Hidden effects of Brexit

This paper investigates the hidden effects for UK firms of the 2016 choice to leave the European Union (EU). By applying a difference-in-difference (DID) methodology to a sample of 1166 firmyear observations from 2012 to 2018, we observe a decrease in UK firms' environmental and social performance compared to those headquartered in the EU. Our evidence also stresses the importance of the adoption of the Global Reporting Initiative (GRI) standards in reducing the negative impact of Brexit on sustainability performance. Moreover, supported by the stakeholder theory, we confirm the existence of an ESG 'insurance mechanism' reducing the detrimental effect of Brexit on UK firms' market risks. Overall, our results uncover the social responsibility effects of exiting the EU's stakeholder-oriented regulatory approach emerge in terms of a greater exposure of UK firms to future financial risk.