Earnings Quality and Corporate ESG Performance: Evidence from Mandatory Environmental Disclosure Policies

Abstract

The interplay between earnings quality and corporate Environmental, Social, and Governance (ESG) performance has garnered increasing attention in the context of sustainable finance. This paper investigates how mandatory environmental disclosure policies influence earnings quality and ESG outcomes in corporations. Drawing on empirical evidence from global markets, we analyze the mechanisms through which enhanced transparency in environmental reporting affects financial reporting integrity and broader ESG metrics. Challenges such as data manipulation risks, compliance costs, and cultural resistance are examined, alongside enablers like regulatory enforcement, investor pressure, and technological advancements. We propose a conceptual framework that integrates these elements with organizational readiness for disclosure mandates. Our findings suggest that firms with higher earnings quality exhibit stronger ESG performance post-mandate implementation, particularly in industries with high environmental impact. This study contributes to the literature by providing insights into policy effectiveness, highlighting the role of governance in mitigating risks, and offering recommendations for regulators and corporate leaders to foster sustainable practices without compromising financial transparency. The implications are relevant for both developed and emerging markets, emphasizing the need for balanced regulatory frameworks that promote accountability while supporting innovation in ESG reporting. Furthermore, we discuss the longterm effects on firm valuation and stakeholder trust, underscoring the transformative potential of these policies in aligning corporate strategies with global sustainability goals.