R&D Expenditures and ESG Disclosure

Abstract

Previous research has highlighted several firm-specific determinants of ESG disclosure; however, the link with R&D activities remains largely underexplored, despite the distinctive characteristics of such investments. We argue that R&D is characterized by asset specificity, uncertainty, and growth prospects, which generate informational frictions and shape firms’ disclosure incentives. This study is motivated by the need to understand how innovation-related opacity influences ESG reporting in the context of increasing demand for non-financial disclosure by capital market participants. Based on 12,025 European firm-year observations over the period 2014–2024 and fixed-effects estimations, we find that R&D intensity is positively associated with ESG disclosure, and this relationship is strengthened by board independence. Robustness tests using GMM estimations and disaggregated ESG components confirm the results. The study is relevant because R&D-related opacity can affect how investors and stakeholders assess firms’ long-term value creation and sustainability orientation. Theoretically, the study extends ESG disclosure literature by highlighting innovation-related informational frictions as a key determinant of sustainability reporting. Practically, the findings suggest that investors and regulators should consider firms’ R&D intensity and governance structures when evaluating ESG transparency and disclosure quality.

1. Introduction

Environmental, social, and governance (ESG) disclosure represents a fundamental component of business reporting, reflecting firm’s commitment to transparency and value generation (Dhaliwal et al., 2011). Stakeholders are becoming increasingly attentive to non-financial information, while financial statements alone may not fully capture sustainability performance challenges (La Torre et al., 2018; Sun, 2024). In Europe, the Non-Financial Reporting Directive (NFRD) has heightened the importance of ESG disclosure and contributed to providing reliable sustainability information (Cicchiello et al., 2023; Cuomo et al., 2024). ESG reporting improves transparency, reduces information asymmetry and enhances firms’ credibility, providing stakeholders with a more complete understanding of corporate strategies (Kolk, 2008; Ferrer et al., 2020). This reporting encompasses environmental, social, and governance dimensions, each reflecting distinct aspects of corporate responsibility. Against this background, this study examines whether R&D intensity is associated with ESG disclosure and whether board independence strengthens this relationship among publicly listed European firms.

This question is important because R&D activities are central to firm innovation and long-term growth but are also associated with high levels of informational opacity (Lev & Sougiannis, 1996). R&D investments are difficult for external stakeholders to evaluate due to their asset specificity, uncertainty, and long-term payoff structure, which distinguish them from ordinary expenditures and make their outcomes highly firm-specific and realized over long horizons (Aboody & Lev, 2000; Elkemali, 2024b). As a result, understanding whether and how firms use ESG disclosure to address these informational challenges is crucial for investors, regulators, and other stakeholders assessing corporate transparency and sustainability orientation. Consequently, firms may rely on complementary disclosure mechanisms to communicate the strategic nature of their innovation activities to external stakeholders.

Recent studies suggest that ESG disclosure may function as a strategic communication channel through which firms signal responsible governance, risk management, and long-term orientation (Cornell, 2021; Hussain & Zhou, 2026). In this sense, ESG reporting can complement traditional financial disclosure by conveying non-financial aspects of innovation that are otherwise difficult to observe. At the same time, the effectiveness of this mechanism is likely influenced by corporate governance structures (Manita et al., 2018; Lagasio & Cucari, 2019). In particular, board independence can enhance monitoring and improve the credibility of ESG disclosures by limiting managerial discretion and increasing oversight quality (Al Amosh & Khatib, 2022; Wadi et al., 2026). Despite growing academic and policy interest in ESG and corporate innovation, empirical evidence on how R&D activities shape ESG disclosure remains limited, particularly in the European regulatory context.

This study develops a conceptual framework that links R&D-related characteristics, such as asset specificity, uncertainty, information asymmetry, and growth opportunities, to ESG disclosure, and examines how governance mechanisms moderate this relationship. Using 12,025 observations from 23 European countries, our results show that R&D intensity and ESG disclosure are positively linked and that the relationship is stronger for businesses with higher board independence. The findings remain robust across fixed-effects and dynamic GMM specifications and hold when considering the environmental, social, and governance components separately.

Several contributions are offered by this study. First, we advance the ESG disclosure literature by identifying R&D-related opacity as an important but underexplored determinant of ESG disclosure. In this regard, we propose a framework connecting specific R&D characteristics to ESG disclosure, offering a structured lens to understand how intangible, high-risk, and growth-oriented investments influence sustainability reporting. Second, we emphasize the moderating role of board independence, showing that it strengthens the translation of R&D investments into credible ESG disclosure. Finally, by focusing on European firms under evolving ESG regulations, we highlight the interplay between innovation, governance, and sustainability in a highly regulated context.

In the rest of the paper, Section 2 reviews the literature and develops the hypotheses, Section 3 presents the methodology, Section 4 reports the results, Section 5 provides the discussion, and Section 6 concludes.

2. Literature and Hypotheses

2.1. ESG Disclosure in the European Context

ESG disclosure has become a key aspect of the corporate information environment by extending the scope of reporting beyond traditional financial metrics. Prior literature shows that voluntary disclosure enhances transparency and reduces information asymmetry by providing stakeholders with relevant insights into firm activities and risk exposure (Healy & Palepu, 2001). In this context, ESG reporting allows firms to communicate environmental performance, social responsibility, and governance practices, thereby improving the overall information quality and supporting stakeholder assessment of long-term corporate value creation (Cornell, 2021; Hussain & Zhou, 2026). Empirical evidence indicates that such disclosures are associated with improved market liquidity, reflecting their role in reducing uncertainty and enhancing market efficiency (Dhaliwal et al., 2011). More recent studies also link ESG reporting to lower financing frictions and stronger investor confidence, reinforcing its growing relevance in capital markets (Cicchiello et al., 2023).

