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The effects of
Between cost and value sustainability
Investigating the effects of sustainability reporting
reporting on a firm’s performance
Amina Buallay 481
Brunel University, London, UK and
Ahlia University, Manama, Bahrain Received 5 December 2017
Revised 12 May 2018
26 September 2018
Abstract 10 December 2018
20 December 2018
Purpose – There are wide debates about the costs and benefits of sustainability reporting. The purpose of this 24 December 2018
paper is to investigate the relationship between sustainability reporting and a firm’s financial, operational and Accepted 6 January 2019
market performance in order to determine when sustainability reporting benefits a firm and when it adds cost.
Design/methodology/approach – This study examined 342 financial institutions within the 20 countries
that top the list of achievers of sustainable development goals for the 10 years 2007 through 2016, for a total of
3,420 observations. The independent variable is the environmental, social and governance (ESG) score; the
dependent variables are performance indicators (return on assets, return on equity and Tobin’s Q). Two types
of control variables are used in this study: firm level and country level.
Findings – The findings deduced from the empirical results demonstrate that, on the one hand, ESG
positively affects market performance, which supports value creation theory. On the other hand, ESG
negatively affects financial and operational performance, which supports cost-of-capital reduction theory.
Research limitations/implications – This study aims to find how sustainable disclosure can and does
play a role in contributing towards performance of financial institutions to eventually achieve country’s
sustainable development goals.
Practical implications – The study provides insights into the effect of sustainability reporting on different
perspectives of business performance, which might be utilised by financial institutions to re-arrange their
disclosure policy to be aligned with their strategy.
Originality/value – This study sheds light on the rare prior studies that relate sustainability reporting to
indicators of business performance (operational, financial and market).
Keywords Sustainability reporting, Performance, ESG disclosure, Financial institutions, SDG’s countries
Paper type Research paper

1. Introduction
Before the financial crisis, the banking and financial service sectors were responding more
slowly than other sectors to sustainability challenges ( Jeucken, 2002). Jeucken and Bouma
(1999) stated that banks were slow in examining the social and environmental impact on their
performance. According to Jeucken (2004), banks were not interested in their environmental
impact. Additionally, Earhart et al. (2009) found that the financial sector was still behind other
sectors in terms of managing environmental and social impacts.
In 2008, after the financial crisis, some banks were able to survive and some even continued
to grow, while others collapsed (Earhart et al., 2009). Banks that were able to survive and grow
were banks that operated sustainably and focused on social, environmental and governance
factors (Earhart et al., 2009). As a result, in order to survive, banks are starting to focus on
environmental and social value, in addition to financial value.
Since the financial crisis, many studies have observed that banks and financial
institutions have become the leading sector in sustainability reporting (Husted and de
Sousa-Filho, 2017; Kuzey and Uyar, 2017; Pryshlakivsky and Searcy, 2017). However,
despite the significant attention researchers have paid to sustainability reporting, there are
Journal of Applied Accounting
few studies that focus on the relationship in the banking sector between the three Research
dimensions of sustainability (environmental, social and governance (ESG)) and performance Vol. 20 No. 4, 2019
pp. 481-496
(i.e. De la Cuesta-González et al., 2006; Branco and Rodrigues, 2008; Chih et al., 2010). © Emerald Publishing Limited
0967-5426
Chih et al. (2010) examined only the determinants of corporate social responsibility in DOI 10.1108/JAAR-12-2017-0137
JAAR financial institutions. However, Branco and Rodrigues (2008) argued that little attention has
20,4 been paid to sustainability reporting in the area of environmental impact by companies in
banking and financial services.
The current study goes beyond prior research by connecting the three sustainability
dimensions (ESG) with different indicators of business performance: operational
performance, measured by return on assets (ROA); financial performance, measured by
482 return on equity (ROE); and market performance, measured by Tobin’s Q (TQ). The effects
of sustainability reporting on multiple performance dimensions can give us further insights
into ESG’s impact. More specifically, this study focuses on a sample from the 20 countries
that top the list of achievers of sustainable development goals for the 10 years 2007 through
2016 (SDG Index and Dashboards Report, 2017). These countries are achieving sustainable
agenda goals through a focus on the importance of multi-stakeholder partnerships; an
emphasis on accountability and measurement; and an acknowledgement that
environmental, social and economic goals are interconnected. These countries also vary
by region, culture, economic and commercial environment, level of competitiveness and
robustness of investment environment, and we assume that this diversity gives us more
broadly applicable results about sustainability reporting.
Despite the above facts, there has been little accounting focus on this potentially
important area of research in such countries. This study assesses how sustainability
disclosure can and does contribute to the performance of financial institutions as part of a
country’s efforts to achieve its sustainable development goals.
Our study contributes to the literature in many ways. First, it sheds light on the rare
prior studies that relate sustainability reporting to indicators of business performance
(operational, financial and market). Second, it provides empirical evidence on the level of
sustainability reporting in financial institutions in those countries that are most successful
in achieving sustainable development goals. Thus, we expect the results to broaden the
understanding of sustainability at the level of the individual firm, which eventually affects a
country’s sustainable development. Finally, such information will help stakeholders,
investors, decision makers, regulators, policy makers and scholars to improve their
knowledge about sustainable reporting practices.
The study is divided into the following sections: Section 1 is the introduction. Section 2
reviews the literature and develops hypotheses. Section 3 presents the research methodology
and design. Section 4 reports the descriptive statistics. Section 5 presents empirical analysis
results. Section 6 discusses conclusions, recommendations and the scope for further research.

