Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter?
Abstract
:1. Introduction
2. Literature Review
2.1. ESG Financial Materiality Versus ESG Disclosure
2.2. Empirical Review and Hypothesis Development
3. Materials and Method
4. Results and Discussion
4.1. Robustness Check
4.2. Discussion of Findings
5. Conclusions, Practical Implication of Findings, Limitations, and Suggestion for Future Studies
5.1. Conclusions
5.2. Practical Implication of Findings
5.3. Limitations of the Study and Suggestion for Future Research
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Conflicts of Interest
Abbreviations
Appendix A. Two-Stage Least Square Results with Instrumental Variables
Instrumental Variables | ESG(-1) ESG(-2) ESG(-3) ESG(-4) MCAP(-1) MCAP(-2) MCAP(-3) | ESG(-1) ESG(-2) MCAP(-1) MCAP(-2) MCAP(-3) MCAP(-4) INF(-1) INF(-2) | |||
---|---|---|---|---|---|
Variable | ROA | ROE | TOBIN-Q | ||
B | p-Value | B | p-Value | ||
ESG | −0.1042 | 0.3430 | −1.5376 | 0.0462 | There is absence of the problem of endogeneity in this model. |
MCAP | 0.0009 | 0.8081 | 0.0340 | 0.0319 | |
DER | 0.0011 | 0.8878 | 0.0278 | 0.5869 | |
INF | 0.0445 | 0.757 | 1.091 | 0.1675 | |
C | 1.731 | 0.1218 | 11.435 | 0.0885 | |
R-Square | 0.9181 | 0.7161 | |||
F-test | 30.647 | 0.0000 | 6.3953 | 0.00009 |
Instrumental Variables | DER(-1) DER(-2) DER(-3) INF(-1) INF(-2) INF(-3) INF(-4) INF(-5) | DER(-1) DER(-2) DER(-3) INF(-1) INF(-2) INF(-3) | DER(-1) DER(-2) DER(-3) DER(-4) DER(-5) DER(-6) DER(-7) | |||
---|---|---|---|---|---|---|
Variable | ROA | ROE | TOBIN-Q | |||
B | p-Value | B | p-Value | B | p-Value | |
ESG | −0.4561 | 0.7719 | −5.822647 | 0.3003 | 0.0005 | 0.9026 |
MCAP | −0.0564 | 0.2161 | −239.333 | 0.5527 | −0.5446 | 0.0304 |
DER | −0.038 | 0.0239 | −0.2022 | 0.0104 | 0.0006 | 0.0001 |
INF | 0.7547 | 0.6148 | 6.420 | 0.2599 | 0.0028 | 0.5480 |
C | 4.0811 | 0.4589 | 17.8113 | 0.6140 | 0.5453 | 0.0000 |
R-Square | 0.3891 | 0.38 | 0.3179 | 0.864 | ||
F-test | 2.87 | 0.043 | 2.3830 | 0.087 | 3.042 | 0.056 |
Instrumental Variables | MCAP(-1) MCAP(-2) MCAP(-3) MCAP(-4) MCAP(-5) MCAP(-6) MCAP(-7) | MCAP(-1) MCAP(-2) MCAP(-3) MCAP(-4) MCAP(-5) INF(-1) INF(-2) INF(-3) | |||
---|---|---|---|---|---|
Variable | ROA | ROE | TOBIN-Q | ||
B | p-Value | B | p-Value | ||
ESG | 0.0952 | 0.5508 | −7.684 | 0.2621 | There is absence of the problem of endogeneity in this model. |
ESG*TRS | −0.0014 | 0.5324 | 0.0915 | 0.4313 | |
MCAP | 2.930 | 0.0388 | 0.0330 | 0.0063 | |
DER | 0.0018 | 0.1852 | 0.0278 | 0.6017 | |
INF | 0.0036 | 0.8869 | 1.8739 | 0.0265 | |
C | 1.3285 | 0.0058 | 1.476 | ||
