The Strategic Role of Sustainable Finance in Corporate Reputation: A Signaling Theory Perspective

Abstract

The United Kingdom has long been a frontrunner in green finance, establishing programs like the Green Finance Institute to promote corporate engagement in sustainable initiatives. The Green Finance Strategy, enacted in 2019, aligns UK financial procedures with international standards, including the EU taxonomy for sustainable Activities. The study examined how sustainable finance enhances the corporate reputation of the firms listed on the London Stock Exchange. A purposive sampling yielded 17 years of data from 143 non-financial companies from the Thomson Reuters Eikon DataStream between 2007 and 2023. In dealing with the issue of endogeneity and auto-serial correlation, the Generalized Methods of Movement (GMM) was employed to provide reliable and unbiased estimation results. The study revealed a positive impact of green bond issues, environmental expenditures, and policies for emission reduction on corporate reputation. The moderating relationship between green bond issues, environmental expenditures, and board diversity revealed a positive and significant relationship with corporate reputation. Managers should ensure that their endorsed activities gain public recognition and align with sustainability goals, particularly by emphasizing the issuance of green bonds in their financing strategy. They should also collaborate with environmental experts and stakeholders to ensure that the outcomes of funded projects are evaluated in line with international ESG standards.

1. Introduction

Organizations value sustainable finance as it fortifies their capacity to endure financial, legal, and environmental risks [1]. It promotes the distribution of resources to projects that improve sustainable value generation and reduce risks, providing a sense of reassurance and security. This financial approach establishes operational stability and alliances by attracting investors and stakeholders who prioritize sustainability and accountability [2]. Aligning sustainable finance with global sustainability trends enhances a company’s market position and presents chances for development and innovation [3]. Businesses can showcase their dedication to ethical and progressive values while securing a competitive edge through the principle of financial practices. They aid in the attainment of global sustainability goals.

Companies prioritize their reputation, an essential intangible asset that affects employee happiness, investor confidence, and consumer loyalty [4]. The company cultivates a strong reputation by distinguishing itself from competitors by its dedication to sustainable practices, high-quality products, and ethical conduct. It bolsters stakeholder credibility and trust, vital for sustaining market leadership, forming alliances, and securing financing [5]. Establishing a stronger reputation enables companies to enhance stakeholder relationships, foster brand loyalty, and attract and retain top employees [6]. These alleviate risks, promote sustained growth, and create a basis for success in the unforeseeable future.

Sustainable finance reflects a company’s commitment to social responsibility and ethical leadership, enhancing its brand equity [7]. Companies actively address environmental, social, and governance (ESG) concerns by prioritizing and investing in sustainable practices. This strategy appeals to long-term investors and socially conscious consumers and contributes to brand reputation. Companies with a positive image in sustainable finance enjoy competitive advantages, flexible governmental regulation, and enhanced market valuation [8]. Sustainable finance, therefore, plays a crucial role in building a strong reputation by fostering trust and differentiation in increasingly competitive markets.

The decline of corporate reputations is often linked to increased unethical conduct, environmental degradation, and inadequate management oversight [9]. These factors erode competitive advantage and diminish stakeholder confidence in markets where consumers highly value corporate ethics. In such situations, stakeholders often stress the need for transparency and trust, which can be challenging to restore. This underscores the importance of immediate action to protect corporate reputations, with investment in sustainable finance emerging as a key strategy.

Corporate reputation has been thoroughly examined in the literature regarding how it is influenced by financial performance [10,11]. Also, studies have explored the impact of corporate social responsibility in building corporate reputation [12,13,14]. Despite studies on the factors that influence corporate reputation, how investment in sustainable finance by corporations and their impact on corporate reputation remained unexplored in the literature. These create a knowledge gap about how financial sustainability activities such as policy for reduction, green bond issuance, and environmental expenditures affect corporate reputation. Moreover, there are no empirical findings regarding the moderating effect of board diversity on the relationship between green bond issuance, environmental expenditures, and corporate reputation. Bridging this gap would provide critical insights into the impact of sustainable financing on investor and public confidence, ultimately enhancing corporate reputations.

This study contributes significantly to the literature by examining the impact of green bond issuance on corporate reputation. Green bonds indicate a company’s commitment to sustainability, enhancing its reputation. Issuers of green bonds are perceived as more ecologically responsible, which enhances their corporate reputation and attracts investors and consumers who prioritize ecological considerations.

This study contributes to the literature by probing the influence of environmental expenditure on corporate reputation. Organizations that emphasize environmental efforts and sustainable practices obtain a competitive edge. This relationship emphasizes that financing environmental projects is not simply an expense but an investment in cultivating a positive reputation and fostering closer ties with stakeholders.

The study also contributes to the literature by exploring the moderating effect of board diversity on the relationship between green bond issuance and corporate reputation. The varied opinions and backgrounds of the board members significantly improve strategic decisions about green bonds, enlightening the stakeholder. Diverse boards excel in recognizing and executing sustainability measures that resonate with a broad spectrum of stakeholders, thereby bolstering the corporate reputation by presenting ethical and impactful green bond bids.

The research investigates the influence of board diversity on the relationship between environmental expenditures and corporate reputation. A diverse board is more likely to guarantee that the company’s environmental investments are thorough and aligned with societal norms, enhancing corporate reputation. This highlights the importance of board diversity in assessing the influence of environmental expenditures on a corporate reputation.

This study emphasizes the importance of investment in sustainable finance in establishing a strong corporation. This would offer essential insights into how endorsing environmental activities can improve a business’s position in competitive marketplaces. The findings from this study would enhance the knowledge of reputation management and aid professionals in reconciling financial goals with reputation management, as well as legislators promoting corporate transparency and environmental responsibility.

2. Literature Review

2.1. Theoretical Background of the Study

Signaling theory, a cornerstone in understanding the influence of sustainable finance on corporate performance, has been extensively utilized in prior studies. It suggests that corporations, through initiatives like green bond issuances, signal their commitment to sustainability, attracting investors with a strong focus on environmental issues [15]. This signaling behavior provides a profound understanding of how organizations leverage sustainable finance to communicate their quality to stakeholders, thereby bolstering the company’s market value and financial performance [7].

On the other hand, agency theory brings to light the conflict of interest between owners (principals) and management (agents) [16]. It explains that managers prioritize their welfare over shareholders, especially with sustainable financing. However, agency theory also serves as a tool for management to adopt environmentally sustainable practices, thereby enhancing their reputation in sustainable financing and aligning their goals with the interests of long-term shareholders [17]. Understanding the internal dynamics of a company’s green finance decisions provides reassurance about aligning interests, although it may not fully address external stakeholders’ perspectives.

Stakeholder theory, while emphasizing the importance of considering the interests of all stakeholders, does not establish a direct link between sustainable finance and specific financial performance indicators. This theory asserts that sustainable finance can enhance a company’s performance and reputation by addressing the needs of various stakeholders, including consumers, employees, and environmental organizations. However, it does not provide a clear framework for understanding the financial implications of sustainable funding.

Signaling theory is the most relevant theory for this study. Although agency theory is advantageous in explaining managerial actions, it inadequately reflects public sentiment over a corporation’s sustainability efforts. Stakeholder theory enhances the understanding of corporate social responsibility, yet it does not explicitly consider the financial implications of sustainable funding. Conversely, signaling theory explains how firms utilize sustainability activities to signify their dedication to the market, illustrating the precise relationship between sustainable financing and enhanced performance metrics [18].

Signaling theory asserts that firms can exhibit their dedication to sustainability through signaling measures, such as substantial environmental investments or green bonds, while achieving financial success [19]. These improve business performance by diminishing the knowledge asymmetry between the corporation and external investors, refining decision-making.

