Is mandatory sustainability disclosure associated with default risk? Evidence from emerging markets

We examine the impact of mandatory environmental, social, and governance (ESG) disclosure on firms' default risk. Using a comprehensive sample of 17 emerging countries, we empirically show that firms subject to the mandatory ESG regulation have decreased default risk subsequent to the mandate. This result is consistent with the argument that implementation of mandatory ESG disclosure improves corporate transparency and serves as a substitute for corporate governance mechanisms. Overall, our study supports the positive view of mandatory ESG disclosure and thus contributes to a timely debate on the pros and cons of the mandate in the economy and wider society.