How does financial reporting quality mediate ESG performance to investment efficiency?

Purpose: This study aims to assess the direct and indirect effects of environmental, social and governance (ESG) performance on investment efficiency by investigating the role of financial reporting quality in mediating this relationship. Design/methodology/approach: To obtain a more comprehensive measurement of ESG performance, this study used both Refinitiv Eikon and Bloomberg ESG scores, while previous studies typically used one ESG score measurement. The test was conducted on cross-country samples of 5,980 observations over 2016–2023. The mediation effect was tested using the three-stage least squares method developed by Baron and Kenny (1986). The Oster test was done to address endogeneity issues that become a matter of concern in determining the estimation model used in this study. Findings: Empirical results show that ESG performance positively affects investment efficiency, and financial reporting quality mediates the positive effects of ESG performance on investment efficiency. The results of this study indicate that ESG performance will reduce agency problems, thus increasing investment efficiency. This implies that high ESG performance and good financial reporting quality are determining factors for companies to invest more efficiently. Originality/value: This study reveals how ESG performance affects investment efficiency mediated by financial reporting quality, which has never been discussed in other studies. ESG performance was measured by using the average of Bloomberg ESG score and Refinitiv Eikon ESG score to complement previous studies that generally used one ESG score measurement.