Green signaling or greenwashing? ESG disclosure, firm performance and capital allocation in BRICS equity markets Open Access

In the aftermath of the Paris Agreement in 2015, environmental, social and governance (ESG) investing surged from a niche strategy to a mainstream pillar of global capital markets. Institutional investors, asset managers, and rating agencies increasingly prioritize ESG metrics to evaluate long-term risk-adjusted returns. Yet, beneath this global enthusiasm lies a profound structural asymmetry: while ESG disclosure norms have expanded across emerging markets, their actual impact on capital allocation and firm valuation remains uncertain (Amel-Zadeh and Serafeim, 2018; Egorova, 2025). Nowhere is this asymmetry more visible – and more contested – than in the BRICS economies.

The BRICS nations – Brazil, Russia, India, China and South Africa – represent a paradox. On one hand, they are pivotal players in global sustainability efforts, each facing intense domestic and international pressure to align with ESG goals (Rodrigues de Sá, 2025). On the other, they are marked by regulatory divergence, governance fragmentation, and limited enforcement of ESG standards (Aboluwodi et al., 2024). These institutional contradictions raise a critical empirical question:

While an extensive body of research links ESG performance to firm value and capital reallocation in developed markets (Fang and Guo, 2025; Tron et al., 2025), comparative evidence from emerging economies remains scarce. Existing studies on BRICS tend to focus either on ESG index trends (Aboluwodi et al., 2024), the evolution of disclosure frameworks (Cherian and Seranmadevi, 2025) or macro-level policy responses (Rodrigues de Sá, 2025), without systematically testing firm-level valuation and investment effects. This article addresses that gap.

The primary objective of this study is to examine whether ESG disclosure is priced into firm valuation – measured here through Tobin's Q as a market-based performance metric and ROA as an operational performance metric – and whether it influences institutional capital allocation in BRICS equity markets. Secondary objectives include:

1. Disaggregating ESG into its E, S and G components to test differential effects.

2. Testing whether country-level governance quality moderates ESG's market impact.

3. Evaluating whether ESG influences investor behavior through signaling or is diluted by greenwashing dynamics in weak institutional contexts.

The study draws on a panel dataset of publicly listed firms across BRICS countries from 2015 to 2023, leveraging ESG ratings from Refinitiv, financials from Compustat and Orbis, and institutional ownership data from Refinitiv Ownership. Using fixed effects regression models and moderation analysis, it tests whether ESG is rewarded by markets or ignored under institutional noise. The focus on BRICS enables a stress test of signaling and institutional theories under real-world complexity (Amenta and Ramsey, 2010; Karasek and Bryant, 2012).

The novelty of this research lies in:

1. It's firm-level empirical testing of ESG's impact on valuation and capital flows across five structurally diverse emerging economies.

2. Its focus on governance quality as a moderator offers a contextual lens missing inESG–value studies.

Its comparative ESG component analysis addresses the increasing concern that ESG scores are not monolithic and may mislead investors (Nguyen et al., 2025).

The rest of the article is structured as follows. Section 2 reviews the literature on ESG–valuation and ESG–capital allocation linkages. Section 3 outlines the theoretical framework and hypotheses, drawing on signaling and institutional theory. Section 4 describes the data, variables and methodology. Section 5 presents the results, followed by a discussion in Section 6. Sections 7 and 8 conclude with theoretical contributions, practical implications, limitations and directions for future research.

The relationship between ESG disclosure and firm valuation has been a central theme in capital markets research, yet the literature remains theoretically fragmented and empirically inconsistent. Studies in developed markets generally report a positive association between ESG performance and firm value, attributing this to enhanced investor confidence, reduced information asymmetry and lower cost of capital (Fang and Guo, 2025; Tron et al., 2025). ESG disclosures are often interpreted as credible signals of long-term strategic orientation, leading to favorable assessments by both institutional and retail investors. Recent evidence further suggests that ESG transparency can lower firms' financing costs and improve access to capital markets, particularly when disclosures are perceived as credible and verifiable (Fiorillo et al., 2025; Chau et al., 2025).

However, this narrative is far from universal. Several studies challenge the robustness of this linkage, arguing that the valuation premium attributed to ESG may be contingent on disclosure credibility, industry context and regulatory enforcement (Karasek and Bryant, 2012). For example, Li et al. (2025) show that in China, the positive valuation impact of ESG depends heavily on firm size and ownership structure, suggesting that ESG acts less as a universal signal and more as a differentiator among elite firms. Similarly, Safitri and Paramita (2025) find that while ESG scores are positively associated with firm value in Indonesia's IDX ESG Leaders Index, the effect weakens when profitability and capital structure are jointly considered. Studies in other emerging market contexts report similar conditionality, noting that the financial market's reaction to ESG depends on both the quality of disclosure and the institutional enforcement environment (Itan et al., 2025; Xu et al., 2025). Nicolò et al. (2025) also demonstrate that the form and visibility of ESG reporting – including the use of visual disclosures in non-financial reports – can materially influence lenders' and investors' perceptions of creditworthiness and risk.

This empirical inconsistency has triggered a broader theoretical debate. ESG performance can enhance firm value via multiple transmission channels: (1) by reducing perceived operational risk, especially in environmentally sensitive sectors; (2) by attracting long-term investors who value nonfinancial performance and (3) by preempting future regulatory sanctions (Nguyen et al., 2025). Textual analysis approaches have shown that beyond quantitative ratings, the tone and framing of ESG disclosures influence public perception and, in turn, firm value (Chen et al., 2025). Yet, these mechanisms presuppose investor belief in ESG credibility, which may not hold in contexts with weak enforcement or low information transparency (Amenta and Ramsey, 2010). Indeed, greenwashing concerns are particularly salient in emerging markets, where weak governance can allow firms to benefit reputationally without substantive ESG improvements (Liu et al., 2025; Xu et al., 2025).