2. Literature review and hypothesis development

2.1 The significance of sustainability reporting
Herzig and Schaltegger (2006) suggested five benefits of sustainability reporting for firms:
(1) enhancing the firm’s reputation;
(2) gaining a competitive advantage;
(3) improving transparency;
(4) enabling comparison with competitors; and
(5) assisting employees in recognising the firm’s sustainable development activities.
Other previous literature (Lindgreen et al., 2009; Maignan and Ferrell, 2001; Orlitzky et al.,
2003) has stated that sustainability reporting enables firms to increase revenues and reduce
costs. Additionally, sustainability reporting often leads to superior external and internal
decision making and greater transparency, simultaneously enforcing financial stability
(Eccles et al., 2015; Eccles and Saltzman, 2011).
2.2 Theories supporting sustainability reporting The effects of
Approaching the topic from a firm’s point of view, Deegan (2014) demonstrated that even sustainability
though there are many theories that analyse the motivation of firms to report sustainability reporting
information, sustainability reporting motives are quite often associated with legitimacy,
standards, regulations and stakeholders. Deegan et al. (2002) stated that firms can disclose
information to manage stakeholders in order to avoid their disapproval and gain legitimacy.
Thus, managers have a motivation to disclose information about their activities to 483
stakeholders (Deegan et al., 2002; Bhattacharyya and Cummings, 2015). Coleman (2011)
found that there are growing efforts in firms to report sustainability information to
stakeholders, and these efforts create a legitimacy crisis (Bhattacharyya and Cummings,
2015) for their continuity (Deegan, 2014).
Suchman (1995) defined legitimacy as “generalized perception or assumption that the
actions of an entity are desirable, proper, or appropriate within some socially constructed
system of norms, values, beliefs, and definitions” (p. 574). An organisation allowed to work
in a society is responsible to society for how it works and what it does, because it uses the
natural resources of the public and hires members of the public as employees (Deegan,
2004). If stakeholders feel that a firm has violated the social contract, the existence of the
firm will be threatened. Thus, legitimacy is an important strategic resource a firm relies on
for survival (Dowling and Pfeffer, 1975). Legitimacy theory states that a firm must consider
the rights of the public, not only the rights of the shareholders. Failure to respond to societal
expectations may result in penalties being imposed by the society in the form of restrictions
on a firm’s operations and on the demand for its products. To sum up, social and
environmental studies often rely on legitimacy theory to explain why management should
disclose social and environmental actions as part of a firm’s business strategy. In fact,
legitimacy theory could hold that sustainability activities may help a firm strengthen its
legitimacy by demonstrating that it can meet the competing needs of its stakeholders and at
the same time operate profitably. A firm would thereby be perceived as a member of its
community, and its operations would be sanctioned.
In contrast, from a stakeholder’s point of view, stakeholder theory states that a firm
has a responsibility towards its other stakeholders, which include customers, suppliers,
government, employees and public society (Ferrell et al., 2010). Sustainability reporting by
firms is regarded as a significant issue to a broad range of stakeholders. McElroy and
Van Engelen (2012) argued that stakeholders play a crucial role in guaranteeing that firms
manage, measure and report their sustainability strategies. Thus, a firm is based not only on
profit maximisation, but also on maximisation of sustainability value (Martirosyan and
Vashakmadze, 2013).
The consideration of stakeholder needs and interests is a main driver for business
sustainability (Foley, 2001). Parmigiani et al. (2011) stated that stakeholders’ disclosure
preferences could vary according to the levels of power, legitimacy and urgency (Mitchell
et al., 1997), which could affect the significance of sustainability reporting. For this reason,
firms tend to use sustainability information to either manage or manipulate the firm’s
sustainability situation so as to create a positive image among their stakeholders. Gray et al.
(1995) argued that there is an interaction between legitimacy theory and stakeholder theory.
Therefore, this study considers a combination of the legitimacy and stakeholder theories in
analysing the relationship between ESG and a firm’s performance.
Finally, from the point of view of stakeholders and managers, agency theory suggests that
principal–agent problems can arise from conflict of interest between the principals and agents
(Baker, 1992). According to Frankforter et al. (2000, p. 322), for the most part “managers/agents
[…] stay focused on the need for profitable operations to the extent that they own company
stock and/or have part of their compensation contingent on strong financial performance
(interest alignment)”, and “[…] the interests of shareholders/ principals are kept in mind in
JAAR major corporate decisions by a vigilant board of directors (monitoring)”. These agents,
20,4 therefore, are retained by the shareholders to reduce risk or exposure, and costs, while
increasing returns and value for the firm. In the risk–return relationship, generally, one can
expect to obtain greater returns for increasing levels of risk, but competitive advantage is
achieved by continuously increasing returns for a given level of risk, or by continuously
increasing returns while simultaneously reducing levels of risk.
484
2.3 Sustainability reporting and performance
Two different perspectives on sustainability appear in the literature. The first, the cost-of-
capital reduction perspective, argues that investing in ESG increases costs and brings
economic consequences, resulting in lower market values. The second, the value creation
perspective, argues that ESG is a tool to generate competitive advantage and improve
financial performance. However, there are mixed or even conflicting results from research
into the effects of ESG (Orlitzky et al., 2003; Margolis et al., 2009; Fulton et al., 2012). Table I
differentiates between the two indicators of sustainability.
As Table I shows, there are conflicting results about the effects of sustainability on
performance. In brief, building an ESG policy within a company has some costs (which are
discussed by the cost-of-capital reduction camp), which the firm expects to be
compensated for by positive performance (which is discussed by the value creation camp).
Given the presence of two opposing theories, we investigated the effects of ESG on several
indicators of business performance (operational, financial and market) to answer
questions about why ESG has variable effects on performance. Why does ESG sometimes
prove to be a net cost while other times it is a net benefit? Does ESG have different effects
on different performance indicators? To answer these questions, we developed the
following hypotheses:
H1. There is a positive relationship between ESG and operational performance (ROA).
The ESG practices could be seen as part of a firm’s goodwill effort, so a positive ESG score
would lead to a greater ROA:
H2. There is a positive relationship between ESG and financial performance (ROE).

