ESG disclosure and firm performance before and after IR. The moderating role of governance mechanisms

• DOI: https://doi.org/10.1108/IJAIM-09-2019-0108
• Date: 27 March 2020
• Pages: 429-444
• Published date: 27 March 2020
• Author: Khaldoon Albitar,Khaled Hussainey,Nasir Kolade,Ali Meftah Gerged
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

ESG disclosure and f‌irm

performance before and after IR

The moderating role of governance mechanisms

Khaldoon Albitar

Department of Accounting and Financial Management, Portsmouth Business

School, University of Portsmouth, Portsmouth, UK

Khaled Hussainey

Portsmouth Business School, University of Portsmouth, Portsmouth, UK

Nasir Kolade

Department of Accounting and Finance, University of Northampton,

Northampton, UK, and

Ali Meftah Gerged

Leicester Castle Business School, De Montfort University, UK and

Faculty of Economics, Misurata University, Misrata, Libya

Abstract

Purpose –This paper aims to investigate the effect of environmental, social and governance disclosure

(ESGD) on f‌irm performance (FP) before and after the introduction of integrated reporting (IR) further to

exploringa potential moderation effect of corporategovernance mechanisms on this relationship.

Design/methodology/approach –Ordinary least squares and f‌irm-f‌ixed effects models were estimated

based on data related to FTSE 350 between 2009 and 2018. The data has been mainly collected from Bloomberg

and Capital IQ. This analysis was supplemented with applying a two-stage least squares (2 SLS) model to address

any concerns regarding the expected occurrence of endogeneity problems.

Findings –The results show a positive and signif‌icant relationship between ESGD score and FP before and

after 2013, among a sample of FTSE 350. Furthermore, the study is suggestive of a moderation effect of corporate

governance mechanisms (i.e. ownership concentration, gender diversity and board size) on the ESGD-FP nexus.

Additionally, this paper f‌inds that f‌irms voluntarily associated with IR have a tendency to achieve better f‌irm

f‌inancial performance.

Practical implications –The f‌indings of the present study have several policy and practitioner

implications. For example,managers may engage in ESGD to enhance their f‌irms’f‌inancial performance by

the voluntary involvement in IR, which believedto help investors to rationalise their investment decisions.

Likewise, the results reiterate the crucial need to integrate more social, environmental and economic

regulationsto promote sustainability in the UK. The paper also offersa systematic picture for policymakers in

the UK as well as future researchers.

Social implications –The f‌indings of this paper indicate that IR plays a signif‌icant role in the relationship

between ESGD and FP, where IR f‌irms seemed to be achieving better FP as compared with their non-IR

counterparts. This implies that stakeholders may have played a magnif‌icentefforttoencouragef‌irms’voluntary

engagement in IR in the UK.

Originality/value –To the best of the authors’knowledge, this is the f‌irst study to explorethe potential

moderating effect of ownership concentration, gender diversity and board size on the relationship between

The authors gratefully acknowledge the constructive comments and suggestions given by colleagues

and attendees at the 13th Research and Innovation Conference, University of Portsmouth.

Moderating

role of

governance

mechanisms

429

Received16 September 2019

Revised2 December 2019

Accepted31 December 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 3, 2020

pp. 429-444

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2019-0108

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

ESGD and FP and to examine whether f‌irms’voluntary involvement in IR can lead to better FP after the

introductionof IR in 2013 in the UK.

Keywords Ownership concentration, Gender diversity, Integrated reporting, Board size,

Environmental disclosure, Social disclosure, Governance disclosure

Paper type Research paper

1. Introduction

As sustainability is increasingly signif‌icant to economic development, corporate

environmental and social responsibility have become an international trend, and this was

accompanied with a lack of f‌irms’non-f‌inancial disclosure, such as environmental, social

and governance (ESG) information and practice(Li et al., 2018). Recently, there is a growing

demand for improving businessreporting, with more focus on encouraging f‌irms to provide

more non-f‌inancial information(Lai et al.,2018). Sustainable development is not only related

to corporate social responsibility (CSR) and accounting standards but also associated with

customer satisfaction (Akisikand Gal, 2011). Previous research focuses on the effect of CSR

on f‌irm value or the concept of socially responsible investing and lacks the perspective of

sustainabilityand integrated reporting (IR) (Kimbro and Cao, 2011;Li et al., 2019).

Environmental, social and governance disclosures (ESGDs) offer a more signif‌icant

opportunity to understand f‌irms’non-f‌inancial reporting. Non-f‌inancial information can

help corporate managers in the fulf‌ilment of their strategic environmental objectives

(Alewine and Stone, 2013). Furthermore, corporate ESGD appeared to be of imperative

importance to both academics and practitioners. In addition to this, stakeholders began to

raise questions about managers’credentials in integrating ESG considerations (Husted and

Sousa-Filho, 2018). According to the arguments of stakeholder and agency theories, f‌irms

have to adopt a more sustainable and long-term value view, as stakeholders are concerned

about a company’s ESG factors to know where the f‌irm invests and how the f‌irm conducts

business (Eccles et al.,2014;Atan et al.,2018). For instance, the environmental concerns of

stakeholders might be related to natural environment protection, climate change and

environmental impactsarising from a business operation.

Moreover, social factors, which are important to stakeholders, could be human rights,

equality, diversity in the workplace and contribution to society. Further, concerns related to

governance issues are ownership structure, board independence, minority shareholders’

rights, transparency and disclosure quality. Investors may have a preference for products

that consider and ref‌lect the relationshipbetween their investments and ESG as challenging

(Li et al.,2018). Further to this, by 2030, all f‌irms are expectedto disclose information related

to their environmental and social effect according to the United Nations Sustainable Stock

Exchange Initiative(Sustainable Stock Exchanges [SSE], 2015).

ESG is a commonly researched concept,which has been considered as an important part

of the strategy of the f‌irm because it might have a crucial effect on f‌irm performance (FP)

(Aouadi and Marsat, 2018;Fatemi et al.,2017;Baldini et al.,2016;El Ghoul et al.,2017;

Nekhili et al.,2017;Aboud and Diab, 2018). ESG integration has become an essential issue

for investors, governments, regulators, f‌irms and non-governmental organisations (Lee

et al.,2013). Understanding what motivates IR, therefore, is crucial following stakeholders’

demands. However, understanding what motivates sustainability reporting could be

developed by the conceptof reputation risk management (Hogan and Lodhia, 2011). Various

studies examine the relationship betweenESGD and FP; the f‌indings are inconclusive (Cho

et al.,2006;Garay and Font, 2012;Madsen and Rodgers, 2015;Revelli and Viviani, 2015;

Bernardi and Stark, 2018;Li etal.,2018).

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