A further complication arises from the composite nature of ESG ratings themselves. ESG scores often bundle heterogeneous indicators – from carbon emissions to board diversity – making it difficult to isolate the value-driving components (Cherian and Seranmadevi, 2025). This has led to growing calls for dimension-specific analysis, particularly in emerging markets where firms may engage in selective signaling or “green window-dressing.”

In sum, while there is mounting evidence that ESG disclosures can influence firm valuation, the causal direction, strength and interpretation of this relationship remain contested. This article contributes by synthesizing these recent empirical insights and situating them in the BRICS context, where disclosure credibility and governance quality vary widely.

This study responds to these gaps in three ways. First, it disaggregates ESG into E, S and G components to test which dimension (if any) exerts a valuation premium. Second, it investigates whether investors in BRICS equity markets respond systematically to ESG disclosures, or whether such signals are discounted due to institutional noise. Third, it tests for moderating effects of country-level governance quality, building on institutional theory to argue that ESG's value relevance is conditioned by the broader regulatory and enforcement environment.

While ESG's impact on firm valuation has received substantial attention, a more recent line of inquiry has turned to its role in shaping capital allocation decisions, particularly among institutional investors. The core hypothesis is that firms with stronger ESG profiles attract more stable and long-term capital due to perceived lower non-financial risks, improved reputational standing and alignment with investors' sustainability mandates (Amel-Zadeh and Serafeim, 2018). In developed markets, empirical evidence largely supports this view: higher ESG scores are associated with increased institutional ownership, improved IPO performance and portfolio reallocation toward ESG-compliant assets (Fang and Guo, 2025; Esparcia and Gubareva, 2024). Recent studies also show that lenders and debt investors incorporate ESG disclosures into credit and bond pricing, rewarding firms with lower borrowing costs when disclosures are credible (Fiorillo et al., 2025). Similarly, Chau et al. (2025) find that transparent ESG practices are linked to more favorable analyst recommendations and capital raising conditions.

Amel-Zadeh and Serafeim's (2018) global survey of institutional investors is especially influential in this domain. It reveals that while investors use ESG data to identify long-term risks and opportunities, their actual integration of this information into allocation decisions depends heavily on data credibility, regulatory clarity and client preferences – factors often taken for granted in well-regulated capital markets. More recent studies reinforce these dynamics. For instance, Tron et al. (2025) find that stronger ESG performance reduces the cost of capital, particularly in high-transparency markets. Similarly, Nguyen et al. (2025) argue that ESG disclosures can indirectly drive capital reallocation by influencing investor perceptions of firm resilience and innovation capacity. Nicolò et al. (2025) add that the visual presentation of ESG information in corporate reporting can influence institutional lending decisions, suggesting that the form of disclosure matters alongside content.

Yet, these findings raise serious questions about their applicability in emerging markets, where institutional environments differ markedly. In the BRICS countries, regulatory fragmentation, limited disclosure enforcement and inconsistent rating methodologies may undermine ESG's signaling power (Egorova, 2025; Mirza et al., 2025). Itan et al. (2025) find that in several emerging market exchanges, ESG announcements elicit weaker abnormal returns than in developed markets, consistent with investor skepticism toward disclosure quality. Xu et al. (2025) similarly document that greenwashing perceptions can erode investor trust, leading to reduced capital inflows despite high ESG scores.

As Phung and Ngo (2025) emphasize in their BRICS-focused analysis, capital allocation toward ESG-performing firms remains highly uneven and context-dependent, with investors often privileging short-term profitability over ESG metrics. Moreover, ESG-linked capital inflows may be distorted by political risks (e.g. Russia's post-2022 sanctions), shallow capital markets (South Africa) or state-controlled finance (China).

There is also the problem of selective investor response. As Amenta and Ramsey (2010) suggest, institutions do not respond uniformly to market signals; rather, they interpret them through the lens of national regulatory norms and governance structures. Chen et al. (2025) highlight that public perception – shaped by media narratives and sentiment around ESG – can mediate investor reaction, making allocation decisions contingent on both hard data and soft information.

This implies that even when ESG disclosures are made, investor interpretation – and subsequent capital allocation – will vary across institutional contexts. Such variation is rarely captured in current studies, which often assume a uniform ESG-capital response mechanism.

This study addresses these limitations by explicitly testing whether ESG disclosures in BRICS equity markets are associated with changes in institutional ownership, controlling for firm fundamentals and macroeconomic variables. It also incorporates country-level governance quality as a moderating variable, to assess whether institutional strength enhances the translation of ESG disclosure into capital inflows. Finally, by including IPO activity as a supplementary outcome, the analysis captures early-stage investor responses, which are especially important in underdeveloped markets.

Although global ESG frameworks often promote a unified vision of sustainability, the institutional, regulatory and market structures of emerging economies diverge sharply from those in the Global North. This divergence is particularly evident in the BRICS bloc, where ESG-related disclosure practices, enforcement mechanisms and investor responses are highly heterogeneous and often contradictory (Cherian and Seranmadevi, 2025; Egorova, 2025).

Recent evidence underscores that such divergence not only affects disclosure frequency but also shapes market interpretation, with greenwashing risks and inconsistent reporting formats undermining investor confidence in several emerging market contexts (Xu et al., 2025; Liu et al., 2025).