R-Square | 0.9992 | 0.7446 | |||
F-test | 700.49 | 0.0000 | 7.098 | 0.0000 |
Instrumental Variables | ESG*TRS(-1) ESG*TRS(-2) ESG*TRS(-3) DER (-1) DER(-2) DER(-3) INF(-1) INF(-2) INF(-3) | ESG*TRS(-1) ESG*TRS(-2) ESG*TRS(-3) DER(-1) DER(-2) DER(-3) INF(-1) INF(-2) INF(-3) | ESG*TRS(-1) ESG*TRS(-2) ESG*TRS(-3) DER(-1) DER(-2) DER(-3) INF(-1) INF(-2) INF(-3) | |||
---|---|---|---|---|---|---|
Variable | ROA | ROE | TOBIN-Q | |||
B | p-Value | B | p-Value | B | p-Value | |
ESG | 1.7795 | 0.8506 | −24.15875 | 0.3911 | −0.1135 | 0.2366 |
ESG*TRS | −0.0646 | 0.4811 | 0.5361 | 0.4452 | 0.0011 | 0.2173 |
MCAP | −0.0539 | 0.0726 | −0.2784 | 0.4067 | 0.0018 | 0.4395 |
DER | −0.0188 | 0.7192 | −0.2784 | 0.1778 | 0.0011 | 0.0120 |
INF | 0.3615 | 0.8106 | −7.3970 | 0.6584 | 0.0517 | 0.3554 |
C | 9.1717 | 0.5796 | 49.7323 | 0.3544 | 0.3394 | 0.0014 |
R-Square | 0.2321 | 0.2095 | 0.2045 | |||
F-test | 2.19 | 0.100 | 2.448 | 0.0274 | 8.417 | 0.0000 |
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Variables | Measurement | Sources |
---|---|---|
Return on Assets (ROA) | Profit before interest and tax(PBIT) Total assets | Bloomberg terminal |
Return on Equity (ROE) | Profit before interest and tax (PBIT) Total equity | Bloomberg terminal |
Tobin’s Q | MCAP + total debt Total assets | Bloomberg terminal |
MCAP | Market capitalization | Bloomberg terminal |
DER | Debt-to-equity ratio | Bloomberg terminal |
INF | Inflation rate | Bloomberg terminal |
ESG | ESG financial materiality disclosure score | Bloomberg terminal |
ESG Transparency (TRS) | Overall ESG disclosure score | Bloomberg terminal |
Banks | Manufacturing Firms | |||||||
---|---|---|---|---|---|---|---|---|
Variable | Mean | Maximum | Minimum | Std | Mean | Maximum | Minimum | Std |
ROA | 1.893 | 5.710 | 0.3700 | 1.537 | 6.058 | 120.81 | −25.392 | 16.814 |
ROE | 16.388 | 26.510 | 0.000 | 6.227 | 11.465 | 297.28 | −128.065 | 44.168 |
TOBIN Q | 0.890 | 0.921 | 0.777 | 0.045 | 0.541 | 0.874 | 0.270 | 0.1417 |
ESG | 2.589 | 4.850 | 0.000 | 1.289 | 2.76 | 5.160 | 0.000 | 1.182 |
MCAP | 7.900 | 467.03 | 0.0001 | −0.320 | 9.749 | 580.57 | 0.0017 | 74.941 |
DER | 112.44 | 303.95 | 0.000 | 81.72 | 83.391 | 419.66 | 2.140 | 75.737 |
INF | 4.95 | 7.200 | 3.000 | 1.347 | 4.950 | 7.200 | 3.000 | 1.347 |
TRS | 46.090 | 68.100 | 0.000 | 20.109 | 49.95 | 71.461 | 0.000 | 18.306 |
Variables | ROA | ROE | TOBIN Q | ESG | MCAP | DER | INF | TRS |
---|---|---|---|---|---|---|---|---|
ROA | 1 | |||||||
ROE | 0.7859 | 1 | ||||||
TOBIN Q | −0.9560 | −0.6092 | 1 | |||||
ESG | −0.2916 | −0.2907 | 0.2467 | 1 | ||||