Substantial research has examined the determinants of ESG disclosure, underscoring the role of firm-specific characteristics and external pressures. Firm size, profitability, leverage, and industry visibility are among the most commonly identified drivers, as larger and more visible firms face greater scrutiny and stakeholder expectations (Kolk, 2008; Brammer & Pavelin, 2008). More profitable firms are also more prone to undertake ESG disclosure, as they possess the necessary capital for reporting practices and sustainability initiatives (Reverte, 2009; García-Sánchez et al., 2013). Similarly, leverage influences disclosure incentives, as highly leveraged corporations may offer more information to reduce monitoring costs and reassure creditors (Jensen & Meckling, 1976; Reverte, 2009). In addition, governance quality plays a central role, as oversight mechanisms lead to transparent and comprehensive ESG reporting (Michelon & Parbonetti, 2012). Recent evidence further suggests that board and audit committee characteristics improve disclosure quality and credibility (Al Amosh & Khatib, 2022; Wadi et al., 2026).

The European context provides a particularly relevant setting for examining ESG disclosure due to its strong and evolving regulatory framework. The introduction of the NFRD in 2014 (Directive 2014/95/EU) marked a major step toward enhancing non-financial reporting transparency. Under this directive, large public-interest organizations are required to publish environmental, social, human rights, anti-corruption and board diversity information. By mandating ESG-related disclosure, the directive aimed to improve the consistency, comparability, and reliability of non-financial data across European firms (La Torre et al., 2018).

Despite its importance, prior research has identified several limitations of the NFRD, including reporting flexibility and variability in the quality and depth of disclosed information. Firms retained considerable discretion in how and what they reported, which raised concerns about comparability and the potential for symbolic disclosure or “greenwashing” (Kolk, 2008; La Torre et al., 2018). These limitations motivated the need for a more rigorous and harmonized regulatory framework.

In response, the European Union introduced in 2023 the Corporate Sustainability Reporting Directive (CSRD), to strengthen ESG disclosure rules by expanding reporting to additional firms, introducing more detailed and standardized requirements, and mandating external assurance of sustainability information. The concept of double materiality, one of the key innovations of the CSRD, requires firms to disclose both how sustainability factors influence financial performance and how firms affect the environment and society (Grewal et al., 2019; Fiechter et al., 2022). This represents a shift toward a more comprehensive and enforceable ESG reporting regime, enhancing the credibility of disclosed information and reducing managerial discretion in sustainability reporting (Cicchiello et al., 2023; Cuomo et al., 2024).

These regulatory developments increase the pressure on European firms to provide reliable ESG disclosure, minimize information asymmetry between firms and stakeholders and emphasize how firm-specific factors shape disclosure strategies. While prior literature has primarily focused on traditional determinants, relatively less attention has been paid to how strategic investment decisions, particularly those related to innovation, affect ESG disclosure. This gap remains important because investment choices can materially influence firms’ information environment and disclosure incentives, yet innovation-related drivers of ESG reporting remain underexplored.

In particular, R&D expenditures, characterized by asset specificity, uncertainty, and growth opportunities, may create stronger incentives for firms to engage in ESG disclosure as a complementary mechanism to communicate long-term value creation. Accordingly, the present study addresses this omission by examining whether R&D intensity is associated with ESG disclosure and whether board independence strengthens this relationship in the European regulatory context. By doing so, we extend the ESG disclosure literature beyond traditional determinants and identify R&D-related opacity as an underexplored driver of sustainability reporting.

This motivates the analysis developed in the following section.

2.2. R&D Expenditures and ESG Disclosure

R&D activities are critical for innovation and long-term growth, but they possess characteristics that make valuation and stakeholder assessment challenging. These characteristics, namely specificity, uncertainty, and growth opportunities, create distinct informational and strategic frictions that increase the need for complementary disclosure mechanisms. ESG disclosure provides a useful channel through which firms can reduce opacity and communicate the broader implications of their innovation activities. Although these three characteristics are related, they operate through different channels: asset specificity primarily creates valuation difficulties, uncertainty primarily creates information asymmetry regarding future outcomes, and growth opportunities primarily increase external demand for forward-looking information. Distinguishing these mechanisms helps clarify why R&D-intensive firms may rely on ESG disclosure.

Unlike other disclosure channels such as patents, management discussion and analysis (MD&A) narratives, or innovation reports, ESG disclosure offers a standardized, externally monitored, and comparably structured framework that is increasingly shaped by regulatory and market expectations. This makes it particularly suitable for addressing valuation difficulties, uncertainty-related information asymmetry, and communication challenges associated with R&D, as it allows firms to communicate not only innovation outcomes but also their governance quality, risk management practices, and long-term sustainability orientation in a more credible and verifiable form. In contrast to these alternative channels, ESG disclosure integrates financial and non-financial dimensions into a unified, stakeholder-oriented reporting system that is increasingly demanded by capital markets and regulators, thereby enhancing comparability and credibility across firms (Dhaliwal et al., 2011; La Torre et al., 2018; Sun, 2024).