In India, regulatory developments have pushed toward mandatory ESG disclosures, particularly through the Business Responsibility and Sustainability Reporting (BRSR) framework. As a result, Indian firms are increasingly aligning with global ESG benchmarks – at least formally. However, compliance-driven disclosure does not necessarily translate to credibility or investor impact, especially in sectors with limited ESG audit transparency (Safitri and Paramita, 2025).Itan et al. (2025) find that in several Asian emerging markets, including India, ESG announcements tend to generate muted abnormal returns unless accompanied by verifiable performance indicators, suggesting that investors remain cautious.

China, by contrast, exhibits rapid ESG uptake but through opaque and state-influenced mechanisms. ESG integration is often driven by government priorities, including environmental cleanup and technological modernization, yet disclosure practices remain highly uneven across provinces and industries (Li et al., 2025; Mustafa et al., 2025). ESG scores may thus reflect regulatory compliance rather than market discipline – raising doubts about their usefulness as investment signals. Chau et al. (2025) report that Chinese firms with more transparent ESG communications experience stronger analyst coverage and more favorable financing conditions, but these benefits are contingent on governance quality and sectoral alignment with state priorities.

Brazil and South Africa have relatively mature ESG reporting frameworks in place, partly influenced by investor pressure and global standards. However, high macroeconomic volatility, political instability and shallow capital markets challenge the consistency and credibility of ESG integration (Aboluwodi et al., 2024; Sang et al., 2025). In South Africa, ESG is often embedded in corporate governance codes (e.g. King IV), but investor uptake is uneven and often reactive. Nicolò et al. (2025) show that in South Africa, the way ESG information is presented – particularly in visually structured sustainability reports – can influence lender decision-making, reinforcing the idea that format and accessibility matter alongside content.

Russia represents a unique disruption in ESG trajectories. Before the 2022 Ukraine invasion, ESG integration was gaining slow traction, especially in resource extraction sectors. Post-invasion, sanctions, delistings, and geopolitical isolation have largely severed Russian firms from ESG-driven capital flows, making it a statistical and theoretical outlier (Rodrigues de Sá, 2025). Chen et al. (2025) further highlight that in politically volatile markets, public sentiment around ESG can be heavily influenced by geopolitical narratives, which in turn affects market valuation responses.

What emerges from this landscape is not a coherent ESG regime, but a patchwork of symbolic compliance, regulatory heterogeneity, and investor ambivalence. This directly challenges the dominant assumptions in ESG literature – namely, that disclosure leads to improved valuation and capital reallocation regardless of context. As Lovisolo (2022) argues, ESG capital allocation in emerging markets is often shaped more by measurement challenges and political dynamics than by market discipline or stakeholder accountability. Fiorillo et al. (2025) also caution that, without standardized verification mechanisms, ESG performance signals in emerging markets may not be reliably priced into debt or equity instruments.

Critically, few studies offer comparative, firm-level, multi-country evidence on whether ESG disclosures are priced or rewarded in BRICS capital markets. Some studies address single-country ESG dynamics (e.g. Li et al., 2025 for China; Phung and Ngo, 2025 for BRICS broadly), but rarely with standardized data, market valuation metrics and capital allocation outcomes over time. Moreover, there remains little empirical work testing whether institutional quality moderates the relationship between ESG and firm outcomes in these economies – a key theoretical oversight, given what institutional theory predicts (Amenta and Ramsey, 2010).

This study addresses these gaps by (1) applying a consistent, cross-national dataset to assess ESG's relationship with firm valuation and capital allocation in BRICS; (2) disaggregating ESG into its E, S and G components to test which dimensions matter most in context and (3) introducing governance quality as a moderator, offering a conditional model of ESG efficacy under varied institutional constraints.

Despite the growing integration of ESG considerations into investment decisions, the interpretation and market impact of ESG disclosures remain theoretically ambiguous. Two dominant frameworks –signaling theory and institutional theory – offer competing explanations for how ESG information is processed by capital market actors. This study draws on both perspectives to build a conditional, context-sensitive theory of ESG valuation and capital allocation in emerging economies.

Signaling Theory posits that market actors operate under asymmetric information – firms know more about their prospects than investors do. To reduce this asymmetry, high-quality firms voluntarily disclose information that is costly to imitate by low-quality firms (Karasek and Bryant, 2012). In the ESG context, disclosure serves as a signal of long-term orientation, operational integrity and risk management competence (Fang and Guo, 2025; Nguyen et al., 2025). Investors, in turn, interpret these disclosures as indicators of future performance and reward them through enhanced valuation or increased capital allocation (Amel-Zadeh and Serafeim, 2018; Tron et al., 2025).

However, this signaling mechanism assumes that ESG information is both credible and costly. That assumption is increasingly contested. ESG ratings often exhibit methodological opacity and divergence, especially across rating agencies and national jurisdictions (Lovisolo, 2022). In markets with limited third-party auditing, fragmented disclosure standards, or low investor literacy, ESG communication may devolve into cheap talk – symbolic gestures that are neither informative nor punishable when misused (Cherian and Seranmadevi, 2025). Thus, while signaling theory offers a powerful explanation in high-governance, high-transparency contexts, its relevance in BRICS markets remains an open empirical question.

Institutional theory complements and challenges the signaling narrative by embedding firm behavior within broader regulatory, normative and cognitive environments (Amenta and Ramsey, 2010). According to this perspective, the effectiveness of signals – including ESG disclosures – is not inherent but is conditioned by the institutional architecture in which they are received and interpreted. Where legal enforcement, regulatory oversight and media scrutiny are weak, symbolic compliance is often sufficient to achieve legitimacy, even in the absence of substantive performance.

In this study, institutional context is operationalized through the world governance indicators (WGI), which aggregate six dimensions – voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption – into percentile ranks from 0 (lowest) to 100 (highest). Higher WGI scores indicate stronger institutional environments in which ESG disclosures are more likely to be credible, verifiable and enforced; lower scores reflect settings where ESG statements may go unverified and thus carry less informational value for investors.