Cost capital reduction perspective Value creation perspective

Friedman (1962) stated that the main purpose of a
firm is solely to increase the wealth of its
stakeholders, and any other non-financial objectives
will make the firm least effective
Porter (1991) assumed that sustainable firms are
expected to have lower costs in relation to future
regulations
Mackey et al. (2007) and Zivin and Small (2005) debated
that investors expect from a firm to increased its wealth
without sustainable policy, and that sustainable policy
should be done by non-profit organisation
El Ghoul et al. (2011) found the lower cost of capital
the higher sustainable reporting score
Marsat and Williams (2014) supported Aupperle et al.
Table I. (1985) who argued that investing in ESG increases
Sustainable reporting costs and leave an economic consequence, resulting in
perspectives lower market values
Porter (1991) argued that firms putting established
regulations before competitors are leaders in best
practices, which promoted its wealth and eventually
the wealth of its stakeholders
ESG is a tool to generate competitive advantages and
to improve financial performance (Alexander and
Buchholz, 1978; Porter and Van der Linde, 1995;
McWilliams et al., 2006; Porter and Kramer, 2006)
Sharfman and Fernando (2008) debated that the
disclosure of the non-accounting information gives us an
indicator about how the firm controls the business risks.
Therefore, higher ESG scores the lower business risks
Eccles et al. (2012) stated that sustainable firms lead
to superior performance
Many studies support the ESG value creation theory
(Luo and Bhattacharya, 2009; El Ghoul et al., 2011;
Goss and Roberts, 2011; Cheng et al., 2014; Eccles
et al., 2014; Kaspereit and Lopatta, 2016)
As noted in the literature, sustainability action is expected to create higher demand and The effects of
greater growth for firms. These firms should realise ESG’s added value, which lowers the sustainability
business risks: reporting
H3. There is a positive relationship between ESG and market performance (TQ).
The positive relationship between ESG and firm value is driven by cash flow, which leads to
higher market prices.
485
3. Research methodology
3.1 Study population, sample and data resources
The study depends on the selected sample, which is a set of 3,420 observations derived from
342 listed financial institutions from the top 20 countries in achieving the sustainable
development goals stock exchange – as classified by SDG Index and Dashboards Report
(2017) – for 10 years from 2007 to 2016 (see Table II).
The data used in this study were collected from the Bloomberg database. Bloomberg
scores corporations based on their ESG data disclosure. The scores are based on Global
Reporting Initiative guidelines (Suzuki and Levy, 2010). There are four major categories:
Environmental Disclosure Score (ED), Social Disclosure Score (CSRD), Governance
Disclosure Score (CGD) and ESG Disclosure Score (overall combination of Environmental,
Social and Governance Disclosure Scores) (Buallay and AlDhaen, 2018).