This comparative advantage of ESG disclosure reinforces the view that firms use it primarily as a response to information frictions arising from R&D activities. Accordingly, ESG reporting is interpreted in this study as a structured disclosure response to opacity rather than as an indicator of firms’ sustainability commitment.

2.2.1. Asset Specificity and ESG Disclosure

R&D investments are largely firm-specific, making their value difficult to observe or verify externally (Lev & Sougiannis, 1996). In line with transaction cost economics, an asset is considered specific when it is not easily redeployable and its value within the firm exceeds its value in alternative uses (Williamson, 1988). R&D investments exhibit a high degree of asset specificity, as their outcomes are tailored to the firm’s unique capabilities, technologies, and strategic objectives (Elkemali & Ben Rejeb, 2015). This specificity creates a “valuation gap,” where external stakeholders systematically underestimate the value of firm-specific R&D assets. Thus, the distinctive role of asset specificity is to create measurement and valuation difficulties rather than uncertainty about project outcomes.

As these assets are non-collateralizable and inherently risky, firms face strong incentives to provide additional disclosure to improve valuation transparency and enhance transparency (Healy & Palepu, 2001).

However, prior ESG disclosure literature has largely focused on conventional firm characteristics such as size, profitability, leverage, and governance quality, while paying limited attention to how asset-specific investments shape disclosure incentives. This omission is important because valuation frictions arising from firm-specific R&D may generate a distinct demand for complementary non-financial disclosure mechanisms.

Recent studies suggest that ESG disclosure can provide complementary non-financial information on firms’ intellectual capital and innovation-related activities (Pham et al., 2024). In settings characterized by intangible and difficult-to-value resources, governance and social disclosures are often used to communicate organizational quality and internal capability structures (Adomako & Tran, 2024; Pinto & Gaio, 2025). However, the specific role of R&D-related asset specificity in shaping ESG disclosure decisions remains underexplored in the literature. Accordingly, firms with high R&D specificity may have stronger incentives to rely on ESG reporting as an additional communication channel to external stakeholders.

Importantly, ESG disclosure in this setting should be interpreted as a strategic response to valuation-related informational frictions rather than as evidence that R&D-intensive firms are more sustainability-oriented.

2.2.2. Uncertainty and ESG Disclosure

While asset specificity primarily challenges the valuation of R&D, uncertainty affects the predictability of outcomes and stakeholder confidence. R&D projects are inherently uncertain, involving long development cycles, high technical and market risks, and substantial probabilities of failure (Aboody & Lev, 2000; Elkemali, 2024b). This uncertainty creates information asymmetry between managers, who have detailed knowledge of ongoing projects, and external stakeholders, who cannot easily forecast outcomes or returns (Bessière & Elkemali, 2014). Investors may perceive higher risk, increasing the cost of capital and limiting confidence in the innovation strategy (Lev, 2001; Chan et al., 2001). Accordingly, the main implication of uncertainty is not valuation itself, but asymmetric information regarding the timing and success of future R&D returns.

Signaling theory suggests that firms can mitigate these information asymmetries by providing credible signals of long-term strategic orientation (Spence, 1973). ESG disclosure functions as such a signaling mechanism: by voluntarily reporting environmental, social, and governance performance, firms communicate stability, responsible management practices, and commitment to sustainable value creation. Recent evidence indicates that firms facing higher innovation uncertainty tend to engage in ESG reporting to reduce perceived risk and strengthen trust (Bin-Feng et al., 2024; Liu & Song, 2025). Yet the role of R&D uncertainty has rarely been isolated as a standalone explanation for ESG disclosure decisions. Most existing evidence discusses ESG reporting in broader governance or stakeholder contexts, leaving limited understanding of whether uncertainty tied to innovation activities creates additional disclosure incentives. This pattern suggests that ESG reporting may reflect strategic information-management motives rather than sustainability commitment alone.

Furthermore, ESG disclosure enables firms to highlight internal capabilities and governance mechanisms that manage innovation-related risks. High-quality governance structures, ethical practices, and robust social policies reassure stakeholders that uncertainty is being managed effectively and that R&D investments are monitored responsibly (C. A. Adams & Abhayawansa, 2022). By complementing financial statements with ESG information, firms provide a more complete picture of risk management and strategic foresight, reducing opacity and signaling credibility to investors and other stakeholders.

2.2.3. Growth Opportunities and ESG Disclosure

R&D expenditures signal a firm’s future growth potential, reflecting its capacity to innovate, expand into new markets, and achieve competitive advantage (Chan et al., 2001; Lev, 2001). Because their benefits are realized over long horizons, these opportunities are difficult for external stakeholders to assess ex ante. Growth opportunities primarily operate by increasing external demand for forward-looking information about the firm’s strategic direction and long-term prospects.

