Environmental reporting, financial fundamentals and company valuation: Insights from the industrial sector

Dumitrescu, Dan Gabriel et al. Article Environmental reporting, financial fundamentals and company valuation: Insights from the industrial sector Amfiteatru Economic Provided in Cooperation with: The Bucharest University of Economic Studies Suggested Citation: Dumitrescu, Dan Gabriel et al. (2025) : Environmental reporting, financial fundamentals and company valuation: Insights from the industrial sector, Amfiteatru Economic, ISSN 2247-9104, The Bucharest University of Economic Studies, Bucharest, Vol. 27, Iss. 70, pp. 731-749, https://doi.org/10.24818/EA/2025/70/731 This Version is available at: https://hdl.handle.net/10419/328018 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Sustainability Reporting: Catalyst for Organisational and Professional Change AE Vol. 27 • No. 70 • August 2025 731 ENVIRONMENTAL REPORTING, FINANCIAL FUNDAMENTALS, AND COMPANY VALUATION: INSIGHTS FROM THE INDUSTRIAL SECTOR Dan Gabriel Dumitrescu1, Stefania Cristina Curea2, Cristiana Ioana Coman3, Anca Gabriela Ilie4, Renate Bratu5 and Alma Pentescu6 1),2),3),4)Bucharest University of Economic Studies, Bucharest, Romania 5),6) "Lucian Blaga" University of Sibiu, Sibiu, Romania Please cite this article as: Dumitrescu, D.G., Curea, S.C., Coman, C.I., Ilie, A.G., Bratu, R. and Pentescu, A., 2025. Environmental Reporting, Financial Fundamentals, and Company Valuation: Insights from the Industrial Sector. Amfiteatru Economic, 27(70), pp. 731-749. DOI: https://doi.org/10.24818/EA/2025/70/731 Article History Received: 29 March 2025 Revised: 24 April 2025 Accepted: 20 May 2025 Abstract The paper investigates the effect of environmental policies on the market valuation of companies within the European Union's Industrial sector, along with traditional financial indicators. Taking into account the Corporate Sustainability Reporting Directive imposed by the European Union authorities for the most prominent companies, we used a comprehensive data set of 494 publicly listed companies over the period 2020-2023 to assess the predictive impact of environmental policy adoption (EPO), environmental policy quality scores (EPOS), and financial variables (FV) on the price-to-book (PB) ratio of listed companies. We use a Random Forest regression model to identify and rank the importance of a comprehensive set of variables, underlining the idea of investor attention and priorities. The main findings point to an increase in investor interest in the effectiveness of environmental policies rather than their simple presence, emphasising the strategic importance of integrating measurable environmental outcomes into company valuation frameworks. However, traditional financial variables consistently outperform environmental indicators in explaining market valuation. Keywords: environmental policies, market valuation, random forests, CSRD. JEL Classification: G32, Q56, M14, C55  Corresponding author, Stefania Cristina Curea – e-mail: ste[email protected] This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. © 2025 The Author(s). AE Environmental Reporting, Financial Fundamentals and Company Valuation: Insights from the Industrial Sector 732 Amfiteatru Economic Introduction Climate change is one of the greatest challenges of our time. In this context, companies are among the most important players, as they contribute significantly to greenhouse gas emissions through production, energy consumption, transportation, and other activities. Moreover, companies control vast amounts of resources, supply chains, and infrastructure; hence, their decisions affect the environment on a large scale. Consequently, policymakers are increasingly introducing environmental protection regulations, relying on companies' responsibilities to protect the environment. The European Commission adopted the Corporate Sustainability Reporting Directive (CSRD), a main regulatory framework aimed at enhancing and standardising sustainability reporting among nearly 50.000 European companies. This number includes both large companies and listed small and medium enterprises (SMEs) (Allgeier and Feldmann, 2023; Ruohonen and Kullas, 2024). The implementation of CSRD started in 2023 for large companies and will be extended to smaller companies with at least 250 employees until 2026 (Santilli, 2023). Companies must include sustainability information in specific management reports considering a set of standards named as the European Sustainability Reporting Standards (ESRS) (Brans, Bloemberg and Felder, 2024). Green finance policies improve corporate environmental, social and governance (ESG) performance (Wang, Elahi and Khalid, 2022). However, there is evidence that the implementation of ESG requirements could generate a certain pressure to change business models (Horobet et al., 2024). Specifically, companies need to focus on monitoring factors such as greenhouse emissions, pollution, social issues, and governance policies (Lament, 2024). The corporate valuation landscape has changed with the implementation of ESG policies. Furthermore, extensive research shows that investors, both institutional and retail, recalibrate their investment strategies to include more sustainable characteristics of financial assets (Mirza et al., 2025). Investors and stakeholders increasingly scrutinise not only financial performance but also the sustainability practices of companies, specifically in economic sectors with importance environmental footprints such as industrials (Friede, Busch and Bassen, 2015; Said and El Bannan, 2024; Song and Rimmel, 2025). Therefore, we consider that the link between financial and