3.2 The study variables and measurement

The independent variable (sustainability reporting) was measured using three disclosure
indicators: environmental disclosure, corporate social disclosure and corporate governance
disclosure (de Villiers et al., 2017; Buallay, 2019). The dependent variables (firm’s performance)
have been measured using operational performance (ROA), financial performance (ROE) and
market performance (TQ) (Buallay et al., 2017; Hamdan et al., 2017). Finally, two types of

No. of firms No. of observations

Country Banks Investment Insurance Total Banks Investment Insurance Total

Sweden 9 15 1 25 90 150 10 250

Denmark 3 3 1 7 30 30 10 70
Finland 3 3 0 6 30 30 0 60
Norway 1 3 2 6 10 30 20 60
Czech Republic 6 0 0 6 60 0 0 60
Germany 7 4 4 15 70 40 40 150
Austria 5 1 2 8 50 10 20 80
Switzerland 11 6 7 24 110 60 70 240
Slovenia 2 0 0 2 20 0 0 20
France 9 0 1 10 90 0 10 100
Japan 82 35 16 133 820 350 160 1,320
Belgium 3 4 1 8 30 40 10 80
The Netherlands 5 1 1 7 50 10 10 70
Iceland 4 0 0 4 40 0 0 40
Estonia 1 1 0 2 10 10 0 20
UK 10 0 0 10 100 0 0 100
Canada 22 8 14 44 220 80 140 440
Hungary 8 0 0 8 80 0 0 80
Ireland 8 0 4 12 80 0 40 120
New Zealand 3 1 1 5 30 10 10 50 Table II.
Total 202 85 55 342 2,020 850 550 3,420 Sample selection
JAAR control variables were used in this study. First were the country-specific control variables. In
20,4 economics-based sustainability reporting research, the problem of endogeneity often appears.
Endogeneity consists of three problems: correlated variables, reverse causality and
simultaneity (Nikolaev and Van Lent, 2005; Larcker and Rusticus, 2010). Therefore, we
considered a country’s specifications as control variables in order to deal with these issues,
where factors affecting the decision to present a sustainability report are interconnected with
486 economic consequences. Our control variables were gross domestic product (GDP),
governance (GOV) and unemployment (UNEM). The second set of control variables we
used were firm-specific control variables, such as total assets (TA) and financial leverage
(FLEV; see Table III).

3.3 Study model

In order to measure the relationship between sustainability reporting and a financial
institution’s performance, the study estimated the linear model as follows:

Perf itg ¼ b0 þb1 EDitg þb2 CSRDitg þb3 CGDitg þb4 ESGitg þb5 TAitg

þb6 FLEVitg þb7 GDPitg þb8 UNEMitg þb9 GOVitg þeitg ;

where Perf is a continuous variable; the dependent variable is the performance measured by
three models (i.e. ROA model, ROE model and TQ model). β0 is the constant and β1–9 is the
slope of the control and independent variables. The independent variable is sustainability
disclosure measured by four indicators (ED, CSRD, CGD and ESG). The firm’s control
variables are (TA and FLEV ) and the country’s control variables are (GDP, GOV and
UNEM). ε is random error. i stands for the financial institution; t stands for the period; and g
represents the country.