From a legitimacy and stakeholder perspective, ESG disclosure provides a mechanism for firms to communicate their long-term growth orientation and commitment to sustainable value creation. By integrating ESG reporting with R&D activities, firms can demonstrate that their innovation strategies are not only profit-oriented but also socially responsible and well-governed (Freeman, 1984; Suchman, 1995). At the same time, an alternative perspective suggests that R&D-intensive firms may limit disclosure to protect proprietary information, preserve competitive advantages, or avoid revealing sensitive innovation strategies to competitors (Bah & Dumontier, 2001; Elkemali & Ben Rejeb, 2015). This implies that proprietary cost considerations may constrain the extent of voluntary disclosure in R&D-intensive firms (Lahyani & Ayadi, 2025). However, prior evidence indicates that firms with strong innovation and growth prospects face higher investor demand for voluntary disclosure, as stakeholders seek additional forward-looking information to assess the firm’s long-term value creation potential (Padgett & Galan, 2010; Huang et al., 2021). In response to this demand, firms have stronger incentives to communicate their strategic orientation and governance practices in order to reduce information gaps and support valuation, despite proprietary cost concerns. ESG disclosure is particularly suitable for this purpose because it enables firms to convey broad information about governance quality, sustainability orientation, and risk management without disclosing proprietary technological details. This mechanism suggests that ESG disclosure in this context is primarily driven by information demand and cost–benefit trade-offs rather than by underlying sustainability orientation.

Empirical studies highlight that firms with significant innovation-driven growth opportunities disclose ESG information, particularly regarding governance and social practices, as a way to align stakeholder expectations with strategic plans (Di Simone et al., 2022; Dicuonzo et al., 2022).

Thus, the growth potential embedded in R&D provides an additional rationale for firms to engage in ESG disclosure: it allows them to signal responsible management of innovation, convey credibility to investors, and legitimize strategic growth initiatives in the eyes of stakeholders.

Collectively, the literature suggests that R&D investments encourage ESG disclosure through three complementary channels: asset specificity increases valuation transparency needs, uncertainty increases information asymmetry regarding outcomes, and growth opportunities increase demand for forward-looking signals. These mechanisms jointly underpin a single theoretical prediction linking R&D intensity to ESG disclosure.

In the European context, this disclosure environment is further reinforced by regulatory developments such as the NFRD and the CSRD. These frameworks have progressively strengthened disclosure requirements by increasing standardization, comparability, and assurance of sustainability-related reporting (Cicchiello et al., 2023; Cuomo et al., 2024). As a result, firms operating under EU regulation face stronger institutional pressure to provide structured ESG information. This regulatory environment amplifies the disclosure response of R&D-intensive firms by reducing managerial discretion and reinforcing incentives to disclose information related to innovation activities, governance structures, and long-term strategic orientation.

Accordingly, we propose the following hypothesis:

H1. 

R&D expenditures are positively associated with ESG disclosure.

2.3. Board Independence as a Moderator

While the characteristics of R&D investments create strong incentives for ESG disclosure, the extent to which firms translate these incentives into transparent reporting may depend on the effectiveness of their governance structures. In particular, board independence can shape disclosure policies by strengthening oversight and limiting managerial discretion. Independent directors tend to demand higher reporting quality and ensure that corporate disclosures more accurately reflect the firm’s underlying economic activities (Jensen & Meckling, 1976; R. B. Adams & Ferreira, 2007).

In the context of R&D, where uncertainty and informational opacity are substantial, board independence becomes especially important. The primary moderating mechanism is stronger monitoring: independent directors are more likely to pressure managers to disclose relevant information about innovation-related risks, governance practices, and long-term strategic activities. Consistent with this argument, recent evidence from UK listed firms shows that stronger board and audit committee characteristics are positively associated with corporate innovation disclosure, highlighting the role of governance oversight in promoting transparency surrounding innovative activities (Wadi et al., 2026). This is particularly relevant for ESG reporting, which serves as a complementary channel through which firms communicate non-financial aspects of strategy and risk management. Moreover, prior evidence suggests that independent boards can shape firms’ innovation decisions and oversight capacity, reinforcing their governance role in R&D-intensive settings (Balsmeier et al., 2017).

A second mechanism is disclosure credibility. Independent boards can enhance investor confidence that ESG disclosures are less opportunistic and more reliable (Manita et al., 2018). As a result, ESG reporting becomes a more effective tool for reducing opacity associated with R&D investments. Prior literature suggests that stronger governance mechanisms improve the credibility of voluntary disclosures and reinforce their signaling value (Lagasio & Cucari, 2019; Al Amosh & Khatib, 2022). By contrast, weaker governance structures may limit the effectiveness of ESG reporting because managers face fewer pressures to disclose and external stakeholders may assign lower credibility to reported information.

Accordingly, governance quality, proxied by board independence, is expected to strengthen the positive association between R&D intensity and ESG disclosure.

H2. 

The positive relationship between R&D intensity and ESG disclosure is stronger in firms with higher board independence.

3. Empirical Design

3.1. Sample

We examine publicly listed European firms over the period 2014–2024, a timeframe chosen because it aligns with the implementation of the NFRD 2014) and captures the transition toward the CSRD 2023, both of which have significantly influenced ESG practices across Europe. All variables used in this study, including ESG disclosure (dependent variable) and R&D intensity (independent variable), are extracted from Bloomberg. Bloomberg is one of the leading global providers of ESG data and is widely used by academics, investors, and practitioners. Its ESG scoring framework is aligned with internationally recognized standards, including United Nations–related sustainability guidelines and the Global Reporting Initiative (GRI), ensuring consistency with global reporting practices. In addition, Bloomberg compiles ESG information from multiple sources, such as firms’ annual and sustainability reports, press releases, and dedicated surveys, which enhances the breadth and reliability of the data. Consequently, Bloomberg ESG scores are commonly employed as a proxy for non-financial transparency and sustainability reporting (Luo & Wu, 2022; Campanella et al., 2021; Elkemali, 2026), as they capture the extent of environmental, social, and governance disclosure.

