Exploring the bidirectional relationship between Sustainability Disclosure and Risk in Europe using a cross-lagged panel model

Abstract

In this Study the bidirectional relationship between Sustainability Disclosure und Risk is modeled with a three wave cross-lagged panel model (CLPM). Sustainability Disclosure (SD) is operationalized by using Refinitiv Eikons aggregated and disaggregated ESG-scores and individual scores for Total Risk, Systematic Risk, and Idiosyncratic Risk, which are also generated from the Refinitiv Eikon database. The relationship is tested for a four-year time lag from 2014 to 2019 and a one-year time lag from 2018 to 2019.

Usually, it is assumed that transparency in SD has a negative effect on risk (Orlitzky and Benjamin, 2001; Sassen et al., 2016). On the other hand, it can be argued that a higher risk may lead a company to increase SD as a measure of window dressing (Lueg and Lueg, 2020). Our initial findings suggest, that the CLPM needs to be further specified to fit the data.

This study is relevant for future research because, with the CLPM, the speed and direction of the bidirectional effect between SD and risk can be assessed (Erhart et al., 2017).