Signaling theory underscores the significance of board diversity in strengthening a company’s signals about its participation in green finance projects. A diverse board enhances the reliability of a company’s communications, thereby reducing investor uncertainty. Companies can bolster their credibility in financial markets by showcasing their commitment to global environmental goals and diversity. Board diversity mitigates the signaling effect, augmenting the credibility of signals regarding the company’s sustainability performance.

Moreover, signaling theory explains how a diverse board might improve the organization’s sustainability indicators. Investors may view a diverse board as more likely to be comprehensive and thoughtful decision-makers, enhancing their confidence in the business’s long-term financing strategies [20]. Thus, the company’s performance depends on improving the credibility and reputation of its sustainability initiatives by implementing board diversity. This is attributable to the significant influence of environmental expenditures and green bond offerings on performance.

2.2. Hypothesis Development

The conceptual framework of this study is depicted in Figure 1, showing all the relationship and their hypotheses.

2.2.1. The Influence of Green Bond Issues on Corporate Reputation

As a symbol of commitment to ethical business practices and environmental sustainability, green bonds are crucial in promoting efforts that benefit the environment, thereby enhancing a company’s reputation [19]. These financial instruments inspire a positive public view of corporations by showcasing alignment with societal ideals, especially those related to sustainable development and climate change. Maltais and Nykvist [21] and Piñeiro-Chousa et al. [22] have shown that corporations issuing green bonds are seen as leaders in sustainability, garnering esteem by presenting themselves as progressive and committed to enduring environmental goals.

The issuance of green bonds is not just a financial decision but a strategic move that can significantly enhance a company’s brand and reputation, especially in industries with considerable environmental effects [23]. A company issuing green bonds undergoes a stringent external assessment to ensure funds are directed towards genuinely environmentally sustainable initiatives. This transparency not only enhances investor confidence but also aids the firm in developing its corporate social responsibility (CSR) brand. Sinha et al. [24] discovered that enterprises issuing green bonds enhance public perception and stock valuations as stakeholders emphasize environmental accountability and awareness.

Furthermore, green bonds are about sustainability and gaining a competitive edge in the market. They attract consumers and investors who are increasingly environmentally conscious [25]. Green bond issuers differentiate themselves from competitors and increase their market share as environmental factors gain prominence in investing and purchasing decisions. Islam et al. [26] and Lai et al. [27] found that organizations with a strong environmental reputation typically improve their financial performance, brand recognition, and consumer loyalty.

The issuance of green bonds is particularly beneficial for companies in environmentally sensitive industries such as oil, gas, and mining, as it can significantly improve public perception and mitigate reputational concerns [28]. By actively supporting eco-friendly projects and adopting sustainable practices, businesses can reduce the risk of negative publicity related to environmental issues. Green bonds serve as a shield, allowing companies to mitigate the adverse effects of environmental disputes by demonstrating authentic sustainable practices, thereby reducing reputational risks [19]. This protective function of green bonds is a key aspect of their value proposition. Based on these discussions, the study proposed that:

Hypothesis (H1).

Green bond issues positively and significantly influence corporate reputation.

2.2.2. The Influence of Policy for Emission Reduction on Corporate Reputation

Policy for emission reduction can significantly enhance a company’s reputation by demonstrating its commitment to environmental conservation and sustainability [29]. Organizations that embrace these policies are actively working to reduce their carbon footprint, reflecting the growing public concern about climate change. This dedication is pivotal in shaping a business’s reputation, as consumers, investors, and stakeholders increasingly favor companies that prioritize sustainability [30]. Companies firmly committed to emission reduction can build superior reputations, being seen as ethical commercial entities [31].

Furthermore, initiatives aimed at emission reduction, focusing on accountability and openness, can significantly enhance a business’s reputation [32]. Companies that openly commit to meeting emission targets and provide regular progress reports are generally perceived as more trustworthy and reputable. Swift [33] emphasized that transparency in environmental practices is a key factor in building stakeholder confidence, a crucial element in establishing a positive reputation. By showcasing their environmental initiatives, companies can strengthen brand loyalty, attract socially conscious consumers, and establish credibility [34].

Moreover, these policies can help a corporation enhance its competitiveness, as sustainability has become a key factor in the industry. Efforts to reduce emissions often lead to operational improvements, such as reduced energy consumption or pollution, which can benefit both the environment and the economy [35,36]. Companies that integrate environmental sustainability into their core operations can enhance their reputation by achieving economic and environmental goals. Consumers and investors are attracted to the benefits of meeting environmental goals and improving corporate reputation [5].

Emission reduction policies enable corporations to mitigate adverse environmental impacts, addressing their reputational issues [19]. In sectors like oil and gas, where environmental issues are often debated, adopting emission reduction measures helps companies evade governmental oversight and public reproach. Bagh and Iftikhar [37] found that companies employing policy-based emission reductions to manage environmental risks demonstrate enhanced reputational resilience amid environmental issues. This proactive strategy improves the organization’s public reputation and reduces any legal and financial risks associated with environmental harm or non-compliance. Based on these discussions, the study hypothesized that:

Hypothesis (H2).

Policy for emission reduction positively and significantly influence corporate reputation.

2.2.3. The Influence of Environmental Expenditures on Corporate Reputation

Environmental expenditure significantly enhances a company’s reputation, serving as a testament to its commitment to sustainable development and ecological responsibility. Implementing environmental initiatives, such as waste reduction, energy efficiency, and pollution mitigation, demonstrates a company’s dedication to minimizing its environmental footprint [31,38]. This commitment is highly esteemed by legislators, investors, and consumers, who view it as a proactive and responsible approach to environmental sustainability. Yu et al. [39] found that organizations that allocate greater resources to environmental issues enjoy a more favorable public image, as stakeholders perceive them as leaders in the fight against environmental hazards. This enhances their overall reputation and strengthens their competitiveness within the industry.

Furthermore, environmental expenditures enhance a company’s image by fostering transparency and trust [40]. Companies that openly share their environmental strategies and investments are seen as more accountable, enhancing public trust. As Tamimi and Sebastianelli [41] argue, firms that publicly disclose their environmental initiatives are more likely to receive positive feedback from stakeholders, as transparency in environmental efforts signals ethical governance. This transparency boosts the company’s image and nurtures lasting trust among the local community and investors, who are increasingly drawn to companies prioritizing sustainability [7].

Moreover, environmental expenditures enhance a company’s standing by reducing its vulnerability to regulatory and reputational concerns [42,43]. As international environmental standards grow more rigorous, organizations that emphasize sustainable practices may reduce penalties, legal disputes, and public backlash. Tu and Wu [44] asserted that environmentally conscious firms comply with regulations and leverage innovative tactics to achieve a competitive edge. Organizations can safeguard their brand and avert financial and reputational detriment by funding environmental initiatives, diminishing the probability of environmental scandals or non-compliance [45].

Environmental expenditure enhances a company’s reputation by aligning its operations with the increasing consumer demand for sustainable products and services [46]. Companies emphasizing sustainability initiatives are more likely to attract environmentally conscious consumers, as ecological concerns increasingly influence consumer choices. Ottman [47] argues that firms demonstrating authentic dedication to environmental conservation are more likely to gain client trust. Companies that exhibit ethical business practices enhance their reputation as sustainability leaders and strengthen customer connections by endorsing environmental initiatives. This alignment with consumer demand enhances the company’s reputation and contributes to its business success. This study proposed that:

Hypothesis (H3).

Environmental expenditures positively and significantly influence corporate reputation.

2.2.4. The Moderating Role of Board Diversity in the Relationship Between Green Bond Issue and Corporate Reputation

Board diversity shapes the relationship between green bonds and corporate reputation. It not only enhances stakeholder participation but also influences strategic decision-making. A diverse board, with its varied viewpoints on sustainability activities, can significantly enhance the credibility of green bond issuance. This is achieved by comprising individuals from diverse backgrounds, genders, and fields of expertise [48]. The reputational advantages of green finance are further amplified when investors and stakeholders perceive that companies with diverse boards demonstrate a more substantial commitment to ESG principles. Incorporating directors with sustainability experience improves market perceptions and ensures that green bonds align with long-term corporate responsibility goals [49].