R&D expenditures are combined with total assets to calculate R&D intensity (Bah & Dumontier, 2001; Elkemali & Ben Rejeb, 2015). Following prior literature, missing R&D values are treated as zero, under the assumption that firms not reporting R&D expenditures do not engage in significant innovation activities (Miller & del Carmen Triana, 2009). This approach allows for the inclusion of R&D-active vs. non-R&D firms, thereby reducing potential sample selection bias (O’Brien, 2003). To ensure a clean and consistent sample, financial entities are omitted given their distinct accounting and disclosure structures, and extreme values are winsorized. After accounting for missing data, the final dataset includes 1876 firms (12,025 observations) from 23 European countries.

3.2. Models and Variables

To examine the relationship between R&D expenditures and ESG disclosure, this study employs panel data regression models. The baseline specification is adapted from Manita et al. (2018), while extending their framework by incorporating R&D intensity as a key explanatory variable. The baseline model (1) is specified as follows:

ESG_it = α + β1 R&D_it + β2 SIZE_it + β3 ROA_it + β4 LEV_it + β5 MTB_it + β6 RISK_it + INDUSTRY + YEAR + ε_it

(1)

where (ESG) disclosure is captured by the Bloomberg ESG scores varying from 0% to 100%. Higher values indicate more comprehensive disclosure. The main independent variable is (R&D) intensity, computed as R&D expenditures divided by total assets.

Consistent with prior literature, several firm-level attributes are included as control variables (Brammer & Pavelin, 2008; Manita et al., 2018). Firm size (SIZE) is measured as the natural logarithm of total assets, capturing visibility and stakeholder pressure. Profitability (ROA) is measured as net income scaled by total assets and reflects firms’ financial capacity to engage in ESG activities. Leverage (LEV), defined as total debt to total assets, accounts for financial risk and monitoring by creditors. Growth opportunities (MTB) are proxied by the market-to-book ratio, capturing firms’ future prospects. Firm risk (RISK) is measured by the company’s beta, capturing operational and market uncertainty.

To assess whether governance influences the R&D–ESG relationship, this study incorporates board independence (BIND) as the moderating variable, determined by the proportion of independent directors on the board. This measure reflects the board’s ability to effectively monitor managerial decisions and promote transparency. Higher levels of board independence lead to stronger oversight and improved disclosure practices, making it a relevant mechanism through which governance can shape the R&D-ESG relationship.

ESG_it = α + β1 R&D_it + β2 BIND_it + β3 (RD_it × BIND_it) + β4 SIZE_it + β5 ROA_it + β6 LEV_it + β7 MTB_it + β8 RISK_it + INDUSTRY + YEAR + ε_it

(2)

The models are estimated using panel fixed effects regressions to control for unobserved firm heterogeneity (INDUSTRY) and time-specific effects (YEAR) including COVID-19 pandemic, NFRD and CSRD effects. Country effects are controlled by Industry effects. Table 1 describes variable measures.

Table 1. Variable descriptions.

Variable	Type	Description
ESG	Dependent	ESG disclosure score obtained from Bloomberg, reflecting the extent of environmental, social, and governance reporting.
R&D	Independent	R&D intensity represents R&D expenditures to total assets. Missing values are set to zero.
BIND	Moderator	Board independence is the proportion of independent directors on the board.
SIZE	Control	Firm size, measured as the natural logarithm of total assets.
ROA	Control	Profitability, measured as net income to total assets.
LEV	Control	Leverage, measured as total debt to total assets.
MTB	Control	Growth opportunities, proxied by the market-to-book ratio.
RISK	Control	Firm risk, defined as the company’s beta.

4. Empirical Results

4.1. Descriptive Statistics

Table 2 indicates that the ESG disclosure score has an average of 43.05, which is slightly higher than that reported by Mahmood et al. (2025), who find an average of 42.24 over the period from 2014 until the reporting year 2023. This difference may reflect the increasing emphasis on ESG disclosure in Europe, particularly following the adoption of the CSRD in 2023, which has encouraged firms to improve the scope and quality of their non-financial reporting.

Table 2. Descriptive statistics.

Variable	Nobs	Mean	Median	Std	Q1 (25%)	Q3 (75%)
ESG	12,025	43.052	42.103	14.412	32.014	54.123
R&D	12,025	0.045	0.025	0.073	0.005	0.058
BIND	12,025	0.582	0.521	0.213	0.422	0.698
SIZE	12,025	22.847	15.703	1.852	14.237	16.912
ROA	12,025	0.031	0.022	0.089	0.012	0.048
LEV	12,025	0.272	0.252	0.178	0.123	0.378
MTB	12,025	1.847	1.421	1.598	0.953	2.215
RISK (Beta)	12,025	1.078	1.021	0.421	0.782	1.318

R&D intensity averages 0.045, with a median of 0.025, showing that many firms invest in innovation, while a subset allocates a larger share of resources to R&D. Board independence (BIND) has a mean of 0.582 and a median of 0.521, demonstrating that the majority of firms maintain boards with a substantial proportion of independent directors. These descriptive statistics indicate meaningful differences in ESG disclosure, R&D intensity, and governance characteristics across European firms, offering a solid basis for analyzing the R&D–ESG relationship and the role of governance.

Table 3 reveals a positive correlation between R&D and ESG disclosure, implying that firms with higher levels of innovation activity tend to report more extensively on ESG practices. This preliminary evidence is consistent with the expected positive association between these variables, as outlined in Hypothesis 1.

