Environmental Disclosure Versus Environmental Performance: Implications for Corporate Financial Performance and Risk

Abstract

Environmental considerations shape corporate strategy, risk management, and firm valuation. Yet, empirical evidence on the links between environmental performance, environmental disclosures and corporate financial performance is mixed and often omits risk implications. We develop a holistic framework to examine the endogenous inter-relations among corporate environmental performance (CEP), environmental disclosure (CED), financial performance, and risk. Employing 3SLS, we analyse the simultaneous links between CEP, CED, and market-based measures of performance and risk for a large panel (7877 firm-year observations) of US-listed firms over 2005–2020. The findings reveal that environmental performance and environmental disclosure have distinct economic implications. Environmental performance is associated with lower market valuation and lower market risk. These findings suggest that while substantive environmental initiatives may enhance organisational resilience, investors are not appropriately factoring the associated benefits in firm valuation. In contrast, environmental disclosure is associated with higher market valuation and higher market risk. Thus, environmental communication may enhance corporate legitimacy and strengthen stakeholder relations while simultaneously increasing investor awareness of environmental exposures and sustainability-related uncertainties. We also find a strong positive association between environmental performance and environmental disclosure, suggesting that environmental reporting increasingly reflects underlying environmental actions rather than symbolic signalling alone. Overall, the results highlight the importance of distinguishing between environmental actions and environmental communication when evaluating corporate environmental strategy, firm value, and risk. Overall, the results carry implications for managers, investors, regulators, and researchers seeking to evaluate the role of corporate environmental strategy in corporate resilience, transparency, and value creation.