*3.1. Theoretical Framework*

Research on ESG disclosure has increased significantly in recent years with a multiple theoretical framework underpinning research such as agency, stakeholder, signaling, institutional, and legitimacy theory. Agency theory stresses the existence of agency problems and information asymmetry between principals (i.e., shareholders) and agents (i.e., managers) [8]. According to agency theory, the principal delegates management power to the agent, who should be in the best interest of the principal, but usually pursues his own objectives to determine the interests of the principal [45], while stakeholder theory suggests that all actors of the firm should be accountable to shareholders and other stakeholders [46]. Moreover, signaling theory is concerned with market signals to address information asymmetry, which increases the likelihood of informed decisions between two parties. Scott and Meyer suggest that there are organizational practices adopted because they correspond to institutionalized expectations that are not under firm control. This is closely related to the theory of legitimacy, as firms constantly seek to ensure that they operate within the limits of social norms [47]. Therefore, in this study, we adopted a multi-theoretical framework that comprises agency, stakeholder, signaling, institutional, and legitimacy theory to understand ESG disclosure practice and its determinants in Europe. Firstly, agency theory is one of the most widely used theoretical perspectives to explain the relationship between corporate governance characteristics and corporate disclosure practices [7]. Agency theory is frequently related to ESG disclosure practices and their impact on corporate performance [31]. This theory argues that managers engage in ESG activities and disclosure to pursue their wishes. Moral hazards, for example, occur in the presence of asymmetry information, where management (the agent) knows more information about the company and decides to withhold this information from investors (the principal) [48]. Regarding ESG disclosure, firms disclose additional information to increase communication between management and investors, minimising the principal-agent problem [49]. In this regard, the disclosure of ESG information represents a tool capable of reducing information asymmetry, therefore

mitigating risk [48]. Managers who disclose their ESG performance can reduce exposure to future risks, such as environmental risk, litigation costs, and bad reputation [50].

Second, stakeholder theory focuses on the need to manage stakeholder expectations, which have the power to provide firms with the required resources (e.g., financial, manufacturing, social, human, and environmental capitals) which are essential to ensure the going concern of the business [49]. Stakeholder theory promotes the use of an internal management tool which focusses on strategies towards non-financial goals such as seeking to improve social welfare and surrounding environments. Such value maximizing governance practices can incorporate shareholder values due to good management practice [51,52].

Third, signaling theory is concerned with reducing information asymmetry. With this, the increase in communication channels increases the information available between the company and the users, thus reducing the information asymmetry [52]. The end user of this information chooses how to interpret the information, the signal sent by the company [53]. ESG disclosure information is used as a tool to provide voluntary information on sustainability efforts and disclosure of ESG performance indicators [54]. Flynn and Thorton argued that signaling theory suggests that voluntary disclosure decisions lead to value-related information on ESG performance. This voluntary nonfinancial disclosure helps investors predict economic earnings; therefore, firms use it to signal their sustainability achievements, legitimize their existence, and maintain or regain their corporate reputation [12,55].

Fourth, institutional theory is a frequently adopted framework in the literature on ESG, since disclosure of ESG plays an important role in portraying the reputation of corporate sustainability [56]. Therefore, institutional theory reflects the impact of social and environmental performance on corporate success [57]. Campbell notes that within the institutional theory paradigm, companies are perceived as economic units operating within such frameworks constructed by institutions with expectations [56]. Firms that operate in countries with similar institutional structures tend to adopt similar behavior forms, such as ethical behavior. Scott considers ethical behavior a normative institution, as it includes informal rules associated with morals and values [58].

Finally, from a legitimacy perspective, corporate legitimacy is gained by releasing more useful information on ESG that helps stakeholders assess the impact of their companies on society and the environment [12]. Reber et al. found that sustainability reporting is a key form of corporate communication that companies engage in with their strategic objective, thus increasing the legitimacy of the firm [59]. Using ESG reporting, organizations such show the public their compliance with societal norms [11]. Therefore, legitimacy theory is an important motivator for companies to disclose more ESG information to legitimize their existence and achieve sustainable growth through the social acceptance of their communities [11]. This disclosure of ESG can be used to convince societies that companies are working in accordance with their social norms to meet their expectations [50].

Based on the above discussion, this study will use these five theories to provide explanations for the ESG disclosure practices of EU companies. Therefore, these five theories are connected to each other to create a structure for the disclosure of the ESG of firms. Therefore, the disclosure of ESG can be used to convince the society that companies are working in accordance with social expectations [11]. Figure 1 represents the four following hypotheses with firm and board level drivers of ESG and country cultural drivers.