Table 3. Pearson correlation matrix.

Variable	ESG	R&D	BIND	SIZE	ROA	LEV	MTB	RISK
ESG	1
R&D	0.227 ***	1
BIND	0.173 ***	0.081 **	1
SIZE	0.351 ***	0.162 ***	0.241 ***	1
ROA	0.149 ***	0.109 ***	0.076 **	0.184 ***	1
LEV	−0.118 ***	−0.074 **	−0.058 *	0.126 ***	−0.219 ***	1
MTB	0.218 ***	0.191 ***	0.084 **	0.157 ***	0.201 ***	−0.096 **	1
RISK	−0.082 **	0.126 ***	−0.039	0.068 *	−0.107 ***	0.154 ***	0.118 ***	1

***, **, and * define significance at the 1%, 5%, and 10% levels, respectively.

ESG is also positively related to board independence, indicating that companies with effective governance structures are more transparent in their non-financial reporting. However, this relationship should be interpreted with caution, as it does not capture the potential moderating influence of governance.

Firm size shows the strongest correlation with ESG, reflecting the higher visibility and scrutiny faced by larger firms. Profitability and growth opportunities are also positively linked to ESG, while leverage exhibits a negative relationship. Firm risk appears to be weakly and negatively related to ESG.

Importantly, the magnitude of all correlation coefficients remains well below commonly accepted thresholds 0.70 (Hair et al., 2010), suggesting the multicollinearity will not affect the regression analysis. VIF tests, reported alongside the regression results, confirm the absence of multicollinearity (Elkemali, 2024a).

4.2. Regression Results

The results in Table 4 are based on panel regressions with robust standard errors clustered at the firm level to account for heteroscedasticity and within-firm correlation over time. A Hausman test indicates the presence of firm-specific effects, suggesting that a fixed-effects approach is appropriate. Consistent with much of the ESG literature, the main models include industry and year fixed effects, which control for sectoral differences and temporal shocks, including the COVID-19 pandemic as well as the adoption of NFRD and CSRD. Industry fixed effects not only account for sectoral variation but also absorb much of the unobserved country- and firm-level variation, since firms in the same industry and country share similar structural characteristics.

Table 4. Regression Results: R&D intensity and ESG.

ESG
Variable	Model 1	Model 2
Constant	2.531 ***	2.485 ***
	(7.19)	(7.06)
R&D	1.843 ***	1.587 ***
	(8.57)	(7.35)
BIND	---	1.067 ***
		(5.77)
R&D × BIND	---	0.487 **
		(2.46)
SIZE	0.372 ***	0.365 ***
	(8.27)	(7.95)
ROA	0.752 ***	0.723 ***
	(4.32)	(4.13)
LEV	−0.641 ***	−0.622 ***
	(−4.19)	(−4.06)
MTB	0.198 ***	0.190 ***
	(4.71)	(4.53)
RISK	−0.211 **	−0.176 *
	(−2.27)	(−1.77)
Industry	Yes	Yes
Year	Yes	Yes
Observations	12,025	12,025
Max VIF	1.87	2.63

***, **, and * define significance at the 1%, 5%, and 10% levels, respectively.

Model 1 examines R&D and ESG disclosure. The positive and significant R&D coefficient (1.843) suggests that firms involved in R&D activities tend to report stronger ESG ratings. This finding corroborates Hypothesis 1, reflecting that more innovative firms report greater ESG information. Control variables behave as expected: larger, more profitable, and high-growth firms report higher ESG scores, whereas firms with higher leverage or risk report lower ESG scores (Manita et al., 2018; Dicuonzo et al., 2022).

Model 2 extends the analysis by incorporating board independence and its interaction with R&D. The positive coefficient on the interaction term suggests that the relationship between R&D expenditures and ESG disclosure becomes stronger as boards include a higher proportion of independent directors. From an economic perspective, this indicates that independent boards play an important role in overseeing how firms communicate the outcomes of their innovation activities. Given the uncertainty and information asymmetry associated with R&D, independent directors are likely to encourage more transparent and credible ESG reporting to reassure external stakeholders. In this sense, governance quality does not simply coexist with innovation but helps shape how firms translate R&D efforts into observable disclosure practices.

This finding supports Hypothesis 2 and is consistent with prior studies showing that stronger governance mechanisms enhance the quality and extent of ESG disclosure (Lagasio & Cucari, 2019; Al Amosh & Khatib, 2022). It suggests that board independence reinforces the link between R&D and ESG reporting by improving monitoring and reducing potential information gaps.

4.3. Robustness

4.3.1. GMM Results

To further validate the main findings, additional robustness tests using the Generalized Method of Moments (GMM) are conducted. The study employs a dynamic panel estimation approach, which helps address endogeneity issues, such as reverse causation and omitted variable bias, by using internal instruments derived from lagged variables (Arellano & Bond, 1991). In particular, the lagged dependent variable (ESG) is included to capture stability in ESG disclosure over time.

The results reported in Table 5 indicate that the lagged ESG variable is positive, suggesting that ESG disclosure exhibits persistence over time. R&D remains positive, confirming that firms engaged in R&D generally report stronger ESG scores even after accounting for endogeneity concerns, supporting Hypothesis 1 and prior research highlighting the role of innovation in shaping ESG practices (Dicuonzo et al., 2022).

Table 5. GMM Regression Results.