MCAP | −0.0273 | 0.1112 | 0.0834 | 0.1094 | 1 | |||
DER | −0.5499 | −0.5923 | 0.4694 | 0.1251 | 0.1144 | 1 | ||
INF | 0.00027 | 0.0332 | −0.0359 | 0.3902 | −0.1802 | −0.013 | 1 | |
TRS | −0.2087 | −0.2627 | 0.1507 | 0.8908 | 0.077 | 0.2136 | 0.3070 | 1 |
Variables | ROA | ROE | TOBIN Q | ESG | MCAP | DER | INF | TRS |
---|---|---|---|---|---|---|---|---|
ROA | 1 | |||||||
ROE | 0.9769 | 1 | ||||||
TOBIN Q | −0.2548 | −0.2482 | 1 | |||||
ESG | 0.0834 | 0.0929 | −0.1655 | 1 | ||||
MCAP | −0.1873 | −0.1821 | 0.2178 | −0.014 | 1 | |||
DER | −0.3493 | −0.4219 | 0.7153 | −0.255 | 0.1969 | 1 | ||
INF | 0.2794 | 0.2698 | −0.0722 | 0.4478 | −0.1969 | −0.1721 | 1 | |
TRS | −0.1297 | −0.1250 | −0.0776 | 0.7259 | 0.0233 | 0.0518 | 0.3996 | 1 |
Variables | ROA | ROE | Tobinq | |||
---|---|---|---|---|---|---|
FE | RE | FE | RE | FE | RE | |
ESG | −0.0930 * | −0.0947 *** | −1.0440 ** | −1.0490 *** | 0.0003 | 0.0004 |
(0.0362) | (0.0278) | (0.3820) | (0.2760) | (0.0008) | (0.0008) | |
MCAP | 0.0017 *** | 0.0018 *** | 0.0301 *** | 0.0301 *** | 1.64 × 10−5 ** | 1.56 × 10−5 *** |
(0.0003) | (0.0002) | (0.0020) | (0.0013) | (5.04 × 10−6) | (5.02 × 10−6) | |
DER | 0.0009 | −0.0008 | 0.0014 | −0.0204 ** | −1.52 × 10−6 | 1.58 × 10−5 |
(0.0010) | (0.0011) | (0.0091) | (0.0091) | (5.14 × 10−5) | (4.51 × 10−5) | |
INF | 0.0497 | 0.0493 | 0.7880 | 0.7710 * | −0.0012 * | −0.0012 * |
(0.0564) | (0.0513) | (0.4700) | (0.3970) | (0.0006) | (0.0006) | |
Constant | 1.7710 *** | 1.9680 ** | 14.800 *** | 17.340 *** | 0.8960 *** | 0.8940 *** |
(0.2420) | (0.9300) | (2.4220) | (3.4120) | (0.0028) | (0.0204) | |
Robust Hausman test | ||||||
Sargan-Hansen Statistic | 636.056 *** (0.000) | 97.442 *** (0.000) | 119.207 *** (0.000) | |||
Testing for Cross-Sectional Dependence on the preferred model (i.e., Fixed Effect (FE)) | ||||||
Pesaran CD test | 4.156 *** (0.000) | 3.541 *** (0.000) | 1.478 (0.139) |
Variables | ROA | ROE | ||
---|---|---|---|---|
FE | RE | FE | RE | |
ESG | −0.0930 * (0.0426) | −0.0947 (0.0625) | −1.0440 * (0.5120) | −1.0490 (0.6380) |
MCAP | 0.0017 *** (0.0002) | 0.0017 *** (0.0002) | 0.0301 *** (0.0042) | 0.0301 *** (0.0034) |
DER | 0.0009 * (0.0004) | −0.0007 (0.0016) | 0.0013 (0.0046) | −0.0204 ** (0.0078) |
INF | 0.0497 (0.0374) | 0.0493 (0.0391) | 0.7880 (0.4500) | 0.7710 (0.4330) |
Constant | 1.7710 *** (0.1570) | 1.968 ** (0.658) | 14.80 *** (1.718) | 17.34 *** (3.079) |
F-test | 13.540 *** (0.000) | 17.890 *** (0.000) | ||
Wald-chi2 | 85.950 *** (0.000) | 116.00 *** (0.000) | ||
Hausman test (Chi2) | 6.1002 ** (0.0266) | 9.9500 ** (0.0412) |
Variables | ROA | ROE | TOBIN Q |