A diverse board can reduce the risk of greenwashing by enhancing openness and accountability in administering green bonds [50]. A board with diverse perspectives is more inclined to perform a comprehensive assessment of the allocation of green bond proceeds to guarantee that the funds are directed toward genuinely sustainable initiatives. While it enhances investor trust, supplementary inspections strengthen connections with authorities and offer resources for social awareness [51]. The reputational benefits of green bonds are enhanced when stakeholders believe that a diverse and unbiased board supports sustainability assertions.

A diverse board may lack the requisite diversity to properly convey sustainability commitments to diverse stakeholders, reducing the reputational impact of green bond issuances [52]. A less diverse board may compromise the reputational advantages of green finance since it may struggle to foresee and respond to the concerns of socially conscious investors. In this context, board diversity serves as a strategic facilitator, ensuring that the issuance of green bonds transcends an essential financial choice and becomes an integral aspect of corporate sustainability efforts that bolster the company’s brand and stakeholder confidence [53]. Based on these assertions, the study proposes that:

Hypothesis (H4).

Board diversity positively and significantly moderates the relationship between green bond issues and corporate reputation.

2.2.5. The Moderating Role of Board Diversity in the Relationship Between Environmental Expenditure and Corporate Reputation

Board diversity can improve the relationship between environmental expenditure and corporate reputation by ensuring a wider range of viewpoints and expertise in sustainable decision-making. A heterogeneous board of members from various professional fields, life experiences, ethnicities, and genders can offer more thorough supervision of environmental investments [54]. This diversity enhances a company’s environmental accountability and promotes more judicious resource distribution toward significant sustainability efforts. Stakeholders are more likely to endorse and trust a company’s environmental activities when they perceive the leadership team as inclusive and comprehensive in its decision-making [55].

The ability of a firm to effectively convey its environmental expenditures to the public and stakeholders may be affected by the diversity of its board. A diverse board is more likely to understand the importance of stakeholder involvement and transparent sustainability reporting to ensure that environmental investments are successfully integrated into the company’s strategy rather than depending primarily on financial pledges [56,57]. This may lead to stronger partnerships with investors, regulators, and consumers who value environmental sustainability. Furthermore, diverse boards could enhance a corporation’s reputation as a socially responsible entity by endorsing more stringent ESG regulations [58].

The impact of board diversity on the relationship between corporate reputation and environmental expenditure is not always straightforward. It is heavily influenced by the organization’s corporate culture and governance framework. If board diversity is symbolic and does not translate into active participation in sustainability decisions, its effect may be minimal [59]. However, the impact can be significant when board members actively formulate environmental policies, ensure accountability, and align spending with long-term sustainability goals [60]. Diversity on the board can amplify the reputational benefits of environmental investments by promoting sustainability-oriented leadership and inclusivity, thereby presenting the company as progressive and accountable to stakeholders [61]. Based on these discussions, the study assumed that:

Hypothesis (H5).

Board diversity positively and significantly influences the relationship between environmental expenditure and corporate reputation.

3. Materials and Methods

3.1. Sample and Data

The United Kingdom leads in green finance, supported by a robust legislative framework that integrates sustainable financing into corporate governance [62]. Initiatives like the Green Finance Institute and the 2019 Green Finance Strategy align UK financial practices with international standards, such as the EU Taxonomy, promoting eco-friendly financial strategies and enhancing transparency [63]. These institutional efforts have driven companies to embed environmental considerations into their business strategies, increasing pressure to meet national sustainability goals, access green financing, and comply with regulations. Consequently, firms have become proactive in environmental initiatives to satisfy investor expectations and improve their reputation in a climate-conscious market. The UK’s statutory mandates for ESG disclosures, including climate-related risk reporting, further reflect its commitment to corporate sustainability beyond compliance [64].

This study focuses on non-financial firms listed on the London Stock Exchange (LSE) because of their leadership in sustainable finance adoption and mandatory ESG reporting requirements [65]. These companies face market pressures—from consumers, investors, and regulators—to maintain strong environmental and social governance reputations, linking sustainability closely to their corporate identity. Financial institutions are excluded due to their distinct regulatory frameworks and risk profiles, which could bias the analysis.

Using purposive sampling, the study selected 143 non-financial LSE-listed firms with complete, validated data from 2007 to 2023, extracted from Thomson Reuters Eikon Datastream. These firms represent diverse sectors and sizes but share comparable key financial metrics such as profitability, environmental investment, and operational scale, ensuring the results are robust and generalizable across the non-financial sector.

3.2. Dependent, Independent, and Control Variables

Table 1. Summary of dependent, independent, and control variables.

Index	Variable	Acronym	Formulae
	Dependent variable:
1	Corporate reputation	COPRT	ESG score
	Independent variables:
1	Green bond issues	GREBI	Log (total green bond issues)
2	Policy for Emission Reduction	POFEE	A binary variable that indicates if a company has put policies in place to reduce emissions within the selected years of the study; a value of 1 indicates that such a policy is in place, and a value of 0 indicates such policies are not in place.
3	Environmental expenditures	ENVEX	Log (total environmental expenditures)
	Control variables
1	Board diversity	BODDI	${\displaystyle \frac{Numberoffemaledirectors}{Totalnumberofboardmembersinthecorporateroom}}$ × 100
2	ROA	ROA	${\displaystyle \frac{Incomeafafterinterestandtax}{Averagetotalassets}}\times 100$
3	Firm size	FIRSIZ	Log (total assets)
4	COVID-19 pandemic	COVID19	The COVID-19 pandemic was measured as a dummy variable, coded 1 for the years 2020 to 2022—representing the pandemic period—and 0 for the years outside this range.

presents the summary of the dependent, independent, and control variables.

3.2.1. Dependent Variables

The dependent variable for this study was corporate reputation, which is the overall perception it creates among the public, investors, employees, and consumers [66]. It illustrates the degree to which a business is esteemed for its ethical practices, value enhancement, and dedication to honoring its commitments. The ESG score, a widely accepted measure of corporate reputation, was utilized to evaluate corporate reputation, assessing a company’s performance in three essential domains: environmental, social, and governance [67,68]. The ESG score serves as a significant measure of corporate reputation, reflecting the direct influence of a company’s market standing on the efficacy of its sustainability efforts, stakeholder engagement, and ethical practices [68].

3.2.2. Independent Variables

The independent variable was sustainable finance, defined as the incorporation of ESG principles into a corporate financial strategy to improve long-term sustainability and ethical responsibility [69]. Sustainable finance exemplifies a company’s dedication to harmonizing its financial activities with global sustainability goals to benefit society and the economy. This study evaluated sustainable finance using environmental expenditures, green bond issues, and emission reduction policies.

A green bond issue refers to issuing fixed-income instruments to finance environmental initiatives such as pollution mitigation, climate adaptation, and renewable energy [70]. This indicates sustainable finance, demonstrating a company’s commitment to making ecologically advantageous investments. Green bonds serve as a definitive financial instrument for sustainability, communicate a company’s environmental accountability to stakeholders, and align with global ESG investing trends—thereby enhancing a company’s reputation—rendering them a logical metric for sustainable financing [71].

The strategic framework of a company for mitigating greenhouse gas emissions through energy efficiency, regulatory adherence, and sustainable operational practices is referred to as its emission reduction policy [72]. This indicates sustainable financing, reflecting an organization’s commitment to long-term sustainability and environmental stewardship. Employing emission reduction initiatives as a benchmark for sustainable finance is logical since they demonstrate proactive climate risk management, enhance corporate accountability, and adhere to international sustainability standards—factors that bolster investor confidence and corporate reputation [73].

