Strategic Implications of Mandatory ESG Assurance and Its Impact on Competitive Advantage: Evidence From European Market Reactions

ABSTRACT

The EU has recently introduced, for the first time, a market‐wide mandatory assurance requirement for sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD). The directive mandates that affected firms obtain independent third‐party assurance for their ESG reports. This study examines the equity market's reaction to this shift in the assurance regime using an event study methodology. The findings reveal a significant negative market reaction, suggesting that the market anticipates costs of the directive to outweigh its associated benefits. Notably, firms that previously adopted voluntary assurance as a strategic tool experienced significantly pronounced negative reactions. In economic terms, firms in the pre‐directive voluntary regime lost an additional €49.7 million on average per firm relative to firms in the mandatory regime, highlighting the material valuation consequences of the regulatory shift. This finding is consistent with the directive's potential to erode the competitive advantage these firms gained through voluntary assurance in the separating equilibrium. The study's unique contribution lies in its ability to isolate the strategic response of firms with pre‐directive voluntary assurance experience. This provides further insight into how the regulatory approach may be perceived to undermine the differentiation benefits associated with voluntary assurance, as explained by signaling theory and voluntary disclosure theory.