Environmental disclosure and environmental performance: The role of climate governance and ESG controversies

Abstract

This study examines whether environmental disclosure reflects underlying environmental performance and identifies the conditions under which this relationship holds. Prior literature reports mixed evidence on the performance–disclosure link, suggesting that disclosure may either signal substantive outcomes or serve reputational purposes. We address this inconsistency by investigating how climate governance and ESG controversies shape the credibility of environmental disclosure. Using a panel of 3587 firm‐year observations from STOXX Europe 600 firms across 17 countries, we estimate firm fixed‐effects models complemented by multiple robustness tests. We find a strong positive association between environmental performance and environmental disclosure, indicating that firms with stronger environmental outcomes disclose more detailed information that meets stakeholders' expectations and enhances credibility. This relationship is strengthened by climate governance mechanisms, which increase monitoring and tie disclosure more closely to verifiable performance. In contrast, ESG controversies weaken this association by reducing the credibility of managerial claims and increasing stakeholder skepticism. Our study contributes to the literature by showing that the link between performance and disclosure depends on governance and reputational pressures, with disclosure serving as a credible signal only when backed by strong oversight and a solid reputation. Our findings carry implications for regulators, practitioners, and managers by emphasizing that governance‐based reporting frameworks are key to reliable, authentic disclosure, while controversies can undermine even genuine environmental efforts and hinder progress toward sustainable development goals.