	ESG
Variable	Model 3: Without Moderation	Model 4: With BIND Moderation
Constant	1.984 ***	1.932 ***
	(5.86)	(5.71)
ESG (t − 1)	0.608 ***	0.612 ***
	(14.12)	(14.28)
R&D	1.462 ***	1.425 ***
	(7.04)	(6.91)
BIND	---	0.983 ***
		(4.86)
R&D × BIND	---	0.352 **
		(2.18)
SIZE	0.287 ***	0.284 ***
	(6.42)	(6.37)
ROA	0.531 ***	0.518 ***
	(3.79)	(3.72)
LEV	−0.498 ***	−0.487 ***
	(−3.48)	(−3.41)
MTB	0.167 ***	0.162 ***
	(4.05)	(3.98)
RISK	−0.178 **	−0.171 *
	(−2.11)	(−1.69)
Industry	Yes	Yes
Year	Yes	Yes
Observations	12,025	12,025
Hansen (p-value)	0.301	0.284
AR(1) (p-value)	0.000	0.000
AR(2) (p-value)	0.326	0.317

***, **, and * define significance at the 1%, 5%, and 10% levels, respectively.

In Model 4, both board independence and the interaction term (R&D × BIND) remain positive, confirming fixed-effects results, corroborating Hypothesis 2, as well as earlier studies emphasizing the role of governance mechanisms in enhancing ESG reporting.

4.3.2. R&D and ESG Components

For robustness checks, Table 6 reports GMM results using the three ESG aspects, Environmental (E), Social (S), and Governance (G), as dependent variables in the moderation model. The lagged ESG component is included in each model to account for persistence in disclosure practices over time.

Table 6. GMM Results Using ESG Components (Moderation Model).

Variable	Environmental (E)	Social (S)	Governance (G)
Constant	18.472 ***	21.385 ***	25.917 ***
	(6.14)	(6.88)	(7.22)
ESG (t − 1)	0.593 ***	0.617 ***	0.642 ***
	(13.82)	(14.11)	(14.56)
R&D	2.184 ***	1.736 ***	1.295 ***
	(7.42)	(6.18)	(5.03)
BIND	3.862 ***	4.215 ***	5.104 ***
	(3.96)	(4.28)	(4.87)
R&D × BIND	0.684 **	0.512 **	0.398 *
	(2.31)	(2.08)	(1.76)
SIZE	0.945 ***	1.128 ***	1.364 ***
	(6.05)	(6.71)	(7.12)
ROA	2.184 ***	2.836 ***	3.102 ***
	(3.54)	(3.92)	(4.11)
LEV	−1.762 ***	−1.385 ***	−1.128 **
	(−3.22)	(−2.94)	(−2.41)
MTB	0.518 ***	0.462 ***	0.395 ***
	(3.87)	(3.56)	(3.21)
RISK	−0.684 **	−0.512 **	−0.438 *
	(−2.08)	(−1.97)	(−1.72)
Industry	Yes	Yes	Yes
Year	Yes	Yes	Yes
Observations	12,025	12,025	12,025
Hansen (p-value)	0.276	0.291	0.305
AR(1) (p-value)	0.000	0.000	0.000
AR(2) (p-value)	0.334	0.318	0.341

***, **, and * define significance at the 1%, 5%, and 10% levels, respectively.

The results across the three ESG dimensions reveal a consistent pattern: firms with higher R&D intensity tend to provide more extensive disclosure, supporting Hypothesis 1. This relationship can be understood by considering the specific characteristics of R&D investments (Bah & Dumontier, 2001; Elkemali & Ben Rejeb, 2015). First, the high degree of asset specificity implies that these investments are often tailored to the firm and difficult for external stakeholders to evaluate. Second, R&D activities are closely linked to future growth opportunities, which increases the need for firms to communicate their long-term strategic orientation. Together with the inherent uncertainty surrounding innovation, these features create strong incentives for firms to rely on broader ESG disclosure as a means of reducing information gaps and signaling value.

Governance mechanisms further shape this relationship, aligning with Hypothesis 2. Board independence is positively associated with ESG outcomes, suggesting that more autonomous boards encourage greater transparency. More importantly, the positive interaction between R&D and board independence indicates that independent directors strengthen the extent to which innovation efforts are reflected in ESG reporting. This result implies that effective monitoring is particularly relevant when firms engage in complex and opaque activities such as R&D, ensuring that disclosure adequately captures their long-term implications.

5. Discussion

This study examines the relationship between R&D intensity and ESG disclosure, as well as the moderating role of board independence, within the European context. Overall, the findings suggest that R&D-related informational frictions play a central role in shaping firms’ ESG reporting behavior. Specifically, firms with higher R&D intensity tend to engage in more extensive ESG disclosure, and this relationship is significantly strengthened in the presence of higher board independence.

Consistent with Hypothesis 1, the results reveal a positive association between R&D intensity and ESG disclosure. This finding indicates that firms engaged in innovation activities are more likely to use ESG reporting as a complementary communication mechanism. Given that R&D investments are characterized by asset specificity, uncertainty, and long-term payoff structures, they generate informational frictions that make firm valuation more difficult for external stakeholders. In this context, ESG disclosure appears to serve as a tool to enhance transparency and provide additional insights into firms’ strategic orientation and long-term value creation. Rather than reflecting purely sustainability-driven motives, ESG reporting in this setting can be interpreted as a strategic response to valuation-related informational frictions associated with innovation activities.