In emerging markets, particularly the BRICS, ESG disclosure is often shaped more by institutional mimicry than by market discipline. Firms may adopt ESG language to satisfy state demands, align with international frameworks or access green financing, while actual practices remain decoupled from the rhetoric (Egorova, 2025; Rodrigues de Sá, 2025). In such contexts, ESG becomes a form of performative legitimacy, not a credible economic signal. Investors, aware of this institutional fragility, may rationally discount ESG disclosures – or interpret them through political and cultural filters that differ sharply from those in developed economies.

This study argues that neither signaling nor institutional theory, in isolation, can explain the heterogeneous ESG outcomes observed across BRICS markets. Theoretically, the valuation and capital allocation effects of ESG disclosure are not uniform but conditional – shaped by the interaction between signal strength (firm-level ESG disclosures) and institutional context (country-level governance quality).

This framework yields a testable research puzzle:

The puzzle is sharpened by the institutional heterogeneity of BRICS: India's push toward ESG standardization contrasts with China's state-guided opacity; Brazil and South Africa show hybrid dynamics; Russia's geopolitical isolation raises questions about market logic altogether. These variations make BRICS a natural laboratory to test how institutional quality conditions the market meaning of ESG.

By explicitly modeling this interaction, the study contributes to ESG literature in two ways. First, it recovers theoretical nuance by refusing to treat ESG as inherently valuable or universally interpreted. Second, it builds a contingent model of ESG relevance, grounded in signaling and institutional theory, that better reflects the complexity of capital markets in the Global South.

Building on the intersection of signaling theory and institutional theory, this study formulates a set of hypotheses to test whether ESG disclosures function as meaningful signals of firm value and investment attractiveness in the BRICS context. The hypotheses are structured to reflect both direct effects and conditional mechanisms, offering an empirically grounded test of ESG's informational efficacy in emerging markets.

Signaling theory posits that firms use ESG disclosure as a strategic mechanism to differentiate themselves in capital markets, especially when they cannot credibly signal quality through traditional financial metrics alone (Karasek and Bryant, 2012). Prior studies in developed markets show that ESG performance is positively associated with firm value – via Tobin's Q, ROA or market-to-book ratios – due to its role in reducing information asymmetry, signaling long-term strategic orientation and lowering perceived risk (Fang and Guo, 2025; Nguyen et al., 2025).

However, there is limited empirical evidence on whether this signaling effect holds in emerging markets, where investors may distrust or discount ESG disclosures due to regulatory fragmentation or greenwashing concerns (Cherian and Seranmadevi, 2025; Lovisolo, 2022). This article fills that gap by directly testing whether ESG disclosure is priced in BRICS equity markets, using firm-level valuation outcomes.

In addition to influencing firm valuation, ESG disclosure may guide capital allocation decisions, particularly among institutional investors. As Amel-Zadeh and Serafeim (2018) demonstrate, institutional investors increasingly rely on ESG information to allocate funds in line with sustainability mandates, manage reputational risks and identify firms with lower exposure to long-term nonfinancial risk.

The ESG–capital allocation linkage has been observed in several studies – with ESG-compliant firms receiving more attention from long-term investors, higher IPO valuations and greater shareholding stability (Esparcia and Gubareva, 2024; Tron et al., 2025). However, this relationship remains underexplored in BRICS, where institutional investors face noisy signals, limited enforcement and data inconsistencies (Egorova, 2025; Phung and Ngo, 2025). By testing institutional ownership change as a function of ESG performance, this study explores whether capital flows respond to ESG in emerging contexts.

While H1 and H2 assume a linear, positive relationship between ESG disclosure and market outcomes, institutional theory suggests this relationship is conditional on context. In countries with strong governance, robust legal systems and active media environments, ESG disclosures are more likely to be credible, verifiable and thus influential (Amenta and Ramsey, 2010; Rodrigues de Sá, 2025).

In contrast, in low-governance environments, symbolic compliance and greenwashing may reduce the informational value of ESG scores.

This theoretical tension implies that the effect of ESG on valuation and capital allocation is not uniform across BRICS. Instead, it is moderated by national governance quality, which influences how investors interpret and respond to ESG signals.

Finally, a growing body of research warns against treating ESG as a monolithic construct. Different ESG dimensions – environmental (E), social (S) and governance (G) – may have distinct effects on market perceptions, depending on sectoral exposure, investor priorities and national development strategies (Cherian and Seranmadevi, 2025; Sang et al., 2025). Environmental disclosures, in particular, are often viewed as the most salient and comparable across borders, given rising climate risks and global net-zero targets.

However, there is limited cross-national, firm-level evidence on whether E, S or G scores drive market valuation and investor response more strongly – especially in BRICS. This study responds to that gap by testing each ESG component separately.

This study employs a cross-national panel regression approach to examine whether ESG disclosure is priced by capital markets and whether it influences capital allocation in the BRICS economies. The methodology is carefully designed to isolate the signaling value of ESG in weak institutional contexts, directly responding to persistent gaps in the literature around comparability, data reliability and model selection in emerging market ESG research (Amel-Zadeh and Serafeim, 2018; Egorova, 2025).

The dataset covers publicly listed firms across Brazil, Russia, India, China and South Africa from 2015 to 2023. This time frame begins with the post–Paris Agreement wave of ESG integration and extends through key macro disruptions, including the COVID-19 pandemic and the 2022 Russia–Ukraine crisis, allowing us to observe ESG behavior under both expansion and stress conditions (Aboluwodi et al., 2024).

Data sources include:

1. ESG Scores: Refinitiv ESG, which provides standardized, annually reported E, S and G scores on a 0–100 scale.

2. Financials: Compustat Global and Orbis, offer harmonized firm-level data including ROA, ROE, leverage and market capitalization.