environmental strategies becomes essential for comprehensive capture of the drivers that influence the valuation of companies by investors or the capital market. The paper presents an important contribution to the sustainability and finance literature by integrating environmental and financial metrics of firm valuation within the context of the EU’s CSRD regulatory framework. We analysed 494 EU-listed companies in the Industrials sector, all of which meet the CSRD requirements. The study has an integrative perspective, using three types of indicators: (i) binary metrics on the corporate adoption of environmental policy; (ii) scores reflecting the quality of these policies; (iii) financial indicators of liquidity, solvency, profitability, efficiency, and market risk. The use of Random Forest regression to assess the importance and ranking of each variable, in each year from 2020 to 2023, provides a robust perspective on the link between environmental policies and market valuation, while addressing issues of nonlinearity and multicollinearity. A key contribution of the study lies in providing empirical evidence that investors increasingly prioritise the effectiveness of environmental policies – particularly those related to emissions and supply chains – over their simple adoption. This finding underscores a shift of investors toward valuing tangible environmental policies and Sustainability Reporting: Catalyst for Organisational and Professional Change AE Vol. 27 • No. 70 • August 2025 733 outcomes, offering a more nuanced and integrative understanding of how environmental strategies influence market valuation under evolving regulatory pressures. The next section of the article provides an overview of prior research, followed by a section outlining the research methodology used in our approach. The following section shows and discusses the main results of the study, and the last section concludes and outlines the research limitations that may open avenues for future research. 1. Review of the scientific literature Sustainable development, a concept introduced by the World Commission on Environment and Development in 1987, has a ratchet effect on society's long-term stability and environment, ensuring balanced and perpetual improvement. (Belascu, 2015; Wang, Elahi and Khalid, 2022). Over time, sustainability has made its way into investors' decisions in financial markets. They have started to integrate it, usually through the Environmental, Social, and Governance (ESG) framework, in their decision making (Busch et al., 2015). This also signals a reorientation of investments towards a long-term paradigm for sustainable development (Folqué, Escrig-Olmedo and Santamaría, 2021; Shome et al., 2023). In line with the global vision toward sustainability, the EU introduced CSRD - as part of the European Green Deal – to foster sustainability practices in the financial and corporate sectors and to grant investors and other stakeholders access to transparent information regarding the company's impact, risks, and opportunities associated with sustainability and ESG issues. Thus, the EU is strengthening mechanisms to avoid an asymmetric flow of information related to sustainability issues by reporting according to the ESRS (Brans, Bloemberg and Felder, 2024; European Commission, 2025). Although CSRD reporting is a recent EU directive, the literature review is rich in scientific articles, with more than 269 papers published in Web of Science (WOS) confirming an interest among researchers in evaluating, on the one hand, the impact of the new legislation requirement at the company level and, on the other hand, the impact of CSRD reporting on investor sentiment. In this line, Martinčević, Primorac and Dorić (2024) provide a general perspective on sustainability reporting through CSRD reporting and its connection to the ESG concept by addressing today's business environment. Gebhardt et al. (2023) examined the challenges of implementing the Sustainable Finance Disclosure Regulation (SFDR) for institutional investors and how the use of a qualitative approach affects their decisionmaking. Basile and Ferrari (2024) reinforced the previous results by proposing strategies to effectively integrate sustainability criteria into the investment process. Several authors evaluated the impact of CSRD from the perspective of reporting requirements at the regional level, and the results reached the same conclusions. For example, Kosi and Relard (2024) validated the nature of efforts required by German companies for CSRD reporting and concluded that this process is "a high burden", especially for companies with no experience in sustainability reporting. Similarly, Brans, Bloemberg and Felder (2024) assessed the impact of CSRD reporting on Dutch companies and emphasised that the new regulations require more context for providing information and explaining risks. Pizzi and Coronella (2024) identified a "mimetic isomorphism" in which Italian companies tend to mimic the sustainability reporting behaviours of other companies. In addition, Baranga and AE Environmental Reporting, Financial Fundamentals and Company Valuation: Insights from the Industrial Sector 734 Amfiteatru Economic Ifrim (2023) affirmed the impact of CSRD reporting for companies listed on the Bucharest Stock Exchange. The connection between corporate environmental and financial performance has received significant attention in the research literature. Socially responsible investing (SRI) is essential to encourage sustainable corporate practices and, consequently, to encourage reasonable practices in environmental policies, consumer protection, and human rights (Horobet and Belascu, 2012; Prelipcean