These findings are broadly consistent with prior literature suggesting that ESG disclosure reduces information asymmetry and enhances transparency (Dhaliwal et al., 2011; Cornell, 2021). However, this study extends existing research by identifying R&D-related informational opacity as a distinct and previously underexplored driver of ESG disclosure. While prior studies have primarily focused on conventional firm characteristics such as size and profitability (Kolk, 2008; Brammer & Pavelin, 2008), our results highlight the importance of innovation-related factors in shaping disclosure incentives. In doing so, we provide a more nuanced understanding of ESG reporting as not only a response to stakeholder pressure or legitimacy concerns, but also as a strategic tool for managing informational frictions arising from complex and intangible investments.

The results also corroborate Hypothesis 2 and further show that board independence strengthens the positive relationship between R&D intensity and ESG disclosure. This finding extends the results of Manita et al. (2018) by highlighting the importance of governance mechanisms in shaping the R&D–ESG disclosure relationship. Independent boards are more likely to demand higher reporting quality and to ensure that ESG disclosures credibly reflect the firm’s underlying activities. In R&D-intensive settings, where uncertainty and informational opacity are elevated, board independence enhances monitoring and reduces managerial discretion, thereby increasing the credibility and effectiveness of ESG reporting as a communication channel.

From a theoretical perspective, this study contributes to the ESG disclosure literature by integrating innovation-related informational frictions into the analysis of disclosure behavior. By jointly considering asset specificity, uncertainty, and growth opportunities, we develop a more comprehensive framework that explains how different dimensions of R&D activities influence ESG reporting. In line with Homer and Lim’s (2024) perspective on theory development, our study goes beyond documenting empirical regularities to explain the underlying mechanisms that drive disclosure behavior in innovation-intensive contexts. This approach extends traditional disclosure theory by showing that ESG reporting can function as a mechanism to mitigate valuation challenges and communicate forward-looking information.

Importantly, the study also offers a contextual contribution by focusing on European firms operating under evolving ESG regulatory frameworks, including the NFRD and the CSRD. This setting represents a meso-level institutional environment in which disclosure practices are shaped by both firm-level characteristics and regulatory pressures. By examining how R&D-related informational frictions interact with governance mechanisms within this context, the study highlights how institutional settings influence the relationship between innovation and ESG disclosure, thereby strengthening the originality and relevance of the contribution.

From a managerial perspective, the findings suggest that ESG disclosure should not be viewed solely as a compliance or reputational exercise, but also as a strategic communication mechanism that reduces informational opacity associated with innovation activities. Managers of R&D-intensive firms may therefore benefit from integrating ESG reporting more closely with their innovation and governance strategies. By providing credible non-financial information on governance quality, risk management, and organizational stability, firms can enhance stakeholder confidence and reduce uncertainty around innovation-related investments. The results further indicate that stronger board independence enhances the credibility and effectiveness of ESG disclosure, underscoring the role of governance structures in supporting transparent communication in innovation-intensive environments.

The findings also have important implications for investors and financial analysts. ESG disclosure provides useful complementary information for evaluating firms with substantial intangible investments and uncertain future growth opportunities. In this context, ESG reporting helps investors better assess firms’ strategic orientation, governance quality, and long-term value creation potential, particularly when traditional financial statements provide limited insight into innovation-related assets.

From a policy perspective, this study supports recent European regulatory initiatives aimed at improving ESG disclosure quality and comparability, including the NFRD and CSRD. The findings suggest that standardized and externally monitored ESG reporting frameworks can reduce informational frictions in innovation-intensive firms. Moreover, the results highlight the importance of governance mechanisms, particularly board independence, in enhancing the credibility and effectiveness of ESG reporting. Policymakers may therefore consider strengthening governance-related disclosure requirements to improve transparency in highly intangible and innovation-driven sectors.

6. Conclusions

Focusing on the moderating role of board independence, this study examines the R&D-ESG disclosure among publicly listed European firms from 2014 to 2024. We argue that R&D represents a distinct type of investment, characterized by features such as growth opportunities, asset specificity, uncertainty, and information asymmetry, which may contribute to stronger ESG performance. The results support Hypothesis 1, revealing a positive link between R&D and ESG disclosure, and support Hypothesis 2, showing that board independence strengthens this association. These findings remain consistent when analyzing the ESG dimensions separately and are robust across fixed-effects and dynamic GMM models.

The main contribution of this study is to advance the ESG disclosure literature by identifying R&D-related opacity as an important and previously underexplored driver of ESG reporting. While prior studies have focused on institutional, governance, and performance-related drivers of ESG reporting, we show that the informational frictions associated with corporate research activities also shape disclosure incentives. In this regard, we propose a conceptual framework linking R&D characteristics to ESG disclosure and highlighting the conditions under which R&D translates into higher sustainability reporting. Additionally, we extend prior literature by incorporating governance quality as a moderator, providing a structured lens to understand the R&D–ESG relationship.

Some limitations should be noted. This study relies exclusively on Bloomberg ESG scores due to data availability, while previous research has documented divergences between ESG databases. Future studies could use alternative ESG datasets or composite measures to validate and extend these findings. Moreover, examining other investment-related characteristics or governance mechanisms could provide deeper insights into how corporate resources and board structures influence ESG practices. Future research could also explore different contexts, including other regions, industries, or privately held firms, to assess whether the observed relationships hold under varying regulatory, cultural, or market conditions.