Variables Labels Measurements

Dependent variables
Operational performance
Financial performance
Market performance
Independent variable
Environmental disclosure
Corporate governance
disclosure
Corporate social
responsibility disclosure
ESG disclosure
Control variables
Bank specific
Financial leverage
Total assets
Macroeconomic
GDP
Governance
Table III. Unemployment
Variable measurement
ROA Net income divided by total assets
ROE Net income divided by shareholder’s equity
TQ The (market value of equity + book value of short-term liabilities) ÷ book
value of assets
ED Bloomberg index which measures the disclosure of bank’s energy use,
waste, pollution, natural resource conservation and animal treatment
CGD Bloomberg index which measures the disclosure of corporate
governance code
CSRD Bloomberg index which measures the disclosure of the bank’s
business relationships, bank donation, volunteer work, employees’
health and safety
ESG Bloomberg index which combine the ED, CGD and CSRD
FLEV The degree to which a bank uses fixed-income securities
TA The LN of total assets of the Bank
GDP The gross domestic product of the country
GOV The public governance level of the country
UNEMP The number of unemployed people divided by the number of people in
the labour force
3.4 Model validity The effects of
The linear regression model was used to test the relationship between sustainability sustainability
reporting and performance. Therefore, we ran several tests to check whether the data to be reporting
used in this study met the conditions of the linearity assumptions.
To secure an approximation of the data to a normal distribution, we used the Shapiro–Wilk
parametric test, as presented in Table IV. The null hypothesis of such tests is that the
population is normally distributed. Thus, if the p-value is less than the chosen 0.05, then the 487
null hypothesis is rejected, and there is evidence that the data are not normal. As shown in
the table, the resulting values for all variables were less than 0.05. Nonetheless, the un-normal
distribution of the data may not influence the credibility of the study, because the size of the
sample was large and assuming not distributing the data normally.
Empirical research that uses time series, as in the case of this study, presupposes
stability of these series. Autocorrelation can occur in the model if the time series on which a
study is based is nonstationary (Gujarati, 2003). To check the stationarity of our time series,
we used the unit root test, which includes the parametric augmented Dicky–Fuller (ADF)
test. As can be seen from Table IV, the ADF test was statistically significant at the level of
1 per cent, which meant that the data in the time series (2007–2016) were stationary.
To test for the autocorrelation problem in the study models, we used the Durbin–Watson
(D–W) test. Table IV shows that the D–W values of the models were within the 1.5–2.5
range. This indicated there was no autocorrelation in this model.
One of the significant assumptions of the regression models was the presence of
heteroscedasticity. We tested for heteroscedasticity using the Breusch–Pagan and Koenker
tests. As is shown in Table IV, we found that p-values of the three models were more than 0.05,
which confirmed the null hypothesis; these models did not suffer from actual heteroscedasticity.
More comprehensively, to measure the collinearity between the dependent and independent
variables, we used the correlation matrix. For the Pearson correlation, Rapp (1978) advised that
multicollinearity could be found if the correlation between independent variables is more than
0.70. As shown in Table V, the values of all variables were less than 0.70, except for the ESG.

Normality Stationarity Collinearity Autocorrelation Heteroscedasticity

Shapiro– Durbin– Breusch– Koenker
Variables Labels Wilk ADF VIF test Watson test Pagan test test

Dependent variables
Operational performance ROA 0.000 −20.111*** 1.556 0.921 0.882
Financial performance ROE 0.000 −17.020*** 2.016 1.040 0.922
Market performance TQ 0.000 −12.019*** 2.288 0.671 0.764
Independent variable
Environmental disclosure ED 0.000 −6.228*** 2.364 0.777 0.878
Corporate governance 0.000 −2.569*** 1.336 0.523 0.505
disclosure
Corporate social CSRD 0.000 5.121 0.566 0.604
responsibility disclosure
ESG disclosure ESG 0.000 −4.992*** 4.222 0.469 0.482
Control variables
Firm specific
Financial leverage FLEV 0.000 −5.252*** 4.279 0.288 0.252
Total assets TA 0.000 −3.001*** 2.303 0.333 0.306
Macroeconomic
GDP GDP 0.000 −2.866*** 3.06 0.945 1.025
Governance GOV 0.000 −4.545*** 2.151 0.667 0.701
Unemployment UNEMP 0.000 −4.232*** 2.337 0.227 0.203 Table IV.
Note: ***Significant at 1 per cent level Model validity
JAAR Variables ROA ROE TQ ED CSRD CGD ESG
20,4
ROA 1
ROE 0.038 1
TQ 0.240 0.001 1
ED 0.054 0.077 0.061 1
CSRD 0.052 0.033 0.048 0.034 1
488 CGD 0.058 0.021 0.054 0.063 0.029 1
ESG 0.033 0.065 0.036 0.793** 0.859** 0.692** 1
Table V. Notes: ROA, return on assets; ROE, return on equity; TQ, Tobin’s Q; ED, environmental disclosure; CSRD,
Pearson correlation corporate social responsibility disclosure; CGD, corporate governance disclosure; ESG, environmental, social
matrix and governance. **Significant at 1 per cent level

