Beyond Disclosure: Sustainable Finance Regulation and the Pricing of ESG Performance in Mature Capital Markets

Abstract

This study examines whether and under what conditions Environmental, Social, and Governance (ESG) performance becomes financially meaningful in mature capital markets. Using a longitudinal transatlantic panel of large firms listed in the EURO STOXX 50 and S&P 100 over the period 2015–2024, we analyse the within‐firm association between lagged ESG performance, market valuation, and accounting profitability. We further examine whether this relationship changes around the 2018 EU Action Plan on Financing Sustainable Growth and the 2021 implementation of the Sustainable Finance Disclosure Regulation, and whether ESG controversies moderate the financial relevance of ESG performance. Firm and year fixed‐effect models show that improvements in ESG performance are positively but only weakly associated with Tobin's Q , whereas no systematic relationship emerges with accounting profitability. Policy interaction models and a dynamic event study provide no evidence of a discrete strengthening of the ESG–valuation relationship for EU‐domiciled firms relative to US‐domiciled firms following the selected regulatory milestones. ESG controversies are directionally associated with weaker ESG value relevance, although the evidence is more pronounced for profitability than for market valuation. Moreover, the Environmental, Social, and Governance pillars are not statistically distinguishable from one another. Among large and highly visible firms, sustainable finance regulation may operate as institutional codification and credibility infrastructure rather than as an abrupt valuation shock, although the evidence is equally consistent with limited statistical power and with measurement error in a domicile‐based indicator of regulatory exposure. The results highlight the conditional and statistically fragile nature of ESG value relevance and should be generalized cautiously beyond institutionally mature capital markets.