3. Capital Allocation: Refinitiv Ownership data to measure institutional ownership changes; IPO volumes cross-verified with Bloomberg and national stock exchanges.

4. Macroeconomic and Governance Indicators: World Bank's world development indicators (WDI) and worldwide governance indicators (WGI). The WGI aggregates six dimensions of institutional quality – voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption – into percentile ranks from 0 (lowest) to 100 (highest). These scores are averaged to construct a composite governance quality index. In the context of this study, higher WGI values indicate stronger institutional environments where ESG disclosures are more likely to be credible, enforceable, and valued by investors; conversely, lower scores signal weak enforcement and higher greenwashing risk in emerging markets. Firms were retained only if they had complete data for at least five years, reducing survivorship bias and increasing longitudinal robustness. ESG scores were winsorized at the 1st and 99th percentiles to mitigate outlier distortion. All continuous variables were z-score normalized within the country to account for structural differences across BRICS economies.

Firm Valuation: Measured using Tobin's Q – a market-based performance measure that reflects investor expectations and growth opportunities – and return on assets (ROA), an operational performance measure that captures accounting-based profitability relative to total assets, representing market-based and accounting-based values, respectively.

Capital Allocation: Measured through year-over-year change in institutional ownership and IPO trading volume, proxies for investor response and reallocation of capital.

ESG Disclosure Score (composite) and its components: environmental (E), social (S) and governance (G) – all scaled 0–100.

Firm-level

Size (log total assets), leverage, ROE, sector dummies.

Country-level

GDP growth, inflation, governance quality index (WGI).

To empirically test the study's hypotheses, we estimate a set of fixed-effects panel regression models structured to capture the direct, interactive and component-specific effects of ESG disclosures on firm valuation and capital allocation. The base model takes the following form:

Formula:

Where:

• $Yit∈{Tobin’sQit,ROAit,ΔOwnershipit}$

• $ESGit$ is the square root-transformed ESG disclosure score, to account for diminishing marginal signal effects

• $log(Assetsit)$ is the log of total firm assets (firm size control)

• $γi$ and $δt$ are firm and year fixed effects

• $εit$ the idiosyncratic error term

To test H3 – the conditional effect of institutional quality – we estimate an extended moderation model with an interaction term:

Formula:

Where:

• $GovQualct$ is country $c′s$ governance quality index at time tt, drawn from the WGI dataset

• $(ESG×GovQual)it$ captures the moderating effect of institutional strength on ESG signal reception

To test H4, we disaggregate the ESG score into its component parts and re-estimate the base model separately for each subdimension:

Formula:

This formulation enables us to test which ESG dimension exerts the greatest influence on market behavior and whether environmental performance, in particular, acts as the dominant signaling mechanism in BRICS capital markets.

All models use firm-clustered standard errors to correct for heteroskedasticity and autocorrelation. Controls are time-varying and standardized. Continuous predictors such as ESG and firm size are winsorized at the 1st and 99th percentiles and standardized within the country to adjust for systemic reporting differences across BRICS economies.

We use firm- and year-fixed effects to control for unobservable heterogeneity and macroeconomic shocks, with clustered standard errors at the firm level to correct for autocorrelation. This method is preferable to random effects, which assume homogeneity between firm-level heterogeneity and ESG scores – an assumption unlikely to hold in emerging market contexts.

While this methodology offers a multi-dimensional test of ESG effects across emerging markets, several limitations remain. First, ESG scores are not directly audited, and disclosure incentives vary widely by country and sector. Second, institutional ownership data may not fully capture foreign investor behavior, especially in opaque markets like China or politically volatile ones like Russia. Third, while we apply country-level governance as a moderator, subnational institutional differences are not captured. Fourth, as in much ESG–performance research, the possibility of reverse causality cannot be entirely ruled out – for example, better-performing firms may have greater resources and incentives to disclose ESG information, creating a feedback loop between performance and disclosure. These constraints are acknowledged in the discussion and addressed through robustness and sensitivity tests.

Table 1 presents the summary statistics for all variables used in the analysis, covering 900 firm-year observations across BRICS countries from 2015 to 2023. The average ESG Score is approximately 51, with a wide range from −1.81 to 96.31, suggesting meaningful variation in disclosure intensity across firms and countries. The subcomponents – environmental, social and governance – show balanced mean values (∼17.8 for E and S; ∼12.8 for G), but with notable dispersion, supporting the decision to test their effects separately in H4.

Firm valuation metrics are stable: the average Tobin's Q is 1.5 and ROA is 7%, consistent with expectations for publicly listed emerging market firms. Ownership Change averages near zero, but ranges from −0.30 to +0.30, validating its use as a proxy for capital allocation dynamics (H2).

Macroeconomic variables reflect typical emerging market characteristics, with GDP growth averaging 3% and inflation around 4%. Governance Quality, used as a moderator in H3, shows wide cross-country variation (range: 0 to 1), reinforcing the decision to test conditional ESG effects based on institutional strength.

These distributions confirm that the dataset is sufficiently varied to empirically test the proposed hypotheses and evaluate both direct and moderated ESG effects across valuation and ownership channels.

Table 2 presents the results from fixed-effects panel regressions testing H1 and H2, which examine whether ESG disclosures are associated with firm valuation (Tobin's Q and ROA) and institutional capital allocation (change in ownership).

In Model 1, ESG disclosure scores exhibit a positive and statistically significant association with Tobin's Q (⁠$β$ = 0.014, p < 0.01), indicating that markets reward firms with stronger ESG performance. This finding supports H1, aligning with the signaling theory's proposition that ESG disclosures serve as credible signals of long-term strategic value (Fang and Guo, 2025; Karasek and Bryant, 2012).