Environmental expenditure refers to the financial resources a firm allocates towards waste management, pollution mitigation, and investments in renewable energy to reduce its ecological footprint [74]. A company’s commitment to sustainability and responsible resource utilization is a reliable indicator of sustainable financing. Environmental expenditure should serve as a benchmark for assessing sustainable finance, demonstrating corporate initiatives to integrate environmental factors into financial decision-making, enhance regulatory compliance, and elevate corporate reputation—all of which ultimately attract environmentally conscious investors [75].

3.2.3. Control Variables

This study assessed the impact of three control variables—board diversity, return on assets (ROA), and firm size—on corporate reputation.

Board diversity is a crucial control variable that improves corporate governance, decision-making, and transparency [76]. It can bolster a company’s dedication to sustainable and responsible finance, affect stakeholder perceptions, and augment corporate reputation. By incorporating diverse perspectives, board diversity aids companies in aligning financial strategies with societal and environmental expectations [77]. Board diversity includes the gender, age, experience, nationality, and professional background of a company’s board of directors [78].

ROA indicates its efficiency in utilizing assets to generate profits, assessing its profitability relative to total assets [76]. ROA is an essential control variable for this study, as financial performance influences stakeholder perceptions of a company’s stability and reliability. A higher ROA signifies robust financial health, whereas a lower ROA may suggest inefficiencies or financial difficulties affect corporate reputation [79]. ROA ensures that elements beyond just financial performance influence corporate reputation.

Firm size is a crucial control variable. Large corporations generally possess greater financial resources for sustainability initiatives and face heightened public scrutiny, which may adversely affect their reputation [80]. Additionally, firm size affects visibility, stakeholder engagement, and financial stability, all contributing to corporate reputation [81]. By controlling for firm size, the study ensures that variations in reputation are not merely due to differences in scale but rather the effect of sustainable finance initiatives.

The COVID-19 pandemic was included as a control variable to account for its economic and social disruptions that could affect corporate reputation. This helps isolate the impact of sustainable finance practices during the study period.

3.3. Choice of Regression Model

We conducted endogeneity tests to determine this study’s most suitable estimation method. These tests were crucial in determining if a perfect correlation exists between the independent variables (green bond issues, environmental expenditure and policy for emission reduction) and the error term. The Durbin–Wu–Hausman (DWH) test, a widely accepted method for endogeneity evaluation, was employed. This test establishes whether independent variables correlate with the error term, indicating that unobserved variables may lead to biased associations [82]. The null hypothesis posits the absence of endogeneity, while the alternative hypothesis suggests its presence [83].

The findings presented in

Table 2. Endogeneity test.

	Corporate Reputation
Durbin–Wu–Hausman (DWH) test	23.201 ***

*** p < 0.01.

underscore a critical point. Endogeneity is present, indicating that the error term perfectly correlates with the independent variables. This discovery implies that the relationship between the independent and dependent variables may be distorted due to the influence of unobserved factors. Ignoring endogeneity could lead to misleading results, jeopardizing the research’s validity and overarching conclusions [84]. Also, the DWH test confirmed the presence of endogeneity, indicating a potential reverse causality between the variables. Specifically, corporate reputation may influence a firm’s decision to adopt sustainable finance strategies, while these strategies may also impact reputation.

Using Ordinary Least Squares (OLS) would be inappropriate here, as it assumes exogenous variables and yields biased estimates if endogeneity exists [83]. Fixed-effects models control for unobserved, time-invariant factors but fail to address simultaneity or dynamic feedback from lagged dependent variables. Random-effects models rely on the assumption that unobserved effects are uncorrelated with regressors, often violated in firm-level data, leading to biased estimates. Therefore, selecting an estimation method that accounts for these issues was critical.

Therefore, selecting an estimation method that accounts for these issues was critical. The Generalized Method of Moments (GMM) effectively addresses endogeneity by using instrumental variables correlated with endogenous regressors but uncorrelated with the error term [85]. This method corrects for endogeneity and reverse causality, producing consistent and unbiased estimates. GMM also controls for autocorrelated errors and unobserved firm-specific effects, while internal instruments mitigate bias from reverse causality, ensuring a reliable assessment of the causal link between sustainable finance and corporate reputation.

This study’s use of the GMM model promises more accurate and robust assessments of the relationship between corporate reputation, board diversity, and sustainable finance.

3.4. Model Specification

Our study employed three models to examine the relationship between sustainable finance and corporate reputation. Our first model examines the direct relationship between sustainable finance and corporate reputation. Our second model incorporates the moderating effect of green bond issues in the relationship between sustainable finance and corporate reputation, while our third model incorporates the moderating effect of board diversity. The models are presented below.

Model 1:

$$\begin{array}{ll}{\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}}_{NN,T}=& \beta 0{\left(\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}-1\right)}_{NN,T}+LogB1{\mathrm{G}\mathrm{R}\mathrm{E}\mathrm{B}\mathrm{I}}_{NN,T}+B2{\mathrm{P}\mathrm{O}\mathrm{F}\mathrm{E}\mathrm{E}}_{NN,T}\\ & +LogB3{\mathrm{E}\mathrm{N}\mathrm{V}\mathrm{E}\mathrm{X}}_{NN,T}+B4{\mathrm{B}\mathrm{O}\mathrm{D}\mathrm{D}\mathrm{I}}_{NN,T}+B5{\mathrm{R}\mathrm{O}\mathrm{A}}_{NN,T}\\ & +B6{\mathrm{F}\mathrm{I}\mathrm{R}\mathrm{S}\mathrm{I}\mathrm{Z}}_{NN,T}+B7{COVID19}_{NN,T}+U\end{array}$$

(1)

Model 2:

$$\begin{array}{ll}{\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}}_{NN,T}=& \beta 0{\left(\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}-1\right)}_{NN,T}+LogB1{\mathrm{G}\mathrm{R}\mathrm{E}\mathrm{B}\mathrm{I}}_{NN,T}+B2{\mathrm{P}\mathrm{O}\mathrm{F}\mathrm{E}\mathrm{E}}_{NN,T}\\ & +LogB3{\mathrm{E}\mathrm{N}\mathrm{V}\mathrm{E}\mathrm{X}}_{NN,T}+B4{\mathrm{B}\mathrm{O}\mathrm{D}\mathrm{D}\mathrm{I}}_{NN,T}+B5{\mathrm{R}\mathrm{O}\mathrm{A}}_{NN,T}\\ & +B6{\mathrm{F}\mathrm{I}\mathrm{R}\mathrm{S}\mathrm{I}\mathrm{Z}}_{NN,T}+B7{COVID19}_{NN,T}\\ & +B8{\mathrm{L}\mathrm{o}\mathrm{g}\mathrm{G}\mathrm{R}\mathrm{E}\mathrm{B}\times \mathrm{B}\mathrm{O}\mathrm{D}\mathrm{D}\mathrm{I}}_{NN,T}+U\end{array}$$

(2)

Model 3:

$$\begin{array}{ll}{\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}}_{NN,T}=& \beta 0{\left(\mathrm{C}\mathrm{O}\mathrm{P}\mathrm{R}\mathrm{T}-1\right)}_{NN,T}+LogB1{\mathrm{G}\mathrm{R}\mathrm{E}\mathrm{B}\mathrm{I}}_{NN,T}+B2{\mathrm{P}\mathrm{O}\mathrm{F}\mathrm{E}\mathrm{E}}_{NN,T}\\ & +LogB3{\mathrm{E}\mathrm{N}\mathrm{V}\mathrm{E}\mathrm{X}}_{NN,T}+B4{\mathrm{B}\mathrm{O}\mathrm{D}\mathrm{D}\mathrm{I}}_{NN,T}+B5{\mathrm{R}\mathrm{O}\mathrm{A}}_{NN,T}\\ & +B6{\mathrm{F}\mathrm{I}\mathrm{R}\mathrm{S}\mathrm{I}\mathrm{Z}}_{NN,T}+B7{COVID19}_{NN,T}\\ & +B8{\mathrm{L}\mathrm{o}\mathrm{g}\mathrm{E}\mathrm{N}\mathrm{V}\mathrm{E}\mathrm{X}\times \mathrm{B}\mathrm{O}\mathrm{D}\mathrm{D}\mathrm{I}}_{NN,T}+U\end{array}$$

(3)

NB: “NN” denotes non-financial companies; “T” denotes years; and “U” denotes error term.