and Boscoianu, 2020; López Vázquez et al., 2025). From a general perspective, the impact of environmental programmes and social practices has been validated for the triple bottom line of environmental, societal, and economic performance (Gimenez, Sierra and Rodon, 2012). Additionally, other studies prove that investors prefer rewarding firms that indicate positive social behaviour (Luz, Schauer and Viehweger, 2024). Friede, Busch and Bassen (2015) scrutinised the findings of approximately 2,200 individual studies and confirmed a positive relationship between ESG and corporate financial performance. Albertini (2013) validated the authors' results on a smaller scale, conducting a meta-analysis of 52 studies over a 35-year period. Baks (2024) highlights the conclusions of Amel-Zadeh and Serafeim (2018) and suggests that sustainability under the CSRD reporting regulations equips investors to better evaluate companies' sustainability performance. In our view, a simple assessment of the existence of environmental policies is of little significance for investment decision making. The quality, nature, and actual impact of these policies matter, but this has not been explored in depth to date. At the sectoral level, Horobet et al. (2024) investigated the influence of ESG scores in the oil and gas industry on financial performance. They concluded that investors examine sustainability discourse and results when determining a company's value. Moreover, Walther (2018) demonstrated that sustainability efforts have financial importance for companies in the energy industry, identifying several trends such as customers' reorientation toward more sustainable alternatives, stranded asset risk, and climate change. By expanding the research area, other authors validated through quantitative studies the positive impact of green marketing practices on sustainable performance (Chen et al., 2024). Although the scientific literature is rich in studies evaluating the link between financial performance and sustainability at the company level, there are still unexplored elements on the importance given to environmental policies compared to financial variables, a perspective that provides a deep understanding of the factors that influence investment decisions. Many of the existing studies address the existence of ESG policies, but omit finer-grained aspects such as quality, impact, or how they are evaluated in analogy with traditional financial indicators. Consequently, we believe that these unexplored dimensions require further investigation, analysing both the impact of the existence of environmental policies and the evaluation of the implementation execution and communication process. Taking into account the existing literature and reporting practices, there is growing investor interest in the impact of sustainability policies, particularly in areas such as gas emissions, supply chain traceability, and climate risk. In this context, this paper aims to explain how investors evaluate companies by analysing in detail the relationship between environmental policies and financial indicators. In line with this perspective, we formulate the following research hypotheses: Sustainability Reporting: Catalyst for Organisational and Professional Change AE Vol. 27 • No. 70 • August 2025 735 I1: Environmental policies are important indicators in the investment decision-making process. I2: The quality of environmental policies is more important than the presence of these policies in the eyes of investors. I3: Financial variables dominate environmental policies in explaining the company's market valuation. 2. Research methodology 2.1. Data used This study uses a data set of 494 companies from the industrial sector of the European Union (according to the TRBC Classification) collected from LSEG-Refinitiv that covers the years 2020–2023. All companies are listed on at least one stock exchange, and their selection considered the fulfilment of two CSRD-related criteria, namely revenues of at least €50 million and assets of at least €25 million earned in 2023. Also, only companies that received an ESG score greater than zero in 2023 were included in the sample. The data set includes market and financial information for each company, along with environmental metrics. The dependent variable is the price-to-book (P/B) ratio, a well-known market valuation indicator, which compares the stock price to its accounting value. The independent variables are included in three categories provided by Refinitiv: (1) Environmental Policies (EPO) – This category includes binary indicators that indicate the presence of specific environmental or sustainability policies at the firm level. These variables were encoded as 1 (Yes) or 0 (No) to signify the presence or absence of each policy. (2) Environmental Policy Scores (EPOS) – This category includes scores (from 0 to 100) that measure the quality or performance of the company’s environmental policies and practices considered in the EPO. EPOS variables capture the effectiveness of environmental initiatives at the corporate level, with higher scores showing improved better environmental performance, allowing us to measure the quality of environmental policies implemented, not just whether such policies exist. The nine indicators included in EPOS are matched with those included in EPO, so that we consider both its existence and its quality for each specific environmental policy. The LSEG-Refinitiv database includes more than nine indicators, but we selected those with at least 100 companies offering data. When data for EPO were not available, we entered zero for EPOS. Table 1 details the EPO and EPOS variables. (3) Financial Variables (FV) – This category includes five financial metrics that influence company performance and valuation that refer to liquidity, solvency, asset use efficiency, profitability, and systematic risk – see Table 2 for details. These were chosen based on prior research that reflected their role in driving market valuations; see, for example, Horobet et al. (2024), Bon and Hartoko (2022), Jihadi et al. (2021). Furthermore, by incorporating these FVs, we control the traditional drivers of firm value so that the incremental relationship of environmental policies with the market value of company stocks can be assessed. AE Environmental Reporting, Financial Fundamentals and Company Valuation: Insights from the Industrial Sector 736 Amfiteatru Economic Table no. 1. EPO and EPOS variables Variable Significance EPO notation EPOS notation Environment Management Team Does the company have an environmental management team that performs the functions dedicated to environmental issues? EMT EMTS Environmental Materials Sourcing Does the company have a policy to improve its water efficiency? This refers to processes, mechanisms, or procedures to improve water use in operation efficiently. EMS EMSS Environmental Products Does the company report at least one product line or service that is designed to have positive effects on the environment or is environmentally labelled/marketed? EP EPS Environmental Supply Chain Management Does the company use environmental criteria (ISO 14000, energy consumption, etc.) in the selection process of its suppliers or sourcing partners? ESCM ESCMS Policy Emissions Does the company have a policy to improve emission reduction? This includes processes, mechanisms, or programmes in place to reduce emissions from land, air, or water from the company’s core activities. PE PES Policy Energy Efficiency Does the company have a policy to improve its energy efficiency? This refers to processes, mechanisms, or procedures to improve energy use in operations. PEE PEES Policy Environmental Supply Chain Does the company have a policy to include its supply chain in the company's efforts to lessen its overall environmental impact? PESC PESCS Policy Water Efficiency Does the company have a policy to improve its water efficiency? This refers to processes, mechanisms, or procedures to improve water use in operations. PWE PWES Resource Reduction Policy Does the company have a policy to reduce the use of natural resources or to reduce the environmental impact of its supply chain? RR RRS Source: Authors’ work based on information from LSEG-Refinitiv 2.2. Research methodology The combination of environmental indicators (policies and scores) with financial variables provides a rich framework for investigating their importance to investors when valuing companies in the stock market. For predictive modelling, we use the Random Forest (RF) algorithm as our primary approach. We choose RF regression because of its robustness and ability to handle diverse types of input (binary, categorical, and continuous) without requiring strong assumptions about their relationships, which makes it ideal for our mix of environmental policy variables and financial ratios. RF algorithms have gained widespread adoption in financial research due to their robust predictive capabilities (Kumbure et al., 2023) in areas such as sovereign default risk patterns (Wang et al., 2021), insolvency risk in insurance companies (Khalil et al., 2022), consumer credit risk assessment (Amarnadh and Moparthi, 2023), stock prices (Sadorsky, 2021), corporate profitability (Almaskati, 2022), or inflation prediction (Mirza et al., 2024). Their ability to handle high-dimensional feature spaces while providing easy-to-understand results in a decision-tree framework has also expanded their application across diverse forecasting domains. For example, Chae (2024) Sustainability Reporting: Catalyst for Organisational and Professional Change AE Vol. 27 • No. 70 • August 2025 737 employed RF to predict Korean high-growth firms using both strategic and financial indicators, Ilie et al. (2023) used them to assess the reliance of EU countries on energy imports, while Yan et al. (2022) applied it to traffic accident severity. Table no. 2. Financial variables (FV) description Variable Notation Description Liquidity CR Measures a company’s ability to pay its short-term (usually one year) financial obligations. Calculated by dividing current assets by current liabilities (current ratio). Solvency DE Measures a company’s level of indebtedness and is an indicator of financial distress and potential default. Calculated as the ratio between total debt and total equity. Profitability PROF Measures a company’s ability to control costs in relation to revenue and turnover. Calculated as EBIT margin. Assets use efficiency TAT Measures management’s ability to generate revenues from assets in use. Calculated as the ratio between turnover and total assets. Systematic risk BETA Measures the risk of a company in relation to market risk. Calculated as beta. Source: Authors’ work Additionally, RF inherently uses bootstrap aggregation (bagging) across many decision trees. Our modelling used 100 trees, which improves generalisation and reduces overfitting. For each year in the timeframe of our analysis (2020-2023), we employed RF to determine the rank and importance of EPO, EPOS and FV indicators for PB prediction for all firms included in the sample. The variable rank output of the RF cannot be used to compare models because it is normalised within each model; therefore, we have allocated ranks to variables from 1 to 23 that indicate their importance in predicting PB (1 the highest). Predictor Importance (Importance