---|---|---|---|
Fixed Effect | Fixed Effect | Fixed Effect | |
ESG | −0.0930 * | −1.0440 * | 0.0003 |
(0.0426) | (0.5120) | (0.0008) | |
MCAP | 0.0017 *** | 0.0301 *** | 1.64 × 10−5 ** |
(0.0003) | (0.0042) | (5.04 × 10−6) | |
DER | 0.0009 * | 0.0014 | −1.52 × 10−6 |
(0.0005) | (0.0046) | (5.14 × 10−5) | |
INF | 0.0497 | 0.7880 | −0.0012 * |
(0.0374) | (0.4500) | (0.0006) | |
Constant | 1.7710 *** | 14.800 *** | 0.8960 *** |
(0.1570) | (1.7180) | (0.0028) | |
Diagnostic test | |||
Hausman (Chi2) | 6.1002 ** (0.0266) | 9.9500 ** (0.0412) | 119.207 *** (0.000) |
Variables | ROA | ROE | TOBIN Q | |||
---|---|---|---|---|---|---|
FE | RE | FE | RE | FE | RE | |
ESG | −2.5670 | −2.1970 | −6.4140 | −5.7310 | −0.0070 | −0.0073 |
(1.9390) | (1.3410) | (4.9830) | (3.557) | (0.0066) | (0.0074) | |
MCAP | −0.0110 | −0.0137 | −0.0200 | −0.0248 | 0.0001 *** | 0.0001 *** |
(0.0107) | (0.0087) | (0.0264) | (0.0209) | (2.06 × 10−5) | (2.65 × 10−5) | |
DER | −0.0612 ** | −0.0662 *** | −0.2520 *** | −0.2450 *** | 0.0007 * | 0.0007 *** |
(0.0158) | (0.0137) | (0.0299) | (0.0360) | (0.0003) | (0.0003) | |
INF | 3.7920 | 3.5710 | 8.7280 | 8.4730 | 0.0029 | 0.0040 |
(2.7510) | (2.5260) | (6.8510) | (6.1930) | (0.0038) | (0.0041) | |
Constant | −0.5040 | 0.0299 | 6.9320 | 5.8540 | 0.4930 *** | 0.4810 *** |
(8.6410) | (7.1580) | (23.950) | (19.610) | (0.0381) | (0.0495) | |
Robust Hausman test | ||||||
Sargan-Hansen Statistic | 76.540 *** (0.000) | 12.474 ** (0.014) | 119.207 *** (0.000) | |||
Testing for Cross-Sectional Dependence on the preferred model (i.e., Fixed Effect (FE)) | ||||||
Pesaran CD test | 0.829 (0.407) | 0.322 (0.747) | 3.450 (0.443) |
Variables | ROA | ROE | TOBIN Q |
---|---|---|---|
Fixed Effect | Fixed Effect | Fixed Effect | |
ESG | −2.5670 | −6.4140 | −0.0070 |
(1.9390) | (4.9830) | (0.0066) | |
MCAP | −0.0110 | −0.0200 | 0.0001 *** |
(0.0107) | (0.0264) | (2.06 × 10−5) | |
DER | −0.0612 ** | −0.2520 *** | 0.0007 * |
(0.0158) | (0.0299) | (0.0003) | |
INF | 3.7920 | 8.7280 | 0.0029 |
(2.7510) | (6.8510) | (0.0038) | |
Constant | −0.5040 | 6.9320 | 0.4930 *** |
(8.6410) | (23.950) | (0.0381) | |
Diagnostic test | |||
Hausman (Chi2) | 76.540 *** (0.000) | 12.474 ** (0.014) | 119.207 *** (0.000) |
Variables | ROA | ROE | TOBIN Q | |||
---|---|---|---|---|---|---|
FE | RE | FE | RE | FE | RE | |
ESG | −0.0287 | 0.215 | −0.606 | 5.848 *** | 0.00243 | 0.000201 |
(0.156) | (0.290) | (1.037) | (1.250) | (0.00410) | (0.00601) | |
ESG_TRS | −0.00105 | −0.0050746 | −0.00718 | −0.121071 *** | −3.44 × 10−5 | 2.50 × 10−6 |
(0.00239) | (0.0046) | (0.0162) | (0.0025) | (6.52 × 10−5) | (0.0009) | |