4. Data Analysis, Results and Interpretations

4.1. Descriptive and Variance Inflation Analysis

Table 3. Descriptive statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max	Skewnwss	Kurtosis	VIF	1/VIF
Corporate reputation	2431	61.663	19.657	4.13	98.05	−0.420	2.569	-	-
Green bond issues	2431	6.288	0.737	3.602	8.559	0.197	3.166	1.912	0.523
Policy for emission reduction	2431	0.977	0.180	0	1	−5.200	2.184	1.336	0.749
Environmental expenditures	2431	1.510	0.820	0.534	3.117	0.712	2.333	1.212	0.825
Board diversity	2431	20.474	13.577	0	66.67	0.234	2.434	1.223	0.818
ROA	2431	5.231	0.643	0.031	32.541	0.172	1.783	1.034	0.967
Firm size	2431	56	18.032	2	134	0.203	0.293	1.021	0.979
COVID-19 pandemic	2431	0.176	0.381	0	1	0.104	0.203	1.032	0.968

presents the descriptive statistics of the dependent, independent, and control variables. The average corporate reputation score reflects a predominantly favorable perception of organizations, implying that stakeholders hold them in high regard. Consequently, robust brand equity, customer trust, and investor assurance are recommended. Variations indicate reputational risks for businesses requiring proactive management to enhance stakeholder engagement.

The average mean score for green bond issuance demonstrates the commitment to sustainable finance initiatives. This illustrates to stakeholders and investors their dedication to sustainability by showing that firms allocate financial resources to support activities that benefit society and the environment. The average score of the emission reduction policy signifies a robust dedication to decreasing greenhouse gas emissions. The companies aim to mitigate their environmental footprint and improve regulatory adherence to comply with global climate action goals. Thus, their operating efficiency and public perception may improve.

The average score for environmental expenditure reflects a steady deployment of financial resources to initiatives that emphasize environmental conservation. This indicates that corporations emphasize environmental concerns, advancing long-term ecological sustainability and enhancing regulatory compliance and community relations. The average board diversity score signifies sufficient representation of diverse groups on business boards. Companies strive to improve governance quality and better address the interests of many stakeholders by fostering diversity and incorporating various perspectives in decision-making.

The average ROA indicates that the companies in the sample uphold a stable level of profitability, which can enhance their corporate reputation. Increased profitability may signify superior financial health and operational efficiency, fostering stakeholder trust and maintaining a favorable public image in competitive markets. The average firm size suggests that the companies in the sample are of moderate size. This indicates they possess adequate resources to execute strategic goals, including those impacting corporate reputation, although they may encounter issues commonly linked to larger firms regarding flexibility or market agility.

The Variance inflation factor was used to assess the presence of multicollinearity among the independent and control variables. The VIF values for all the variables were below the threshold of 5 [86], indicating minimal multicollinearity concerns. This ensures that the model’s independent variables do not display multicollinearity, strengthening the results and validating the reliability of the regression estimates.

4.2. Matrix Correlation Analysis

The multicollinearity among the independent variables was assessed using matrix correlation analysis, and the results are presented in

Table 4. Matrix of correlations.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
(1) Corporate reputation	1.000
(2) Green bond issues	−0.051	1.000
(3) Policy for Emission Reduction	−0.029	−0.057	1.000
(4) Environmental expenditure	0.062	0.035	−0.006	1.000
(5) Board diversity	−0.022	0.062	0.098	−0.080
(6) ROA	0.032	0.382	0.003	0.001	0.401
(7) Firm size	0.005	0.203	0.038	0.523	0.091	0.183	1.000
(8) COVID-19 pandemic	−0.045	−0.004	−0.521	−0.083	−0.031	−0.093	−0.047	1.000

. Higher correlation across independent variables results in multicollinearity, exacerbating standard errors and complicating the identification of each variable’s distinct contribution to the dependent variable [87,88]. Multicollinearity occurs when the correlation coefficient exceeds 0.70 [89]. The findings indicate the absence of multicollinearity, as all correlation coefficients among the independent variables were below 0.70. This means that each independent variable can contribute uniquely to explaining the variation in the dependent variable without redundancy. The VIF values in Table 3 corroborate this finding by affirming the absence of multicollinearity.

Corporate reputation is left-skewed with moderate tails, suggesting a slight tendency toward higher scores. Green bond issues and board diversity show slight right skewness and near-normal distribution, indicating consistent reporting across firms. Emissions reduction policy is markedly left-skewed, reflecting that most firms have comprehensive strategies, while few do not. Environmental expenditures and ROA are right-skewed with light tails, implying more firms either invest heavily or have lower returns. Firm size distribution is symmetrical, representing a broad range of sizes uniformly.

4.3. Panel Unit Root

This investigation employed the Levin, Lin, and Chu (LLC) test and the Im, Pesaran, and Shin (IPS) test to evaluate the unit root of the panel data, and the results are shown in

Table 5. Panel unit root tests.

Variable	Levin, Lin, and Chu (LLC)		Im, Pesaran, and Shin
	Levels	1st Difference	Levels	1st Difference
Corporate reputation	−6.560 ***	−18.872 ***	−5.492 ***	−19.939 ***
Green bond issues	−9.538 ***	−25.045 ***	−3.440 ***	−21.287 ***
Policy for emission reduction	−7.723 ***	−16.617 ***	−8.343 ***	−23.932 ***
Environmental expenditure	−8.933 ***	−26.768 ***	−7.873 ***	−16.750 ***
Board diversity	−6.302 ***	−43.853 ***	−8.882 ***	−34.090 ***
ROA	−3.403 ***	−10.032 ***	−4.443 ***	−19.034 ***
Firm size	−9.009 ***	−13.532 ***	−8.023 ***	15.092 ***
COVID-19 pandemic	−11.094	−32.945	−12.973	−39.623

*** p < 0.01.

. Since non-stationary data results in biased results, conducting unit root tests is essential in this study. The IPS test accommodates heterogeneous unit root processes, whereas the LLC test presumes a uniform autoregressive parameter across all panels [89]. The alternative hypothesis of the tests posits that the variables are stationary, whereas the null hypothesis asserts that the variables possess a unit root. The test results indicated that the variables are stationary at both levels and that their first differences support the alternative hypothesis. These results ensure that the variables are appropriate for further analysis and would produce reliable and unbiased estimates.

4.4. Dealing with Endogeneity Issues

The results in Table 2 revealed an endogeneity problem, as the independent variables exhibited a perfect correlation with the error terms. To address this issue, several procedures were undertaken. The first step involved lagging the dependent variable (corporate reputation) and treating it as an independent variable, thereby mitigating endogeneity and enhancing model accuracy. The second step was lagging all independent variables, eliminating the endogeneity issues. This method, known as utilizing internal instrumental variables, was a key part of our methodology. We then incorporated external instrumental variables in the third step, mitigating the endogeneity problem. After these steps, other indices were used to validate the GMM findings.

The first indices were AR(1) and AR(2) to determine the validity of the GMM model. The statistical significance of the AR(1) test and the statistical insignificance of AR(2) indicates the validity of the GMM model [90]. Also, the AR(2) test validated the absence of auto-serial correlation [91]. The statistically insignificant p-values of the Sargan test suggest that the internal and external instruments were exogenous. The statistically insignificant p-values of the Hansen test indicate that the instruments were uncorrelated with the error term when the values range between 0.10 and 0.30). The results of our three models (Models 1, 2, and 3) met all these assessment indices, indicating the validity of the GMM model.

