ABSTRACT: Investors have long recognized that environmental, social and governance (ESG) factors are important for company valuation, risk management and regulatory compliance. This paper aims to investigate the effect of environmental, social and governance disclosure (measured through ESG score developed by Thomson Reuters) on market firm performance, measured by stock prices. Moreover, it is under investigation that, despite rising corporate interest in social, environmental, and sustainability issues, market trust remains low due to insufficient evidence to substantiate corporate disclosures. The role of external audits – independent verification processes – is highlighted as a potential “assurance” mechanism for the reliability of corporate ESG disclosures. Recent trends emphasize the importance of external, non-mandatory audits of non- financial reporting to enhance stakeholder trust. Nonetheless, the mere existence of external audits does not guarantee the quality of the information, as these audits can be exploited for “window dressing” purposes. Therefore, the quality of the audit, related to the credibility and procedures ofthe auditors, becomes crucial. This study aims to explore the relationship between ESG performance (measured through ESG ratings) and stock prices in the European market, examining whether external audit depth influences this relationship. The research analyses data from STOXX Europe 600 companies over seven years (2017-2023), considering the impact of the 2014/95/EU Directive mandating independent audits of non-financial statements. The study highlights how the market rewards companies with high ESG scores by attributing a positive stock value to them. The research finds a negative relationship between ESG scores and stock prices, aligning with the growing focus on sustainability from consumers, regulators, and stakeholders. Trust and credibility in the information provided by companies appear to influence this relationship, while external auditing of ESG reports does not affect investor sentiment. This suggests that non-financial disclosure, based on external audits, does not replace other sources in the investment decision-making process. Additionally, the study underscores the importance ofthe social and fiduciary dimensions ofthe company, which are essential for its sustainability. The findings may offer insights for managers, stakeholders, and regulators on the market’s perception of ESG policies and the benefits of independent ESG audits.
KEYWORDS: EXTERNAL AUDIT, ESG, SHARE PRICE, STOXX600
