Essays on ESG Reporting: Identifying the Key Performance Indicators and Measuring its Impact on Firm Performance

Abstract

The corporate sector across the global is undergoing a paradigm shift in terms of the information disclosed by the organizations. The stakeholder activism is demanding the firms to be more sustainable in its approach towards achieving long term growth. This increased awareness and the need for long-term survival in the market has forced the organizations to adopt a more holistic approach when it comes to disclosing the firm related information. This transversal of firms towards a more modernistic approach of information disclosure has garnered both praise and criticism from the society at large. On one hand, wherein the market and its forces are lauding this step, questions are being raised about the integrity of such methods. The academia and corporate sector are in a constant state of upheaval and discussion about the acceptability and comparability of such an approach. Contentions are being made about the authenticity, reliability, and validity of the non-financial disclosures made by the firms both in India as well as abroad. The studies carried out so far in this domain have yielded ambiguous and inconclusive results bifurcating the literature into three main streams based on the type of association reported: (a) positive; (b) negative, and (c) neutral. The justifications for such equivocality in the results are attributed to the absence of a common metric that will help in peer comparison of firms on the quality of sustainability-related disclosures. Another reason that is recently being cited for the lack of clarity on the subject under discussion is the nature of the association being studied. Most of the studies have so far focused on empirically examining the direct relationship between sustainability reporting and its impact on firm performance. Against the given backdrop, this study aims at analyzing the relationship between the most commonly used measure of sustainability reporting viz., Environment, Social and Governance (ESG) and Corporate Financial Performance (CFP). It employs the use of both an intervening and a moderating variable to examine the indirect relationship between the two. The study is carried out using data from secondary sources (annual reports and Bloomberg database). The study covers data provided by the sources for a period of five years, ranging from 2016 to 2020. The final sample size considered for the study is 127 companies or 635 firm-level observations. Techniques like content analysis, exploratory factor analysis, and confirmatory analysis are applied to obtain the data for carrying out further analysis. The results obtained based on the empirical analysis show that the study supports the assumptions of Agency Theory. The results show that there exists a significant negative association between the composite ESG disclosure score and the market performance of firms. The results obtained in ROA however, do not show any significant linkages. Similar results are obtained in the case of environmental and governance disclosure scores. The results of moderation analysis show that in the presence of the moderating variable only the composite ESG score is affected. No impact is seen in the case of the accounting performance of firms. Similarly, the availability of unallocated financial resources also does not impact the sub-components of ESG. Further, the examination of the indirect relationship between ESG and CFP depicts that the composite ESG disclosures affect the market performance of firms through corporate reputation. However, no significant results are observed in the case of accounting performance or individual disclosure scores. As its concluding remarks, the study provides implications both from managerial and policy perspectives. It also discusses in detail the major contributions of this study and paves the way for further research by highlighting the limitations and setting agenda for future studies in this domain.