4.5. Testing of Hypothesis

Table 6. Two-step GMM (difference method).

Variables	Corporate Reputation (ESG Score)
	Model 1	Model 2	Model 3
Corporate reputation (−1)	0.532 *** (0.013)	0.531 *** (0.012)	0.543 *** (0.011)
Green bond issues	0.800 *** (0.0233)	0.146 *** (0.028)	0.117 *** (0.027)
Policy for emission reduction	0.044 *** (0.010)	0.049 *** (0.012)	0.054 *** (0.012)
Environmental expenditures	0.351 *** (0.119)	0.312 *** (0.130)	0.917 *** (0.173)
Board diversity	0.085 *** (0.024)	0.105 *** (0.041)	0.057 *** (0.014)
ROA	0.298 *** (0.045)	0.257 *** (0.048)	0.286 *** (0.046)
Firm size	0.382 *** (0.042)	0.401 *** (0.049)	0.444 *** (0.048)
COVID-19 pandemic	−0.573 *** (0.041)	−0.583 *** (0.042)	−0.602 *** (0.040)
Green bond issues ×board diversity		0.118 *** (0.040)
Environmental expenditure × board diversity			0.335 *** (0.102)
Number of observations	2144	2144	2144
AR(1)	0.021	0.011	0.033
AR(2)	0.445	0.484	0.563
Sargan test	0.632	0.698	0.783
Hansen test	0.144	0.149	0.157

*** p < 0.01.

presents the two-step difference in GMM, showing the influence of sustainable finance on corporate reputation. Based on these results, the hypothesis decisions were made.

The study demonstrates that the issuance of green bonds positively and significantly impacts ESG scores, and these findings support Hypothesis (H1). Therefore, the hypothesis was confirmed.

The investigation discovered that the emission reduction policy had a positive and significant impact on ESG scores. These findings support the hypothesis (H2) and confirm it.

The study discovered that environmental expenditures had a positive and significant relationship with ESG scores. These findings support the hypothesis (H3) and were confirmed.

4.6. Robustness Testing

This study’s robustness testing employed brand value as a substitute for the dependent variable to gauge corporate reputation. Brand value denotes a company’s worth derived from consumer trust, loyalty, and market positioning. It indicates the intensity of a company’s perception among consumers and investors, affecting pricing authority and market share.

Brand value is a significant measure of corporate reputation. It amalgamates tangible and intangible assets and is directly associated with consumer and investor perceptions. Brand value provides a definitive indicator of a company’s perceived standing, and it is a valuable instrument for assessing corporate reputation.

Table 7. Robustness testing.

Variables	Corporate Reputation (Brand Value)
	Model 1	Model 2	Model 3
Corporate reputation (Brand value) (−1)	0.569 *** (0.013)	0.569 *** (0.011)	0.568 *** (0.011)
Green bond issues	0.101 ** (0.050)	0.238 *** (0.045)	0.135 *** (0.049)
Policy for emission reduction	0.421 *** (0.103)	0.467 *** (0.122)	0.532 *** (0.144)
Environmental expenditures	0.682 *** (0.239)	0.623 *** (0.227)	0.244 *** (0.053)
Board diversity	0.029 *** (0.012)	0.085 *** (0.026)	0.096 *** (0.021)
ROA	0.847 *** (0.222)	0.135 *** (0.012)	0.697 *** (0.202)
Firm size	0.763 *** (0.118)	0.772 *** (0.119)	0.783 *** (0.115)
COVID-19 pandemic	−0.083 *** (0.009)	−0.087 *** (0.010)	−0.093 *** (0.011)
Green bond issues ×board diversity		0.567 *** (0.119)
Environmental expenditure × board diversity			0.245 *** (0.037)
Number of observations	2144	2144	2144
AR(1)	0.000	0.000	0.000
AR(2)	0.343	0.399	0.403
Sargan test	0.823	0.856	0.899
Hansen test	0.202	0.222	0.283

*** p < 0.01, ** p < 0.05.

presents the robustness testing carried out. The results from Table 7, which are robust to the findings presented in Table 6, provide strong support for the positive and significant impact presented in Table 6. The difference between the findings in Table 6 and Table 7, namely the coefficient estimations, further strengthens the validity of our research.

5. Discussion of the Findings

5.1. Impact of Sustainable Finance on Corporate Reputation (ESG)

The study demonstrates that the issuance of green bonds positively and significantly impacts ESG scores. In line with signaling theory, these findings affirm that companies can signal their commitment to sustainability through visible actions [92]. By issuing green bonds, companies communicate their dedication to promoting ecologically sustainable activities to stakeholders and investors. This practice not only boosts the company’s reputation but also elevates its ESG score, aligning with signaling theory and indicating that enterprises involved in green finance enhance their sustainability profile [93].

These findings indicate a growing interest among investors in sustainable investing, as many companies prioritize environmental conservation. Companies can mitigate their legislative risks and improve long-term profitability by issuing green bonds, which finance ecologically advantageous projects [19]. These actions illustrate a company’s capacity to attain a balanced integration of financial and environmental goals, thus enhancing its reputation among investors who value social responsibility.

The findings suggest that investors likely view companies issuing green bonds as more resilient and sustainable, with the potential for higher earnings and diminished long-term risks [94]. Management emphasizes the importance of green financing in improving ESG performance, recruiting socially responsible investors, and securing capital for environmental goals [95]. These contribute to the company’s overall success.

The investigation discovered that the policy for emission reduction exhibited a positive and significant impact on ESG scores. Signaling theory posits that companies utilize observable activities to convey their internal rules and practices to external stakeholders [96]. Companies exhibit their dedication to environmental responsibility and sustainability by implementing emission-reduction strategies. This enhances their ESG score, which evaluates the company’s reputation. The findings validate the signaling theory by showing that firms that adopt proactive environmental measures garner the esteem of their stakeholders [97].

These results stem from a worldwide initiative for environmental sustainability. Investors are progressively drawn to enterprises emphasizing environmental sustainability [98]. Companies can improve their long-term profitability through emission reduction strategies while reducing their exposure to environmental liabilities, regulatory risks, and reputational damage. These policies illustrate a company’s adaptation to changing environmental standards and resilience against future climate-related difficulties [99].

The findings underscore the strategic significance of sustainability for management. They indicate that investors perceive enterprises with extensive emission reduction strategies as more robust and sustainable, with the potential for enhanced profitability and diminished long-term risks [100]. This highlights the importance of sustainability in attracting socially responsible investors and enhancing business reputation. Such a strategic focus on sustainability can enhance a business’s capital accessibility and strengthen its long-term viability.

The study discovered that environmental expenditures had a positive and significant relationship with ESG scores. These findings align with signaling theory, which asserts that firms utilize behavior to exhibit their dedication to sustainability. Through investment in environmental projects, corporations exhibit their dedication to sustainable practices and mitigate their ecological footprint for their stakeholders [101]. The company’s reputation is bolstered by its dedication, boosting its ESG score. The findings align with signaling theory, as heightened environmental expenditure reflects a company’s proactive stance on environmental responsibility

These findings resulted from the rising demand for sustainable corporate operations. Over time, environmental expenditures enable firms to enhance sustainability and resilience while mitigating their ecological footprint [102]. Companies can alleviate potential brand harm and future regulatory issues by prioritizing sustainability and corporate social responsibility efforts.

The results suggest that investors are more likely to view enterprises with significant environmental investments as sustainable and responsible, potentially leading to diminished long-term risks and enhanced benefits [103]. These findings underscore the importance of incorporating environmental responsibility into corporate management strategy. By prioritizing environmental projects, the company bolsters its reputation and appeals to socially responsible investors, generating more income and sustainable economic prospects.