**Figure 1.** Research schema of expected relationship between firm-level and country-level cultural dimensions and ESG disclosure quality scores.

#### *3.2. Hypothesis Development*

#### 3.2.1. Board CSR Orientation

Board CSR orientation is known as corporate directors' acknowledgment of the importance of the environmental concerns facing their companies [12]. Helfaya and Moussa found that board CSR orientation enhances sustainability activities and performance of companies [12]. Previous studies suggest that corporate board characteristics may be present among directors who have a positive impact on firm ESG disclosure practices, such as board independence, gender diversity, and the presence of at least one financial expert in the audit committee [11,12]. In the following, we discuss the rationale for the inclusion of each of the three characteristics of the board.

*Board Independence*—From an agency perspective, Fama and Jensen state that boards should consist of a greater proportion of non-executive directors (NEDs) to aid in decisionmaking as well as an increased level of monitoring potential conflicts of interest between managers and shareholders [60]. In fact, corporate executives have the ability and potential to be more attentive to short- and medium-term financial goals, while NEDs may feel that social and environmental issues are as important as profit maximization [60]. The presence of NEDs in boardrooms helps challenge decision-making, bringing different stakeholder perspectives [61]. Similarly, from the stakeholder perspective, greater board independence means that there are NEDs on the board who encourage management activities to maximize long-term value and higher levels of transparency [13]. Regarding ESG disclosure practices, previous literature has found that board independence plays a crucial role in mediating and promoting ESG disclosure practices to enhance transparency and build trust with stakeholders [62,63]. Similarly, Cuccari states that the more NEDs in the boardroom, the more investments in sustainability activities [13]. Both legitimacy and signaling theories support the debate that NEDs are very interested in considering the CSR activities and performance of their firms and, therefore, that they are disclosing more information about ESG to carry out their social and environmental responsibility to stakeholders [4,12]. Consequently, we argue that there is a positive association between the ESG disclosure score and the existence of board independence.

*Board Gender Diversity—*Boardroom gender diversity is increasingly recognized within the ESG and sustainability agenda. The role women play in corporate boardrooms is multifaceted [12]. First, according to the literature on board gender diversity, male directors are likely to be characterized by agentic attributes, while female directors have more communal characteristics [64]. In practical terms, women are concerned with the welfare of the entire society rather than shareholders; thus, women directors address the interests of all stakeholders. Therefore, having more women on board affects the business agenda of their company with respect to social and environmental issues [65]. Second, compared to male directors, female directors have different experiences, as female directors tend to gain board experience with smaller firms [66]. This experience and diverse business background lead to contributing to the sustainability strategy and activities of their companies [67]. The presence of a female on board is also related to legitimacy, signaling, and institutional theory, as the presence is generally perceived as a signal of compliance with expectations of society, governance regulations, and capital markets requirements [67]. From the above, it is argued that board gender diversity is positively related to the ESG disclosure score [48,50].

*The presence of financial expert in the Audit Committee—*Iyer et al. define the presence of a financial expert in the audit committee as a director having an accounting or auditing background or any relevant financial experience [68]. It is argued that the efficiency of the audit committee is enhanced by the presence of at least one financial expert, as it ensures the effective operations of the audit committee and increases the effective monitoring of all financial matters [68]. In reality, boardroom directors with financial experience and qualifications will challenge managers and accounting and finance teams to comply fully with accounting standards and financial regulations to improve the credibility of all accounting records, including corporate reports [68]. In the same way as enhancing the credibility of corporate financial reporting, they will also consider other non-financial matters, including CSR reporting [48]. Previous empirical studies have shown a positive relationship between the presence of at least one financial expert on the audit committee and ESG disclosure scores [68]. According to both stakeholder and legitimacy theories, the presence of the financial expert in the audit committee will improve the quality of CSR disclosure practice [68]. In the same vein, the agency theory suggests that members with financial experience and qualifications will work to improve the ability of the audit committee to evaluate the judgments of auditors, and this can be an instrumental tool in controlling risk management, etc. [68]. Based on the above discussion, we expect a positive relationship between the board's CSR orientation and the ESG disclosure score. So, our first hypothesis is the following:

#### **H1:** *There is a positive association between board CSR orientation and ESG disclosure score.*
