Abstract
The ESG landscape has evolved with advancements in reporting standardisation and assurance, proactive responses to political risks and concerted efforts to reduce controversies. Nevertheless, firms still suffer various challenges, resulting in the loss of investors' trust and heightened scrutiny of credibility and governance. Motivated by such industry needs, this thesis examines the interplay between ESG, investor behaviour and political risk by addressing the following research questions:
1. How does the ESG disclosure impact investor behaviour and vice versa?
2. Does firm-level political risk impact ESG controversies?
3. Does firm-level environment-specific political risk impact ESG assurance?
To address the first question, the first essay (Chapter 2) follows the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) framework to synthesise the published literature on ESG disclosure and investor behaviour from 135 articles from 2000 to 2024. The essay performs a theme analysis to classify ESG disclosure and investor behaviour and identifies a two-way relationship between the underlying variables. The majority of the studies focus on the effects of ESG disclosure on investor behaviour, highlighting its positive impact on four dimensions, including investor demand, preference, reaction and perception. Nonetheless, there is evidence of a negative association between ESG disclosure and specific aspects of investor behaviour, such as trust, due to ESG controversies. The essay further documents the theories, methodologies, mediating and moderating factors and channels associated with underlying relationships. Overall, the first essay provides a critical review of the nature and direction of the association between ESG disclosure and investor behaviour and finds avenues for future research. The essay further highlights the scant focus on the negative investor perceptions of ESG disclosures and discovers the research gap associated with the determinants of these negative investor perceptions.
Building on the research gap identified in the first essay, the second essay (Chapter 3) explores the nexus between firm-level political risk and ESG controversies. Using a sample of 12,517 firm-year observations from G7 countries during the 2002-2021 period, the results of this essay demonstrate that the higher the firm-level political risk, the greater the ESG controversies. This essay reports that a negative political environment leads to unethical firm behaviours, supported by the moral disengagement theory and the Cressey fraud triangle hypothesis. Furthermore, this essay identifies ESG-linked CEO compensation as a moderating factor between firm-level political risk and ESG controversies, supported by moral disengagement and agency theories. Moreover, the documented positive relationship is more pronounced for firms lacking environmental initiatives, those with lower levels of board independence and board gender diversity and those with higher CEO power.
The third essay (Chapter 4) extends the firm-level political risk and ESG-related literature by examining the effect of environment-specific political risk on ESG assurance. This study draws on 4,110 firm-year observations of S&P 500 firms from 2010 to 2021. The essay documents the positive impact of environment-specific political risk on ESG assurance, supporting the risk mitigation hypothesis, agency theory and institutional theory. The finding implies that firms obtain ESG assurance upon a high environment-specific political risk as a risk mitigation and compliance strategy. This study identifies the moderating role of corporate cash holdings on the underlying relationship. This study further reports that external corporate monitoring moderates the impact of environment-specific political risk on ESG assurance, and the effect becomes stronger for environmentally sensitive firms and firms that engage more in corporate political lobbying.
The findings of all essays are robust to alternative measures. Potential endogeneity and self-selection bias are also addressed in all essays. Overall, three dynamic and interconnected essays cover three critical elements of ESG, namely, ESG disclosure, ESG controversies and ESG assurance, while highlighting their crucial relationships with investor behaviour and firm-level political risk. The thesis collectively contributes to ESG disclosure, investor behaviour, ESG controversies, ESG assurance and firm-level political risk literature domains. Moreover, the thesis highlights implications for the management teams to meet investor demands, manage political risks and obtain trust in disclosed ESG. Concurrently, the thesis offers vital policy implications for environmental regulators, strategic framework setters and policymakers regarding regulatory, standard and policy reforms to mitigate political risk and calls for regulatory compliance. In sum, this thesis offers significant theoretical and practical insights into the growing industry and academic trends that are of timely interest.