ROA was observed to have a positive and significant relationship with ESG scores. These findings align with signaling theory, which asserts that firms utilize observable behaviors to convey their performance and quality to stakeholders. An elevated ROA signifies that a corporation can exhibit financial stability and efficient asset usage concurrently through investments in environmental efforts [104]. A higher ESG score indicates enhanced efficiency and profitability, reflecting the company’s capacity to harmonize financial success with social and environmental accountability.

These findings illustrate the increasing significance of financial stability and profitability in maintaining and enhancing a business’s reputation. Upon attaining positive financial results, organizations might spend supplementary resources to fulfill ESG criteria and invest in environmentally advantageous technologies. These findings indicate that investors should see organizations with a superior return on assets as more ecologically sustainable and financially robust. The findings highlight the imperative for management to integrate financial and environmental performance, as this may enhance capital accessibility and bolster their reputation.

The firm’s size had a positive and significant effect on ESG scores. These findings align with signaling theory, which asserts that larger businesses are more prone to attract stakeholder interest due to their visibility and resources [105]. Due to their enhanced operational and financial resources, larger firms are generally more adept at investing in sustainable practices and enhancing their ESG performance. Their extent reflects a dedication to governmental, environmental, and social objectives.

These findings can be ascribed to the reality that larger firms have superior resources to efficiently implement and oversee sustainability programs [106]. Moreover, they are increasingly vulnerable to examination by regulators and investors, prompting firms to improve their ESG performance.

These findings suggest that larger firms may be more predisposed to fulfill ESG standards, which would attract investors interested in ethical investing. It underscores to management the imperative of utilizing a company’s scope to attain a leadership role in sustainability practices, enhancing its reputation and enabling access to funding.

The moderating relationship between green bond issuance and board diversity shows a positive and significant impact on ESG scores. These findings support signaling theory, which asserts that corporations can influence stakeholder perceptions by exhibiting their beliefs through observable actions. Board diversity enhances signaling credibility by incorporating varied perspectives and stronger oversight, which reduces the likelihood of greenwashing and strengthens stakeholder trust in sustainability-related disclosures and actions. Green bonds are a financial instrument that reflects an organization’s dedication to environmental sustainability [21]. This commitment is reinforced by a diverse and inclusive board that promotes the business’s adherence to ethical standards and the pursuit of environmental goals. The company’s ESG score is directly affected by the varied perspectives that a diverse board often contributes, which may impact social and environmental responsibility decisions.

This reflects an increased focus on corporate accountability and ecological sustainability. The issuance of green bonds signifies a company’s dedication to sustainability [21], whereas a diverse board reflects its capacity to tackle various perspectives and challenges [107]. Together, they create a compelling narrative about ethical corporate behavior.

These findings indicate that firms prioritizing green bond issuance and possessing diverse boards demonstrate enhanced ESG profiles, attracting investors focused on socially responsible investing. To improve their ESG performance and reputation and to create a diversified leadership team, management should prioritize sustainable finance alternatives, such as green bonds.

The interaction between environmental expenditure and board diversity had a positive and significant impact on ESG scores. These results align with the principle of signaling theory. This theory asserts that corporations utilize observable activities to convey their values and standards of excellence. Board diversity improves the credibility of environmental expenditures by providing broader oversight and accountability, reducing greenwashing concerns, and thereby enhancing stakeholder confidence and positively impacting ESG score performance. Board diversity reflects a dedication to inclusivity and effective governance [87], whereas environmental expenditures signify a commitment to sustainability [108]. The ethical business practices of a corporation are more successfully conveyed to external stakeholders when these two elements are aligned. The likelihood of choices favoring environmental sustainability projects and improving ESG ratings is augmented by board diversity.

The findings of this study stem from an enhanced understanding of the connection between sustainability and successful governance. Board diversity reflects a company’s capacity to adapt and thrive in a complex, evolving global market, while environmental expenditure signifies a company’s dedication to investing in the planet’s welfare [109]. These actions exemplify a company’s dedication to its environmental and social obligations.

These findings assert that firms emphasizing environmental sustainability and board diversity may attract investors due to their potential for diminished risks and long-term advantages. Management should adopt diversified leadership and sustainability project initiatives to improve stakeholder engagement, elevate the company’s ESG profile, and secure long-term success [110].

5.2. Impact of Sustainable Finance on Corporate Reputation (Brand Value)

The study reveals that green bond issuance had a positive and significant impact on brand values. These findings align with signaling theory, a key theoretical framework in our research. Signaling theory asserts that firms must convey their strategies and quality to external stakeholders through transparent operations [92]. As a signal of an organization’s dedication to sustainability and environmental stewardship, green bonds are crucial in influencing the company’s brand and reputation.

These findings are due to the rising demand from investors and consumers for ecologically responsible enterprises. As sustainability becomes more embedded in business plans, stakeholders view corporations that issue green bonds as proactive and progressive in their climate change mitigation efforts [111]. This bolsters the company’s brand equity and attracts socially responsible investors, augmenting its attractiveness.

These findings indicate that investors view corporations that issue green bonds as more reliable, stable, and dedicated to long-term sustainability [21]. These bonds improve market position, financial profitability, and brand strength. These findings highlight the strategic significance of green partnerships for management to bolster consumer loyalty and gain a competitive market edge by augmenting brand value and corporate reputation [112].

The investigation discovered that the emission reduction policy had a positive and significant impact on brand values. These findings support the signaling theory, which asserts that organizations utilize external behaviors to convey their internal processes to external stakeholders [96]. Companies augment their brand value by executing emission-reduction programs, demonstrating their dedication to environmental stewardship and sustainability. These practices evidence the company’s proactive stance on climate change, which will attract consumers, investors, and other stakeholders who value sustainability.

These outcomes are ascribed to the increasing significance of environmental sustainability in modern society. Companies sincerely dedicated to minimizing their ecological footprint consistently draw investment and commercial opportunities [113]. Emission reduction tactics enhance firms’ reputations as ethical and progressive while decreasing the probability of future environmental damage and regulatory measures [31].

The findings indicate that organizations with emission reduction policies had stronger brands, which advantage investors by enhancing consumer loyalty, improving financial performance, and mitigating reputation risk. More importantly, the results underscore the strategic advantages of incorporating sustainability into corporate operations. Corporations can secure long-term success in an increasingly ecologically conscious market by prioritizing environmental responsibility, appealing to socially aware investors, and enhancing brand value.

The study discovered that environmental expenditures had a positive and significant relationship with brand values. These findings align with signaling theory, which asserts that organizations openly exhibit their dedication to particular values and behaviors. By augmenting their environmental expenditures, firms exhibit their commitment to sustainability and eco-friendly efforts, thereby apprising stakeholders of their environmental obligations [114]. This elevates the brand’s worth and augments public perception.

This outcome is due to the growing preference among consumers and investors for enterprises emphasizing environmental sustainability. As sustainability gains prominence in investment strategies and purchasing decisions, companies that emphasize environmental initiatives are viewed more favorably [115]. These expenditures boost the company’s reputation as a socially responsible, progressive entity that attracts investors and consumers who prioritize sustainability while reducing its environmental impact.

These findings indicate that companies making significant environmental investments tend to possess more resilient and robust brand values, which enhance consumer loyalty and long-term profitability. This emphasizes the strategic imperative of financing management’s sustainability activities. In doing so, businesses enhance the environment, strengthen their brand, elevate their reputation, and promote enduring success in a market increasingly centered on sustainability.

ROA was observed to have a positive and significant relationship with brand values. Signaling theory posits that organizations employ external behaviors to communicate information regarding performance and quality. A higher ROA enhances a company’s brand value and reputation by demonstrating operational effectiveness and financial stability [116]. Elevated returns on a corporation’s assets signify effective management and strategy, indicating its capacity to generate value efficiently.

