When Sustainability Reporting Becomes a Strategy: The Impact of Financial Performance and Institutional Pressures From EU Sustainability Reporting Regulations on ESG Decoupling

ABSTRACT Mitigating environmental, social, and governance (ESG) decoupling is essential to advancing reliable sustainability disclosure and ensuring that ESG reporting fulfills its intended purpose. This study aims to provide critical insights into the organizational and contextual elements that could intensify or diminish ESG decoupling. Using a multi‐theoretical framework, this study examines the impact of firm value and institutional pressures from the European Union's sustainability reporting directives on ESG decoupling. The empirical findings, based on a random‐effects panel regression analysis of data from 3465 large companies from 2009 to 2023 (13,488 firm‐year observations), indicate that firms with higher financial performance and market value are more likely to engage in ESG decoupling. Conversely, the results demonstrate that normative and coercive pressures from the European Union's sustainability reporting directives result in greater alignment between ESG disclosures and performance. These findings offer researchers, regulators, investors, stakeholders, and ESG rating agencies additional insight into ESG decoupling and carry significant policy implications.