirm the synergy of complementarities in compliance with our research
hypotheses.

5. Conclusion
This study explored the effect of ESG activities on financial risk disclosure in European
companies listed on the ESG index for the 2010–2020 period. The empirical results show
that environmental and governance performances affect financial risk disclosure
positively and significantly. However, social performance does not influence financial
risk disclosure. For the control variables, our findings indicate that firms’ size and
profitability are determining factors in changing financial risk disclosure in the European
context.
This study has implications for investors, stakeholders, firms and policymakers. First,
our findings are useful for investors who need information about financial risk disclosure to
understand the degree of risk in companies and make a rational investment decision. Also,
investors should consider companies incorporating ESG into their business strategy, as they
tend to have better financial risk disclosure levels. Second, our findings are important for
stakeholders, including employees, consumers, local communities and governments, to let
CR them know to what extent European businesses operate in a socially responsible manner
and discover how ESG practices lead companies to meet the demand for greater
transparency and accountability by strengthening their disclosure strategy, particularly this
related to financial risk. Third, our findings provide implications for firms to increase
interest in ESG as a driver for better financial risk disclosure. More precisely, firms should
pay more attention to environmental and governance activities, as they could enhance their
financial risk disclosure. Fourth, our findings are relevant to policymakers in European
countries, as ESG activities are pertinent factors to assess in reforming corporate policies
and strategies. Indeed, our results will help policymakers revise the ESG criteria, rank firms
based on their ESG performance and penalize them according to their controversy score.
This study suffers from some limitations that could be addressed in future research
works. First, this study was limited to non-financial companies; thus, our findings may not
be generalized to the financial sector. Hence, future research should rely on a larger sample,
including financial firms such as banks, insurance companies, financial services, real estate
investments and investment instruments. Second, this study focused on four European
countries and did not go into detail about the individual dynamics of those countries.
Consequently, the sample can be limited to one specific European country to analyze
whether the results differ from one country to another.

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Appendix Evidence from
European ESG
companies
Risk type Company financial risk disclosure

Credit risk 1. Exposure to credit risk and how they arise.

2. Objectives, policies and processes for managing the credit risk.
3. Method of measuring credit risk exposure.
4. Adequately describes how credit risk management occurs including providing a
clear linkage between the quantitative data and qualitative description.
5. Changes in exposure to credit risk, measurement of risk, and objectives, policies and
processes to manage the credit risk from the previous period.
6. Information about credit quality of financial assets that are not past due or impaired.
7. Renegotiated financial assets (that would be past due or impaired).
8. Aging schedule for past due amounts.
9. Impairment methods and inputs disclosed.
10. Summary quantitative data about exposure to credit risk at the reporting date.
11. Maximum credit exposure by currency.
12. Maximum credit exposure by geography.
13. Maximum credit exposure by economic activity.
14. Disaggregated maximum credit risk exposure including derivatives and off-
balance sheet items (e.g. financial guarantees and contingent commitments).
15. Renegotiated loans for troubled borrowers.
16. Risk of counterparty.
17. Credit risk concentrations.
18. Derivatives.
19. Off-balance sheet and joint venture structures.
20. Credit risk transfer/mitigation/hedging techniques.
21. Collateral.
22. Disclosures to help users understand credit risk.
Liquidity 1. Exposure to liquidity risk and how they arise.
2. Objectives, policies and processes for managing the liquidity risk.
3. Methods used to measure the liquidity risk.
4. Changes in exposure to liquidity risk, measurement of risk, and objectives, policies
and processes to manage the liquidity risk from the previous period.
5. Contractual undiscounted cash flows.
6. Maturity analysis of nonderivative liabilities.
7. Maturity analysis of derivative liabilities.
8. Maturity analysis of off-balance sheet commitments and other financial instruments
without contractually stipulated maturity (e.g. financial guarantees, etc.).
9. Maturity analysis of financial asset.
10. Expected maturity analysis.
11. Derivative and trading liabilities treatment.
12. Liquidity risk transfer/mitigation/hedging techniques.
13. Liquidity buffers sources and volume.
14. Sensitivity analysis.
15. Financing facilities.
16. Counterparty concentration profile.
17. Disclosures to help users understand liquidity risk.
Market 1. Objectives, policies, processes and strategies of market risk management.
2. Structure and organization of the market risk management function.
3. Instruments traded types.
4. Interest rate risk.
5. Equity risk. Table A1.
(continued) FRD categories
CR
Risk type Company financial risk disclosure

6. Currency risk.
7. Commodities risk
8. Market risk transfer/mitigation/hedging techniques.
9. Linkage with credit risk.
10. value-at-risk (VAR).
11. VAR limitations.
12. Stress testing.
13. Stress VAR.
14. Back-testing.
15. Disclosures to help users understand market risk.

Table A1. Source: Adapted of Elamer et al. (2019)

About the authors

Jamel Chouaibi holds a PhD degree from the University of Sfax in Tunisia. He is now associate
professor of Accounting at the Faculty of Economics and Management of Sfax (Tunisia) and a
Researcher at laboratory of research in information technology, governance and entrepreneurship
“LARTIGE.” His research works focus on financial and accounting information, corporate
governance, standards and accounting principles and corporate social responsibility. He has
published several papers in various refereed journals such as International Journal of Law and
Management, Journal of the Knowledge Economy, Journal of Economics Finance and Administrative
Science, International Journal of Managerial and Financial Accounting, Accounting and Management
Information Systems, and EuroMed Journal of Business.
Hayet Benmansour is a PhD student in Accounting, Faculty of Economics and Management of
Sfax, University of Sfax, Sfax, Tunisia. Her main research interests are related to corporate
governance, corporate social responsibility and disclosure. Hayet Benmansour is the corresponding
author and can be contacted at: hayetbenmansour100@gmail.com
Hanen Ben Fatma is a doctor in Accounting, Faculty of Economics and Management of Sfax,
University of Sfax, Sfax, Tunisia. Her main research interests are related to corporate governance,
corporate social responsibility and investment decisions.
Rim Zouari-Hadiji is an Associate Professor in Financial and Accounting Methods at the
University of Sfax, Faculty of Economics and Management, Tunisia. She is a member of the scientific
council and research laboratory LARTIGE, reviewer and member of the scientific committee in
international journals. Her domain of expertise is the R&D investment, Fintech, banking
digitalization, organizational finance, behavioral finance, sustainable and green development and
corporate governance.

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