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As environmental responsibility and social ethics become increasingly important, a question might arise in the boardroom: does the company's sustainability efforts materially affect the financial information on which investors rely?

in the International Journal of Business and Emerging Markets sets about answering that question. It does so by examining data from European firms over the course of a decade and providing empirical evidence that voluntary disclosure and strong performance in sustainability metrics improve the value relevance of financial statements.

The researchers focused on Environmental, Social, and Governance (ESG) criteria. This is a set of standards measuring a company's impact and management of environmental stewardship, social responsibility, and internal governance practices. ESG performance has grown in prominence as investors and regulators seek to understand how these non-financial factors influence long-term corporate viability.

The value relevance of financial statements refers to the extent to which their information correlates with a company's market valuation and so helps stakeholders in investment decisions. Ultimately, the research found, firms voluntarily reporting ESG information tended to present financial statements more aligned with market perceptions of their value.

Moreover, firms with higher ESG performance scores, indicating better sustainability practices, demonstrate even stronger correlations between their financial disclosures and market value. This suggests that sustainability efforts are not merely reputational or regulatory compliance exercises but contribute meaningfully to the transparency of financial reporting.

The findings are rather timely. Europe's Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) are already mandating for more consistent and comprehensive sustainability disclosures. They aim to standardize how ESG data is presented to improve comparability across companies and sectors.

Moreover, globally, the International Financial Reporting Standards (IFRS) Foundation and its International Sustainability Standards Board (ISSB) are developing analogous reporting standards to harmonize sustainability information worldwide, reducing duplication and improving clarity for investors.