ABSTRACT This study examines the impact of EU Directive 2014/95/EU (NFRD) on the Environmental, Social and Governance (ESG) performance of EU‐listed companies, focusing on variations across ESG dimensions and national institutional contexts. Using a dataset of 19,036 observations from 2010 to 2022, we apply a time‐varying Difference‐in‐Differences regression and heterogeneity analyses. Our findings show that the NFRD improves overall ESG ratings, but the effects are heterogeneous. The Directive strengthens social and governance dimensions, whereas its effect on the environmental pillar is limited or may even be negative. In addition, firms exhibit smaller ESG gains in countries with higher qualities of governance, law rules, political stability and anti‐corruption. Further analysis suggests that this pattern reflects institutional inertia and strategic compliance. Our results refine institutional theory by identifying institutional maturity as a boundary condition for the real effects of disclosure mandates and inform expectations for the EU's transition from NFRD‐style flexibility to the CSRD/Omnibus sustainability reporting regime.
Xiao et al. (Thu,) studied this question.