This result was expected, as the ESG is a combination of ED, CGD and CSRD, and it is normally
to be correlated with those variables. To actualise this, collinearity diagnostics standard used
incessant tolerance quotient for every variable of the independent ones. The variance inflation
factor (VIF) had to be found afterwards. This test is the standard that measures the effect of
independent variables. Gujarati (2003) stated that getting a VIF higher than 10 indicates that
there is a multicollinearity problem for the independent variable of concern. As presented in
Table IV, the VIF values for all independent variables were less than 10, which meant that we
did not have collinearity problems in the study models.

4. Descriptive analysis
In this section, we use descriptive statistics to describe the study variables. We first show
the mean, maximum, minimum and standard deviation of the variables, in addition to
skewness to measure the lack of symmetry and kurtosis to measure whether the data are
heavy-tailed or light-tailed relative to a normal distribution. We then compare ESG between
countries based on the type of financial institution. Finally, we use advanced descriptive
analysis to evaluate ESG from different perspectives (firm’s and country’s characteristics).

4.1 Descriptive statistics

As shown in Table VI, the values for asymmetry and kurtosis were between −2 and +2,
which are considered acceptable proof of normal univariate distribution (George, 2011). The
median value was lower than the mean value, indicating that the distribution was skewed to
the right (see Table VI).
The descriptive analysis results show that the mean of governance disclosure had the
highest value, followed by the mean for social disclosure, while the mean for environmental
disclosure had the lowest value among the institutions. This means that many financial
institutions concluded that the disclosure of corporate governance practices and roles

Firm’s control
Dependent variables Independent variables variables Country’s control variables
Variables ROA ROE TQ ED CSRD CGD ESG FLEV TA UNEM GDP GOV

Mean 0.102 0.177 2.176 25.105 35.383 52.366 34.441 17.424 404,481 6.271 3,438,825 80.004
Median 0.088 0.094 1.866 21.442 35.301 51.898 33.450 15.884 107,458 5.232 1,636,469 77.314
Maximum 0.215 0.444 3.407 30.110 86.445 85.980 78.015 117.12 3,649,974 27.484 18,037,252 91.664
Minimum 0.000 0.002 1.400 1.778 3.048 13.994 10.005 2.669 1,799 0.611 14,810 10.336
SD 10.02 12.255 12.307 17.131 18.005 11.882 14.003 9.808 636,495 4.114 4,389,224 17.466
Table VI. Skewness 0.426 0.039 0.724 0.506 0.106 −0.211 0.365 0.621 1.299 1.716 1.803 −1.205
Descriptive analysis Kurtosis 1.064 1.618 1.884 1.332 1.263 2.006 1.355 1.941 1.794 1.499 1.622 1.121
ultimately leads to better performance. We explain the low environmental disclosure value The effects of
by noting that financial institution operations are heavily service-based and therefore have sustainability
less environmental impact than operations of other sectors (i.e. manufacturers). reporting
4.2 Cross-country analysis
As shown in Table VII, cross-country analysis results indicate that banks scored the
highest in sustainability disclosure in Sweden, Finland, Norway, Czech Republic, Germany, 489
Switzerland, Belgium, Iceland, the UK, Canada, Slovenia and Hungary. However, in Denmark,
France, Japan and New Zealand, banks scored the lowest in sustainability disclosure, while
insurance firms scored the highest in disclosing ESG. Other results show that in Austria, the
Netherlands, Estonia and Ireland investment firms scored the highest in ESG disclosure,
followed by insurance firms, while banks scored the lowest in ESG disclosure.