In Model 2, the association between ESG and ROA is positive but weaker (⁠$β$ = 0.0024, p < 0.10), suggesting that while ESG disclosures may influence accounting performance, the effect is smaller – possibly due to time lags between ESG initiatives and operational outcomes. This nuance reinforces the argument that ESG is more influential in shaping market perception (Tobin's Q) than in immediately improving profitability.

Importantly, the positive coefficients hold even after controlling for firm size, leverage, ROE, inflation, GDP growth and governance quality. These results suggest that ESG disclosures are priced in BRICS equity markets, even under conditions of institutional heterogeneity.

In Model 3, ESG scores are also positively associated with changes in institutional ownership (⁠$β$ = 0.0061, p < 0.05), supporting H2. This implies that investors – even in emerging markets – are responding to ESG disclosures with measurable reallocation of capital, echoing findings from Amel-Zadeh and Serafeim (2018) and Esparcia and Gubareva (2024).

This result is nontrivial: it indicates that despite differences in regulatory enforcement and data quality, ESG disclosures are not being ignored or discounted by sophisticated market actors in BRICS. However, the magnitude of the coefficient is modest, consistent with the idea that investor trust in ESG varies by context and possibly by disclosure credibility.

The consistency of ESG's positive association with both market valuation and capital allocation – across three distinct outcomes – provides strong support for the empirical validity of signaling theory in emerging market contexts. This is particularly notable given that the sample includes countries with varied levels of governance and regulatory oversight.

However, the results also suggest limits to generalizability. The relatively weaker effect on ROA and the moderate ownership response indicate that investor action is not automatic or uniform – it is mediated by national context, sectoral exposure and likely disclosure credibility.

To test H3, we introduce interaction terms between the ESG disclosure score and country-level governance quality, as measured by the WGI. This enables us to assess whether the strength of national institutions conditions the effectiveness of ESG as a signal – a key prediction of institutional theory (Amenta and Ramsey, 2010).

Table 3 reports the results from interaction models using Tobin's Q, ROA and institutional ownership change as dependent variables. Across all specifications, the interaction term ESG × Governance Quality is positive and statistically significant, indicating that ESG disclosures are more effective in stronger governance environments.

1. In Model 1, the coefficient on the interaction term is $β$ = 0.011, p < 0.01, suggesting that ESG disclosures have a stronger positive impact on firm valuation in countries with high institutional quality.

2. Model 2 confirms this effect for ROA, albeit at a lower magnitude.

3. Model 3 shows a strong and significant moderation effect on institutional ownership shifts (⁠$β$ = 0.0092, p < 0.05), confirming that investors respond more favorably to ESG disclosures when country institutions support accountability and transparency.

4. Figure. Presents the Marginal Effect of ESG on Firm Valuation Across Governance Quality.

As shown in Figure 1, the plot above illustrates the marginal effect of ESG disclosure on Tobin's Q as a function of country-level governance quality, using interaction estimates from the moderation model. The x-axis represents a country's governance score, ranging from 0 to 1 as measured by the WGI, while the y-axis captures the estimated marginal effect of ESG scores on firm valuation. The gray shaded area around the marginal effect line denotes the 95% confidence interval, signaling the precision of the estimates across varying institutional environments.

The figure reveals a clear upward slope: as governance quality increases, the effect of ESG disclosure on firm valuation becomes stronger and more statistically reliable. In countries with weak institutional environments, ESG disclosures exert minimal or ambiguous influence on market valuation, consistent with theories of greenwashing and symbolic compliance. Conversely, in stronger governance regimes, ESG becomes a more credible signal – investors respond more decisively, and firms are rewarded accordingly in market value. This evidence affirms the core of signaling theory while also integrating the institutional lens: ESG's market impact is not automatic, but contextual.

This moderation analysis advances the field in two critical ways. First, it strengthens signaling theory by demonstrating that not all ESG signals are interpreted equally; their credibility is shaped by the institutional ecosystem in which they are issued. Second, it builds on institutional theory by offering direct empirical confirmation that governance quality is not merely a background variable – it fundamentally shapes how markets interpret and price ESG information. Together, these findings push the literature forward, suggesting that ESG effects are conditional, not universal – a crucial insight for researchers studying emerging economies and investors operating across uneven regulatory terrains.

By identifying governance quality as a key moderator, the study delineates the boundary conditions of ESG efficacy. It shows that applying a uniform ESG strategy across divergent institutional contexts is not only analytically naive but potentially misleading. Policymakers and asset managers should therefore treat ESG performance as a function of both firm behavior and institutional credibility. The broader implication is clear: ESG works – but only where it means something.

To test H4, we disaggregate the ESG composite score into its three pillars –environmental (E), social (S) and governance (G) — and estimate their independent effects on Tobin's Q, ROA and institutional ownership change. This step allows us to examine whether capital markets in BRICS economies respond uniformly to ESG disclosures, or whether certain dimensions carry greater signaling power.

Table 4 presents the results. Across all specifications, the environmental (E) score emerges as the most consistently significant predictor of both firm valuation and investor capital reallocation. In Model 1, E is positively and significantly associated with Tobin's Q (⁠$β$ = 0.021, p < 0.01), and in Model 3, it shows a strong effect on institutional ownership change (⁠$β$ = 0.0084, p < 0.05). The social (S) and governance (G) scores, while directionally positive, are weaker and often statistically insignificant, especially in explaining ownership shifts.

The dominant role of the environmental (E) component in BRICS markets reflects both investor salience and regulatory convergence. Globally, climate-related disclosures have been prioritized by initiatives such as the task force on climate-related financial disclosures (TCFD) and the EU's sustainable finance disclosure regulation (SFDR). Investors – even in emerging markets – increasingly use environmental data as a proxy for long-term risk management and forward-looking strategy (Fang and Guo, 2025; Mirza et al., 2025).

