Centre for Ethical Finance, Accountability and Governance Seminar with Prof Maria Correia (LSE)

ESG Disclosure Mandates and Regulatory Arbitrage in Business Groups

Abstract

We examine how ESG disclosure mandates in the headquarters country of business group parent companies affect the ESG performance of their subsidiaries. Leveraging the staggered introduction of ESG disclosure mandates across numerous countries worldwide, we demonstrate that, while improving their own ESG performance at the headquarter-country level, business group parents actively shift irresponsible ESG activities down the corporate structure. Specifically, we document that subsidiaries of parents subject to disclosure mandates experience an increase in the occurrence and frequency of ESG incidents, particularly in countries where weaker institutions make stakeholder monitoring more challenging. Moreover, we find that, in response to the introduction of ESG disclosure mandates, parent companies streamline their group structures by tightening control over more integrated subsidiaries and divesting from those that are more peripheral. Collectively, our evidence highlights the potential unintended consequences of uneven ESG disclosure regulation and underscores the importance of cross-country coordination in regulatory design.

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