4.3 Advanced analysis

4.3.1 ESG based on firm’s characteristics. 4.3.1.1 ESG based on financial leverage. In this
section, we divided ESG disclosure into two categories: firms with a high level of leverage
and firms with a low level of leverage (see Table VIII). The study used path analysis based
on the value of the financial leverage median to identify the variance between the means of
the two samples. An analysis using a t-statistic test showed that the three sustainability
report indicators tended to be higher with firms that had a high financial leverage ratio.
However, the corporate social responsibility and ESG score were significant, as the p-value
was less than 5 per cent.
4.3.1.2 ESG based on firm size. On further analysis, we divided sustainability disclosure
into two other categories: firms with high assets and firms with low assets (see Table VIII).
The study used path analysis based on the median value of TA to identify the variance
between the means of the two samples. An analysis using a t-statistic test showed that the
ESG disclosure indicators tended to be higher with banks that had more assets. Moreover,
all variables were significant, as the p-value was less than 5 per cent.

Country Banks Investment Insurance

Sweden 34.365 30.646 28.646

Denmark 22.647 29.346 31.641
Finland 34.362 30.643 0
Norway 10.685 28.941 26.146
Czech Republic 20.151 0.000 0.000
Germany 34.101 30.382 28.382
Austria 8.075 26.331 23.536
Switzerland 27.402 23.683 21.683
Slovenia 4.020 0 0
France 10.119 0 25.58
Japan 23.85 30.549 32.844
Belgium 33.156 29.437 27.437
The Netherlands 23.947 30.646 32.941
Iceland 11.079 0 0
Estonia 25.094 31.793 0
UK 21.8 0 0
Canada 36.379 32.66 30.66
Hungary 31.405 0 0 Table VII.
Ireland 23.793 30.492 32.787 Cross-countries
New Zealand 37.947 44.646 46.941 analysis
JAAR Financial leverage Firm size
20,4 Mean difference
by financial Mean difference
leverage Difference tests by B. size Difference tests
High Low High Low
Variables FLEV FLEV t-statistic p-value asset asset t-statistic p-value

Environmental disclosure 24.345 23.167 0.595 0.626 30.315 17.619 16.311 0.000***
490 Governance disclosure 46.027 45.22 0.488 0.771 55.093 43.678 33.207 0.000***
Social disclosure 29.726 21.31 9.114 0.000*** 38.127 17.386 28.005 0.000***
Table VIII. ESG disclosure 21.896 14.887 15.868 0.000*** 36.724 13.15 63.219 0.000***
ESG based on Notes: The t-statistic is based on parametric test, two-independent sample t-test. ***Significant at
firm’s characteristics 1 per cent level

4.3.2 ESG based on country’s characteristics. 4.3.2.1 ESG based on country’s GDP. The ESG
disclosures were again divided into two categories: firms located in high-GDP countries and
firms located in low-GDP countries (see Table IX). The study used path analysis based on
the value of country’s GDP median to identify the variance between the means of the two
samples. An analysis using a t-statistic test showed that the governance disclosure tended
to be higher with firms located in high-GDP countries. However, the social disclosure,
environmental disclosure and ESG scores tended to be better among firms located in
low-GDP countries. As shown in Table IX, all variables were significant, as the p-value was
less than 5 per cent.
4.3.2.2 ESG disclosure and country’s governance. Finally, the ESG disclosures were
divided into two more categories: firms located in high-governance countries and firms
located in low-governance countries (see Table IX). The study used path analysis based on
the value of country’s governance median to identify the variance between the means of the
two samples. An analysis using a t-statistic test showed that the environmental disclosure
and governance disclosure tended to be higher with firms located in high-governance
countries. However, the social disclosure and ESG score tended to be better in firms located
in low-governance countries. Moreover, all variables were significant, as the p-value was
less than 5 per cent.

5. Empirical results
Our study can only assume a correlation between error and the independent variable of the
study sample. A Hausman test confirmed this. In a Hausman test, a null hypothesis assumes
that the capabilities of a fixed-effects approach and a random-effects approach are the same,
but if the null hypothesis is accepted, then this indicates that a random-effect approach

GDP Governance
Mean difference
by financial Mean difference
leverage Difference tests by B. size Difference tests
High Low High Low
Variables GDP GDP t-statistic p-value GOV GOV t-statistic p-value