Moreover, E-related metrics (e.g. emissions, resource use, energy efficiency) are more quantifiable and comparable across borders than social or governance metrics, making them more legible to institutional investors operating globally. This may explain why E signals are more consistently priced, even in markets with weaker institutions.

The relatively muted response to S and G scores may reflect challenges in standardizing and verifying these disclosures in BRICS contexts, where social reporting is often symbolic and governance standards vary widely (Cherian and Seranmadevi, 2025; Egorova, 2025).

These findings suggest that not all ESG signals are equally valuable in global capital markets. In BRICS economies, environmental disclosures stand out as the most credible and influential signal, especially for international investors seeking climate-aligned assets. This reinforces the idea that “E” is leading ESG's integration into emerging market valuation models, while S and G remain contested or underdeveloped.

However, caution is warranted in generalizing this hierarchy across all contexts. In economies with stronger civil society or more mature capital markets, S and G may play a more central role. Nonetheless, for the BRICS bloc – where institutional uncertainty persists – the dominance of E signals is both theoretically defensible and empirically robust.

To verify the stability of our main findings, we conduct a series of robustness tests that assess the sensitivity of the results to temporal assumptions, cross-national heterogeneity and geopolitical shocks. Each test addresses a distinct threat to inference – namely, reverse causality, structural heterogeneity and outlier-induced bias.

First, we re-estimate the core models using lagged ESG disclosure scores (ESG_t−1) to account for potential reverse causality – that is, the concern that high-performing firms may disclose more ESG information rather than ESG driving performance. Results, reported in Table 5, indicate that the positive association between ESG and both Tobin's Q and institutional ownership persists with lagged predictors, though coefficients are slightly attenuated.

Next, we split the sample into high-governance (India, South Africa) and low-governance (Russia, China, Brazil) groups based on the median value of the WGI. Table 6 shows that ESG effects on Tobin's Q and institutional ownership are stronger and more statistically significant in high-governance settings, supporting the institutional theory assertion that governance amplifies signal credibility.

Russia's financial system underwent significant disruption following sanctions imposed in 2022, which may distort firm-level ESG signaling and capital flow dynamics. We re-estimate the baseline models excluding Russian firms after 2021. As shown in Table 7, results remain substantively unchanged – ESG retains a positive and significant effect on valuation and capital reallocation. Figure 2 presents the ESG–valuation marginal effects by governance group.

As seen in Figure 2, the comparison of the marginal effect of ESG disclosure on Tobin's Q between high- and low-governance BRICS countries. The steeper slope observed in the high-governance group demonstrates a stronger market response to ESG signals where institutional frameworks are more robust. In contrast, the flatter trajectory in low-governance countries suggests that ESG disclosures in these settings are met with investor skepticism or interpreted as less credible, thus generating weaker valuation effects.

This divergence in slopes reinforces the theoretical assertion that governance quality is not simply a contextual variable – it is an active moderator of ESG signal credibility. ESG disclosures do not function uniformly across institutional environments; they are interpreted through the lens of regulatory quality, enforcement reliability and information transparency.

Together with the preceding robustness checks, this visualization confirms that the study's core findings – namely, that ESG disclosures positively affect firm valuation and capital allocation, and that these effects are contingent on institutional context – are robust to model variation, time lags, country groupings and outlier exclusion.

Importantly, these results strengthen the generalizability of the research. They demonstrate that while ESG efficacy is not universal, it is predictable – structured by identifiable and testable institutional conditions. For researchers, this offers a replicable explanatory mechanism; for investors, it provides a diagnostic lens for assessing where ESG disclosures will carry financial weight and where they are likely to be discounted as symbolic.

This study set out to examine whether ESG disclosure is a credible signal of firm quality in BRICS equity markets, and under what institutional conditions that signal translates into market valuation and capital allocation outcomes. The findings offer strong empirical support for the core hypotheses and deepen both signaling and institutional theory by demonstrating the conditionality of ESG efficacy.

At the same time, it is important to acknowledge the potential for reverse causality – that firms with stronger market or operational performance may have more resources and incentives to disclose ESG information – although the use of lagged ESG measures and robustness checks helps mitigate this concern.

The first two hypotheses – that ESG disclosure is positively associated with firm valuation (H1) and institutional ownership (H2) – receive broad support across models. Firms with higher ESG disclosure tend to exhibit superior Tobin's Q (market-based performance) and ROA (operational performance) and attract greater capital inflows, especially among institutional investors. This aligns with prior evidence in developed markets (Amel-Zadeh and Serafeim, 2018; Tron et al., 2025), but extends the literature by showing that these dynamics also hold – though unevenly – in emerging economies.

Hypothesis 3, that governance quality moderates the ESG–valuation and ESG–capital allocation relationships, is strongly supported. The marginal effects plots and subgroup regressions clearly show that ESG disclosures carry greater market weight in countries with stronger institutions. This confirms the interactive role of institutional context (Amenta and Ramsey, 2010), where governance quality enhances the perceived credibility of ESG claims and reduces the risk of greenwashing (Egorova, 2025).

Hypothesis 4, which tested for heterogeneity across ESG subdimensions, produced a clear pattern: environmental (E) scores drive valuation and ownership effects more robustly than social (S) or governance (G) scores. This suggests not only investor prioritization of climate-related risk, but also differential quantifiability, standardization and enforcement across ESG domains. E disclosures – tied to emissions, energy, and resource efficiency – are more transparent, comparable and globally regulated than softer social or governance metrics, which often suffer from vagueness or performative reporting (Cherian and Seranmadevi, 2025; Mirza et al., 2025).