MCAP | 0.00172 *** | 0.00174 *** | 0.0301 *** | 0.0234 *** | 1.63 × 10−5 ** | 1.59 × 10−5 *** |
(0.000276) | (0.000243) | (0.00203) | (0.00294) | (5.20 × 10−6) | (5.26 × 10−6) | |
DER | 0.000804 | −0.000762 | 0.000620 | −0.0290 ** | −5.22 × 10−6 | 8.68 × 10−6 |
(0.000936) | (0.00130) | (0.00904) | (0.0118) | (4.90 × 10−5) | (4.50 × 10−5) | |
INF | 0.0471 | 0.0374 | 0.770 | 0.614 | −0.00128 | −0.00119 |
(0.0599) | (0.0636) | (0.468) | (0.374) | (0.000703) | (0.000778) | |
Constant | 1.780 *** | 1.944 ** | 14.86 *** | 18.48 *** | 0.896 *** | 0.895 *** |
(0.253) | (0.939) | (2.432) | (3.181) | (0.00297) | (0.0206) | |
Robust Hausman test | ||||||
Sargan-Hansen Statistic | 1.1 × 104 *** (0.000) | 17.622 *** (0.000) | 589.425 *** (0.000) | |||
Testing for Cross-Sectional Dependence on the preferred model (i.e., Fixed Effect (FE)) | ||||||
Pesaran CD test | 4.190 *** (0.000) | 3.545 *** (0.000) | 1.469 (0.142) |
Variables | ROA | ROE | ||
---|---|---|---|---|
FE | RE | FE | RE | |
ESG | −0.0287 | 0.215 | −0.606 | 5.848 *** |
(0.150) | (0.321) | (1.207) | (1.105) | |
ESG*TRS | −0.00105 | −0.0051 | −0.00718 | −0.1211 |
(0.00223) | (0.0053) | (0.0163) | (0.018) *** | |
MCAP | 0.00172 *** | 0.00174 *** | 0.0301 *** | 0.0234 *** |
(0.000302) | (0.000223) | (0.00425) | (0.00321) | |
DER | 0.000804 | −0.000762 | 0.000620 | −0.0290 *** |
(0.000588) | (0.00156) | (0.00592) | (0.00536) | |
INF | 0.0471 | 0.0374 | 0.770 | 0.614 |
(0.0405) | (0.0444) | (0.472) | (0.442) | |
Constant | 1.780 *** | 1.944 ** | 14.86 *** | 18.48 *** |
(0.172) | (0.734) | (1.833) | (1.977) | |
F-test | 17.47 | 14.67 | ||
Prob > F | 0.000214 | 0.000424 | ||
Wald-chi2 | 195.6 | 306 | ||
Prob > chi2 | 0.000 | 0.000 | ||
Hausman test (Chi2) | 0.420 (0.9948) | 189.41 (0.0000) |
Variable | ROA | ROE | TOBIN Q |
---|---|---|---|
Random Effect | Fixed Effect | Fixed Effect | |
ESG | 0.215 | −0.606 | 0.00243 |
(0.290) | (1.037) | (0.00410) | |
ESG_TRS | −0.00507 | −0.00718 | −3.44 × 10−5 |
(0.0046) | (0.0162) | (6.52 × 10−5) | |
MCAP | 0.00174 *** | 0.0301 *** | 1.63 × 10−5 ** |
(0.000243) | (0.00203) | (5.20 × 10−6) | |
DER | −0.000762 | 0.000620 | −5.22 × 10−6 |
(0.00130) | (0.00904) | (4.90 × 10−5) | |
INF | 0.0374 | 0.770 | −0.00128 |
(0.0636) | (0.468) | (0.000703) | |
Constant | 1.944 ** | 14.86 *** | 0.896 *** |
(0.939) | (2.432) | (0.00297) | |
Diagnostic test | |||
Hausman (Chi2) | 0.420 (0.9948) | 189.41 *** (0.000) | 589.425 *** (0.000) |
Variables | ROA | ROE | TOBIN Q | |||
---|---|---|---|---|---|---|
FE | RE | FE | RE | FE | RE | |