Investors, consumers, and other stakeholders tend to associate reliability, credibility, and sustainability with substantial financial success [117], propelling these findings. A high ROA enhances a company’s brand value by evidencing that the organization is well-managed, efficient, and capable of handling debt.

Investors perceive enterprises with higher ROA as more likely to endure and secure long-term financing. Higher ROA is a strategic initiative for management to elevate financial performance and brand visibility, bolstering the enterprise’s success and market competitiveness [118].

The firm’s size had a positive and significant effect on brand values. These findings support the signaling theory that larger firms have enhanced market presence, resources, and influence, collectively fostering a higher brand’s establishment [119]. Larger firms often benefit from economies of scale, enhanced visibility, and the ability to endure market changes. These benefits enhance financial prosperity, cultivate brand awareness, and convey reliability and stability to investors and consumers.

This finding is substantiated by the fact that larger enterprises generally have a more established customer base and recognized brands, strengthening their market position [120]. Moreover, they possess superior capabilities to offer support in marketing, creative, and customer satisfaction efforts that augment their brand’s value.

Investors may see these larger enterprises as more reliable and profitable, rendering them attractive investment prospects. Management may make strategic decisions and ensure the company invests in areas that enhance its brand while promoting long-term growth and market leadership by understanding the influence of firm size on brand value.

The moderating relationship between green bond issuance and board diversity has shown a positive and significant impact on brand values. These findings indicate that diverse boards substantially improve a company’s reputation by shaping its long-term financial strategies [121]. A firm’s issuance of green bonds signifies its dedication to environmental sustainability, enhancing its brand value. Nonetheless, the impact becomes more evident when considering board diversity. Board diversity strengthens the credibility of green bond issuance by fostering transparency and accountability, which enhances stakeholder confidence and positively influences brand values through perceived ethical and inclusive governance. Due to their varied viewpoints and expertise, diverse boards facilitate more thorough decision-making, improved risk management, and more inventive sustainability solutions [122]. As a result, the brand’s reputation is strengthened due to heightened confidence among investors and consumers.

This result stems from the growing significance of sustainability and diversity in modern corporate governance. Investors and stakeholders increasingly seek diversification to indicate a company’s capacity to adjust to changing market dynamics and societal demands, even though green bonds signify a dedication to environmental stewardship [19]. The amalgamation of these factors yields a more resilient and robust brand.

These findings indicate that businesses dedicated to issuing green bonds and possessing specialized board members can offer investors enhanced long-term value and stability. The findings illustrate to management the strategic advantages of implementing diversity-driven environmental policies. This strategy may bolster stakeholder confidence, augment brand value, and give firms a competitive edge.

The interaction between environmental expenditure and board diversity had a positive and significant impact on brand values. These findings demonstrate how public perception of a firm is influenced by varying leadership and environmental commitment. Board diversity reinforces the trustworthiness of environmental spending, projecting a stronger ethical commitment that resonates with stakeholders and boosts brand values through improved perception of authenticity and responsible leadership. Board diversity reflects a company’s capacity for inclusive decision-making, innovation, and risk management [123]. Environmental expenditure demonstrates its dedication to sustainability. These factors exert a greater synergistic effect, augmenting the brand’s reputation. Organizations that endorse environmental initiatives and exhibit diverse leadership demonstrate their commitment to sustainability and adaptability to evolving perspectives and societal norms.

Companies prioritizing environmental investment are viewed positively, as many now regard corporate sustainability as a core value. Board diversity enhances credibility due to its frequent association with improved governance practices, more innovation, and superior problem-solving capabilities [124]. These encapsulate a corporation’s whole strategy for tackling current corporate difficulties [125].

These findings suggest to investors that companies with diverse boards and substantial environmental expenditures are likely to possess superior and more enduring brand values. They underscore the need for management to integrate diversity and sustainability into business strategy, enhance brand strength, and promote long-term corporate success.

6. Conclusions, Managerial Implications, Limitation of the Study, and Future Directional Studies

The study examined the impact of sustainable finance on corporate reputation of the firms listed on the LSE. A purposive sampling yielded 17 years of data from 143 non-financial companies from the Thomson Reuter Eikon DataStream between 2007 and 2023. In dealing with the issue of endogeneity and auto-serial correlation, the GMM was employed to provide reliable and unbiased estimation results. The study revealed a positive impact of green bond issues, environmental expenditures, and policy for emission reduction on corporate reputation. The moderating relationship between green bond issues, environmental expenditures, and board diversity revealed a positive and significant relationship with corporate reputation.

These findings underscore the pivotal role of sustainability initiatives in bolstering the brand value of companies listed on the LSE. The implications for management are clear—a company’s environmental expenditures profoundly impact its reputation, encompassing investments in various sustainability efforts and emission reduction measures. This is a strategic directive. Managers must prioritize sustainable activities and champion environmental projects aligning with consumer expectations and legal requirements. A robust plan would involve setting explicit, measurable sustainability goals, integrating them into the company’s overarching strategy, and regularly updating stakeholders on environmental progress through sustainability reports and marketing efforts.

Another key finding is that a diverse range of boards significantly enhances a business’s reputation. Establishing separate boards of directors improves governance and decision-making, increasing brand value. Managers can foster diversity in their leadership teams by selecting individuals from diverse backgrounds, experiences, and fields. To ensure that the board reflects a variety of perspectives and to encourage the engagement of diverse talent within the firm, entities might consider developing mentoring programs, educating employees about unconscious bias, and setting diversity goals.

Moreover, the findings suggest that green bonds could significantly enhance a company’s brand equity. Companies committed to financial and ecological performance should consider issuing green bonds to fund projects that improve environmental welfare. Companies can collaborate with financial institutions to assess the feasibility of green bonds and develop a clear communication plan highlighting these projects’ positive environmental impact to investors, consumers, and stakeholders.

The correlation between ROA and brand value underscores the importance of prioritizing financial performance to enhance reputation. Firms must focus on operational efficiency, asset utilization, and cost management to achieve improved profitability. Pragmatic solutions such as regular financial audits, investment in cutting-edge technology or methodologies, and performance improvement initiatives can significantly enhance operational efficiency and profitability. When implemented effectively, these measures can inspire a sense of motivation and drive to improve the company’s financial condition and brand standing.

The accessibility of data significantly influenced our study’s sample size. Despite the initial wealth of data from Thomson Reuters Eikon DataStream, we meticulously filtered out companies with missing data for many years and variables unavailable for some companies. This rigorous process resulted in a sample size of 143 companies with complete data for the selected years, ensuring the robustness of our findings.

Furthermore, no prior studies have explored a similar relationship that compared our study findings to prior studies to ascertain whether the findings of our study support prior studies or contradict it during the discussion of the findings. This is because our research uniquely filled a substantial gap in the literature.

While ESG scores serve as standardized, quantifiable proxies for corporate reputation, they have clear limitations. Their reliance on public data and inconsistent evaluation methods may prevent them from reflecting stakeholders’ current perceptions or capturing deeper reputational dimensions shaped by media and public sentiment. A more comprehensive view can be achieved by integrating stakeholder surveys, media analyses, and reputation rankings alongside ESG metrics.

This study is limited to non-financial firms in the United Kingdom, which restricts the applicability of its findings to other regions with different regulatory or market conditions. It may also reflect survivorship bias, as it includes only firms with complete ESG data, excluding those that were less transparent or underperforming.

Future research could address these limitations by conducting cross-national comparisons to examine how legal and cultural contexts shape corporate reputation and sustainable finance behavior. Qualitative methods, such as executive interviews, may also uncover practical challenges in implementing initiatives like green bonds. Exploring how institutional and cultural dynamics influence stakeholder perceptions would further enhance our understanding of reputation management across settings.