from now on) is, on the other hand, more suitable for cross-model importance, as it takes values between 0 and 1. Higher values indicate a higher predictive power of the variable for the dependent variable, PB in our case. Compared to rank, which only orders variables, variable importance quantifies the actual magnitude of predictive power of indicators, as it is calculated based on how much prediction error increases when that variable is permuted. Continuous variables (EPOS and FV) were standardised to zero mean and unit variance, while binary EPO variables are already on a consistent scale (0/1). Following the methodology established in seminal work on RF, our implementation incorporates both bootstrap aggregation (bagging) and random feature selection techniques. One-third of the observations were utilised for model training, and the remaining data was reserved for validation (test) purposes. 3. Results and discussion Preliminary analysis The distribution of environmental policies (EPO) adoption in the industrial sector is shown in Figure 1. Across almost all types of EPO, except for Resource Reduction (RR) between 2021 and 2023, the number of EPO adopters is lower than the number of nonadopters, as the NO values range between 250 and 300, while the YES responses fall between 100 and 250. This suggests that most of these companies have not yet implemented EP, although the number of adopters is expected to increase steadily from 2020 to 2023 for all EPO. Moreover, AE Environmental Reporting, Financial Fundamentals and Company Valuation: Insights from the Industrial Sector 738 Amfiteatru Economic there is substantially higher adoption of EPO such as Resource Reduction (RR), Policy Energy Efficiency (PEE), Policy Environmental Supply Chain (PESC), or Policy Emissions (PE) across the sample, which may indicate that these policies were the easiest and/or the most stringent to implement than the others. Figure no. 1. Number of companies with or without Environmental Policies Source: Authors’ work based on data from LSEG-Refinitiv This finding is consistent with the broader trend observed in the existing literature on ESG, where policies directly related to cost reduction or regulatory compliance tend to have higher adoption rates (Song and Rimmel, 2025; Sengupta, 2010). Although this upward adoption trend is positive, it raises questions about potential gaps in the depth of implementation. As noted by Callery (2023), companies are likely to adopt sustainability policies to meet disclosure requirements rather than to undergo a proactive transformation of their operational practices. Figure 2 shows the distribution of Environmental Policy Scores (EPOS) at the top and Financial Variables (FV) at the bottom. Each boxplot represents a type of policy and a year, the boxes indicate the range (minimum-maximum), and the whiskers show the mean squared deviation. Squares indicate mean values, which generally fall between 20 and 40. Their evolution shows an increase in EP quality in the industrial sector. This observation is consistent with the findings of Gupta et al. (2021), who noted increased investor scrutiny of environmental policy effectiveness. Moreover, studies by Friede, Busch and Bassen (2015) have demonstrated that well-documented environmental strategies have been shown to correlate with improved financial performance, thereby reinforcing the positive trend observed in EPOS values over time. The spread of scores indicates significant variability in EPOS among the 448 companies analysed, with some policies displaying heightened variance (EPSS, EMSS, or PWES). Discrepancies in EPOS may give rise to investor scepticism, as such inconsistencies can be indicative of a fragmented sustainability strategy (Friede, Busch and Bassen, 2015). Consequently, firms aspiring to enhance market valuation should prioritise aligning their environmental performance more closely with strategic objectives, ensuring coherence between policies and practices. Practical evidence suggests that companies integrating environmental goals into core business strategies often achieve better financial results (Flammer, 2021). Sustainability Reporting: Catalyst for Organisational and Professional Change AE Vol. 27 • No. 70 • August 2025 745 for regulators to strengthen reporting standards, with a focus on the relevance and quality of information in ESG reports. These insights offer practical guidance for both corporate leaders and policymakers. For companies, integrating sustainability objectives into their core business strategies can strengthen investor confidence, particularly when environmental policies are tied to measurable outcomes. Firms that demonstrate clear links between sustainability initiatives and financial stability are likely to enhance their market positioning. Meanwhile, regulators can improve transparency and investor trust by promoting clear and standardised sustainability reporting frameworks, such as those established under the CSRD. Our research results were inherently limited by the lack of reporting data for all companies in the EU industrial sector, as well as the focus on environmental policies, although CSRD refers to social policies as well. These are both interesting avenues for future research. Furthermore, further insights could be provided by examining how ESG integration differs between various industries, helping firms tailor their strategies to specific market dynamics. Additionally, exploring how investor behaviour changes during economic uncertainty may reveal additional insights into the relationship between financial performance and environmental policies. 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