ESG | 10.440 | 9.0730 ** | 21.710 | 20.790 * | −0.0487 | −0.0206 |
(7.4160) | (3.7980) | (17.040) | (12.580) | (0.0307) | (0.0212) | |
ESG_TRS | −0.2190 | −0.1763 ** | −0.4730 | −0.4145 | 0.0007 | 0.0002 |
(0.1570) | (0.0797) | (0.3430) | (0.2320) | (0.0004) | (0.0002) | |
MCAP | −0.0094 | −0.0203 *** | −0.0166 | −0.0424 ** | 0.0001 *** | 0.0001 *** |
(0.0124) | (0.0076) | (0.0300) | (0.0198) | (2.14 × 10−5) | (3.07 × 10−5) | |
DER | −0.0503 ** | −0.0672 *** | −0.2280*** | −0.2240 *** | 0.0006 * | 0.0008 *** |
(0.0129) | (0.0083) | (0.0314) | (0.0646) | (0.0003) | (0.0003) | |
INF | 3.9630 | 3.2300 | 9.0970 | 7.8650 | 0.00233 | 0.0044 |
(3.0630) | (2.5870) | (7.5220) | (6.1090) | (0.0042) | (0.0044) | |
Constant | −4.5900 | −2.1280 | −1.9020 | −2.2070 | 0.5060 *** | 0.4780 *** |
(12.380) | (9.9220) | (32.220) | (27.550) | (0.0436) | (0.0522) | |
Robust Hausman test | ||||||
Sargan-Hansen Statistic | 71.919 *** (0.000) | 10.311 ** (0.014) | 112.472 *** (0.000) | |||
Testing for Cross-Sectional Dependence on the preferred model (i.e., Fixed Effect (FE)) | ||||||
Pesaran CD test | −0.277 (0.781) | −0.456 (0.648) | 3.195 (0.140) |
Variable | ROA | ROE | TOBIN Q |
---|---|---|---|
Fixed Effect | Fixed Effect | Fixed Effect | |
ESG | 10.440 | 21.710 | −0.0487 |
(7.4160) | (17.040) | (0.0307) | |
ESG_TRS | −0.2190 | −0.4730 | 0.0007 |
(0.1570) | (0.3430) | (0.0004) | |
MCAP | −0.0094 | −0.0166 | 0.0001 *** |
(0.0124) | (0.0300) | (2.14 × 10−5) | |
DER | −0.0503 ** | −0.2280 *** | 0.0006 * |
(0.0129) | (0.0314) | (0.0003) | |
INF | 3.9630 | 9.0970 | 0.00233 |
(3.0630) | (7.5220) | (0.0042) | |
Constant | −4.5900 | −1.9020 | 0.5060 *** |
(12.380) | (32.220) | (0.0436) | |
Diagnostic test | |||
Hausman (Chi2) | 71.919 *** (0.000) | 10.311 ** (0.014) | 112.472 *** (0.000) |
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Oluwakemi, A.A.; Mishelle, D. Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter? J. Risk Financial Manag. 2025, 18, 315. https://doi.org/10.3390/jrfm18060315
Oluwakemi AA, Mishelle D. Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter? Journal of Risk and Financial Management. 2025; 18(6):315. https://doi.org/10.3390/jrfm18060315
Chicago/Turabian StyleOluwakemi, Adejayan Adeola, and Doorasamy Mishelle. 2025. "Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter?" Journal of Risk and Financial Management 18, no. 6: 315. https://doi.org/10.3390/jrfm18060315
APA StyleOluwakemi, A. A., & Mishelle, D. (2025). Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter? Journal of Risk and Financial Management, 18(6), 315. https://doi.org/10.3390/jrfm18060315