*2.1. Importance of ESG Disclosure*

Growing concerns about corporate CSR and sustainable development practices have been of central importance in meeting stakeholders' expectations [21]. Therefore, the integration of a sustainable business strategy into the culture of the organization is believed to fulfil the varied expectations of stakeholders. Integration of ESG into strategic business operations has become vital when evaluating a firm's performance [21]. In this vein, socially responsible investing is an investment strategy that considers two main components: (1) sustainable financial return, which focusses on long-term financial performance to create shareholder value; (2) nonfinancial returns to protect the interests of no shareholder stakeholders [22]. Therefore, stakeholders are increasingly exerting pressure on companies to minimize their negative impacts on society. Stakeholders also exert pressure to report increasingly detailed information on said practices through ESG disclosure [23]. This increased level of transparency ensures that companies act visibly and report on their activities, holding companies responsible for their actions [2,4]. Within this, the Sustainability Accounting Standards Board (SASB) developed ESG financial materiality standards. Khan et al. propose that the value of ESG is industry-sensitive and may not be important in some industries [24]. Furthermore, Williams also found this link within the disclosure of ESG and materiality within industries [25]. The work of Schiehll et al.'s integrated SASB content

analysis and identified stock price information is sensitive to ESG disclosure components. This indicates that industry-specific materiality should be considered in sustainability reports [26]. The findings also suggest that as ESG disclosure is industry-driven, stakeholders base non-equal weights on ESG disclosure based on the industry they are in, i.e., high or low industry impact.

Disclosure of ESG has become increasingly important for the reputation, brand image, and investment decision-making of a firm [27]. The ESG activities of a firm are considered crucial to institutional and individual investors, as disclosure of ESG serves the opportunities and risks faced by the firm. For example, Ellili's study states that investors now use ESG information to decide whether to invest in a firm or not. Consequently, ESG disclosure plays an important role in the growing need to satisfy investors' demands for non-financial information and corporate compliance, such as the GRI sustainability reporting framework [28]. The interplay between firm-level and country-level attributes is also significant within ESG disclosure performance. For example, Schiehll et al. found that cross-national governance has equated governance effectiveness with shareholder wealth. Within other cross-country literature [29], the research found that investor protection from the firm ownership structure is important for higher levels of governance within firms. The overall governance of the firm is highly influenced by voluntary codes, relationships, and the social norms seen in the country headquarters that establish the president for the internal governance systems in place [29]. In fact, there are several sustainability reporting frameworks, such as GRI and the International Integrated Reporting Council (IIRC) framework that covers ESG; these frameworks aim to provide reliable reporting guidelines that create comparability between firms [30]. However, the production of reports means that an effective corporate governance system must be in place. These build trust with end users of this information that fosters innovation in the capital market through the achievement of sustainable financial performance [31]. The overall objective of the disclosure of ESG used as a sustainable development mechanism is to create a long-term solution to the needs of society and protect the ecosystem [32]. Within the global sustainability agenda, the mitigation of climate change and the social shift to social and governance factors have become permanent characteristics of investors [33]. Furthermore, the 'Triple Bottom Line' model aims to protect and sustain society and the environment for future generations by achieving positive *profit*, making *people* happy and protecting the *planet* (i.e., 3Ps). This also involves maximizing the objective of market capitalization [34]. The focus on sustainability strategy means that it must be financially secure to create long-term value from reducing environmental impact through product innovation and activities to create a strategy that creates a competitive advantage. In summary, disclosure of ESG is considered necessary to create sustainable growth and provide market metrics for investment decisions [32].

#### *2.2. EU Context of Sustainability*

In light of significant differences in mentalities between different member states, the current EU framework on the disclosure of non-financial information does not provide a onesize-fits-all reporting of corporate narratives [35]. The perception of European governments is drawn from a myriad of intelligent and reflexive tools and guidance for responsible business practices that are continually drawn from EU institutions [35]. In the same context, Deegan states, governments tend to believe that social and environmental practices should remain voluntary and be determined by capital market forces and take the side of businesses when it comes to expanding corporate accountability [36]. In addition, social and environmental practices have been criticized in the social accounting literature for their lack of relevance and for their failure to affect sustainable development [36,37]. In the past, ESG disclosure has been offered on a voluntary basis in addition to traditional regulations to address domestic and global issues. In the absence of regulation for companies, there is limited motivation and incentive for companies to disclose more ESG information [38]. Furthermore, societies pay the benefits of ESG disclosures, and the company pays the cost of preparing and publishing this ESG information to the public [38]. This absence of regulation means that individual rating

agencies have different weightings for ESG disclosure, therefore ratings for the same company due to different weightings, and decreased comparability between different rating agencies, as the information is based on different key words creating biases [39].

The importance and need for non-financial information for internal and external stakeholders has increased [40]. Within the European context, on 12 June 2013, the EU adopted Directive 2013/50/EU, which amended the previous transparency directive 92004/109/EC) [41]. This amendment addressed stakeholders' concerns that ESG disclosure practices should be required in conjunction with mandatory financial requirements for EU firms [41]. The implementation of the revised EU Directive 95/2014 is the first towards the transition from voluntary to mandatory reporting requirements of nonfinancial information. The purpose of this European Directive is to increase the overall integration of nonfinancial information into business strategies that enable the monitoring and communication of suitability efforts through this mandatory reporting [42]. This EU Directive also encompasses a broader strategy for promoting CSR within European firms. This creates a strong instrument for a more proactive system, where a softer approach to non-financial reporting has not been as effective with CSR integration [43]. In general, this directive requires large and listed companies with more than 500 employees in Europe to address nonfinancial issues such as social themes, staffing issues, human and labor rights, diversity policies, and business practices [43]. Cooper and Owen, for example, debate the choice between mandatory and voluntary reporting based on the EU directive. The authors argue that it is difficult to gauge the correct level of detail of the mandatory requirements in each included company [44]. This lack of sufficient information leads to a failure to change the regulation. However, one of the key points behind the EU Directive (2014/95/EU) is that all countries must follow the same rules for ESG information to increase the comparability and usefulness of the information for stakeholders [43].