The moderating effect of governance quality deserves further theoretical unpacking. In high-governance environments (e.g. India, South Africa), ESG disclosures likely reduce information asymmetry and function as credible commitments – signaling a firm's willingness to adhere to environmental and social standards even in the presence of external monitoring. These disclosures are often verified, auditable and embedded in formal legal frameworks (Nguyen et al., 2025).

By contrast, in low-governance settings (e.g. Russia, China), ESG disclosures risk being dismissed as cheap talk – firms may publish ESG reports to gain reputational legitimacy without substantive change. In such environments, weak regulatory enforcement and limited civil society scrutiny render ESG signaling less credible, a dynamic echoed in institutional theory's emphasis on decoupling between formal structures and actual behavior (Amenta and Ramsey, 2010).

This credibility differential helps explain why investor trust emerges as a crucial mechanism: in stronger institutional contexts, ESG disclosures convey real informational value; in weaker ones, they may be discounted altogether.

Addressing Potential Endogeneity: As in much of the ESG–performance literature, potential endogeneity is a concern – for example, firms with higher valuation or stronger investor demand may have greater incentives and resources to disclose ESG information, creating a reverse causality risk. To address this, we incorporated lagged ESG disclosure scores in robustness checks to ensure that disclosure preceded the observed valuation and capital allocation changes. The persistence of significant effects in these lagged models, alongside subgroup and outlier tests, strengthens the interpretation that the observed relationships reflect a signaling effect rather than being solely performance-driven.

These findings contribute to theory by reframing ESG not as a universally legible or effective signal, but as a contingent mechanism whose success depends on external institutional scaffolding. This positions the article squarely within the intersection of signaling theory and institutional theory and moves the field away from essentialist views of ESG as inherently valuable. Three mechanisms emerge from the findings:

1. Investor trust: ESG works where investors trust the disclosure process – a product of third-party verification and legal accountability.

2. Regulatory enforcement: Stronger institutions enforce reporting accuracy and penalize greenwashing, reinforcing ESG's credibility.

3. Information asymmetry: ESG reduces asymmetry only where disclosures are clear, consistent and comparable – especially for environmental metrics.

Together, these mechanisms suggest that ESG is not just firm-level behavior – it is systemically embedded in institutional quality.

This study set out to interrogate the role of ESG disclosure in shaping firm valuation and capital allocation across BRICS equity markets. Drawing on panel data from 2015 to 2023 and grounded in signaling and institutional theory, we find clear evidence that ESG disclosures are priced by investors in emerging markets – but selectively. The strength of this relationship depends significantly on national governance quality. ESG signals are interpreted as credible and valuable in countries with stronger institutions; in low-governance environments, they are more likely to be discounted or ignored.

Among the three ESG dimensions, environmental disclosures are the most consistently influential, likely due to their global comparability, rising climate-related regulatory attention and investor focus on long-term risk exposure. Social and governance disclosures – though conceptually important – appear more vulnerable to perception as symbolic or nonstandardized.

This article contributes to the ESG finance literature in two major ways:

1. It extends signaling theory to emerging markets, showing that the success of a signal (ESG disclosure) is not merely a function of firm intent but also institutional credibility.

2. It integrates institutional theory by demonstrating that governance quality acts as a boundary condition – structuring how ESG disclosures are interpreted and rewarded by capital markets.

3. In doing so, the study challenges the implicit universalism of much ESG research, proposing a more context-contingent, governance-sensitive understanding of sustainability signals in financial markets.

For policymakers, the findings underscore that ESG mandates without enforcement can be counterproductive. If firms are compelled to disclose but regulators cannot verify or sanction, the result may be a dilution of signal credibility – undermining the very goals of sustainable finance. In the BRICS context, regulators should: (1) introduce mandatory third-party ESG audits, modeled on financial audits, to verify data accuracy; (2) establish clear penalties for misreporting, including fines, delisting threats or restrictions on accessing public capital markets; (3) harmonize ESG disclosure templates across BRICS exchanges to improve comparability and (4) create public ESG registries where verified disclosures are stored and accessible to investors, media and civil society.

Effective ESG regulation must therefore be paired with strong institutional enforcement and third-party verification mechanisms.

ESG scores are not globally fungible signals; their informational value depends on governance quality. To avoid mispricing and misallocation, investors should:

A more nuanced, governance-aware ESG strategy is essential, particularly in emerging and frontier markets.

This study is not without limitations. First, although the dataset spans nine years and five major emerging economies, it remains geographically constrained to BRICS, limiting generalizability to other regions in the Global South. Future research should examine whether the conditional effects of governance quality observed here extend to MINT countries (Mexico, Indonesia, Nigeria, Turkey) or ASEAN markets.

Second, the ESG scores used (from Refinitiv) are subject to known issues around rating divergence and opacity in scoring methodologies (e.g. Cherian and Seranmadevi, 2025). Alternative ESG metrics – including those derived from textual analysis or machine learning on annual reports – could offer more granular insights into signal credibility.

Third, while the study explores firm-level valuation and ownership shifts, it does not examine long-term performance or real-world ESG outcomes. Future work should incorporate sustainability-linked KPIs, emissions reductions or labor practices to test whether market valuation reflects substantive ESG improvement or merely symbolic compliance.

Future research could also examine differences in short-term versus long-term investor responses to ESG disclosure, distinguishing between immediate market reactions and sustained capital allocation changes.

Lastly, while we test for governance quality as a moderator, other institutional factors – such as media freedom, civic activism or cultural norms – could further shape ESG signal reception. Exploring these dimensions could help deepen theoretical frameworks and sharpen investor strategies in diverse institutional ecosystems.