Effect of Environmental, Social and Governance Reporting on Financial Performance of Firms Listed at the Nairobi Securities Exchange

Abstract

Environmental, social and governance reporting encourages transparency, which can foster trust among stakeholders and mitigate reputational risks. By aligning business strategies with sustainable practices, companies can gain a competitive edge, access new markets, and innovate for long-term success, ultimately leading to improved financial performance. Sustainable initiatives such as energy efficiency measures and waste reduction can lead to cost savings and operational efficiencies. Skeptics, however, argue that short-term financial gains often take precedence over long-term sustainability objectives, and that investors may not consistently reward companies for their sustainability initiatives. This study sought to investigate how ESG reporting influences the financial performance among firms listed at the NSE. The independent variable for the research was ESG reporting as measured by using a sustainability index developed by Global Reporting Initiative. Liquidity and firm size were the control variables while the dependent variable was financial performance measured as ROA. The study was guided by triple bottom line theory, stakeholder theory, and institutional theory. Descriptive research design was utilized in this research. The 65 firms listed at the NSE as at December 2022 served as target population. The study collected secondary data for five years (2018-2022) on an annual basis from CMA and individual firms listed at the NSE annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research findings yielded a 0.247 R square value implying that 24.7% of changes in firms listed at the NSE ROA can be described by the five variables chosen for this research. The multivariate regression analysis further revealed that individually, environmental reporting has a positive and significant effect on ROA of firms listed at the NSE (β=0.162, p=0.001). Social reporting had a positive effect on ROA of firms listed at the NSE as shown by (β=0.157, p=0.000). Firm size also exhibited a positive and significant ROA influence as shown by (β=0.293, p=0.000). Liquidity and governance reporting exhibited a positive but not statistically significant influence on ROA. The study concludes that ESG reporting plays a significant role on financial performance of firms listed at the NSE. The study recommends the need for a strategic shift toward robust ESG reporting practices, encompassing both social and environmental dimensions, as a means to enhance financial performance for firms listed at the NSE. Future research ought to focus on other firms in Kenya to corroborate or refute the conclusions of this research.