Environmental disclosure 24.202 25.939 −5.626 0.000*** 27.2211 25.0461 2.614 0.012***
Governance disclosure 48.617 44.262 6.355 0.000*** 49.9741 43.7471 21.996 0.000***
Table IX. Social disclosure 21.563 32.917 −18.158 0.000*** 20.8031 36.3121 −20.31 0.000***
ESG based on ESG disclosure 17.254 22.557 −20.214 0.000*** 18.0421 22.3031 −11.225 0.000***
country’s Notes: The t-statistic is based on parametric test, two-independent sample t-test. ***Significant at
characteristics 1 per cent level
is appropriate and preferable. The Hausman χ2 model shown in Table X is statistically The effects of
significant, as the p-value is less than 5 per cent. This refutes the null hypothesis and sustainability
indicates the capabilities of a fixed-effect model best represent the relationship, confirming reporting
our assumption that ε_i and X’s are not correlated.
We created this model to discover whether sustainability reporting could be a proxy for
better performance. In other words, is it possible that ESG enhanced different indicators of
business performance? 491
The results reveal that ROA, ROE and TQ regression models have high statistical
significance and high explanatory power, as the p-value of the F-test is less than
5 per cent (0.000).
As shown in Table X, the slope coefficients of ESG for ROA, ROE and TQ indicate that
the impact of sustainability reporting is significant, as evident from the coefficient and the
p-values are less than 1 per cent (0.000, 0.005 and 0.000). However, ESG reporting has a
positive impact on market performance but a negative impact on operational and financial
performance. Therefore, we accept the null hypothesis (H3). There is a positive relationship
between ESG and market performance (TQ).
On the one hand, the market performance results support the value creation theory, though
this result is in opposition to Barth et al. (2016), who found that ESG is positively associated
with firm value (using TQ as a measure). ESG is a tool to generate competitive advantage and
to improve performance (Alexander and Buchholz, 1978; Porter and Van der Linde, 1995;
McWilliams et al., 2006; Porter and Kramer, 2006). Sharfman and Fernando (2008) argued that
the disclosure of the non-accounting information gives us an indicator about how a firm
controls business risks. Therefore, higher ESG scores the lower business risks and the long-
term survival. Porter (1991) argued that firms putting established regulations before
competitors are leaders in adopting best practices, which promotes the wealth of those firms
and eventually the wealth of their stakeholders. Their innovation and their thinking about the
future and about continued development could increase the market value of these firms and
help them retain or expand their stakeholder base.

ROA model ROE model TQ model

Variables Label β t-statistic β t-statistic β t-statistic

Independent variable
ESG ESG −0.523 −4.804*** (0.000) −0.208 −2.743*** (0.005) 0.125 3.154*** (0.000)
Control variables
Firm level
Financial leverage FLEV −0.019 −3.623*** (0.000) −0.066 −2.350** (0.019) −0.025 −2.338** (0.020)
Total assets TA 7.602 26.403*** (0.000) 0.342 4.571*** (0.000) 0.003 5.081*** (0.000)
Country level
GDP GDP −7.900 −27.552*** (0.000) −0.455 −7.320*** (0.000) −0.005 −5.211*** (0.000)
Governance GOV 8.333 28.002*** (0.000) 0.462 8.010*** (0.000) 0.006 5.481*** (0.000)
Unemployment UNEMP 7.881 27.001*** (0.000) 0.355 4.662*** (0.000) 0.004 5.099*** (0.000)
R2 0.284 0.446 0.311
Adj. R2 0.272 0.450 0.309
F-statistic 103.005*** 331.001*** 388.212***
p-value 0.000 0.000 0.000
Hausman test ( χ2) 18.440 22.161 34.005
p-value ( χ2) 0.030** 0.001*** 0.000***
Notes: This table reports the simple regression results with firm and year. All regressions are estimated with
robust standard errors clustered at the firm level. t-Critical: at df 3,420, and confidence level of 99% is 2.326 and
level of 95% is 1.645 and level of 90% is 1.282. F-critical (df for denominator n−β−1 ¼ 3,420−9−1 ¼ 3,410)
and (df for numerator ¼ β ¼ 9 and confidence level of 99% is 2.79 and confidence level of 95% is 2.09 and
confidence level of 10% is 1.77). The upper value is for t-statistic test and the lower value in parentheses Table X.
( p-value) is the probability value for this test. **,***Significant at 5 and 1 per cent levels, respectively Simple regression
JAAR On the other hand, the financial and operational performance results support the cost-of-
20,4 capital reduction theory. This result is contrary to Margolis et al. (2007), who found that
there is a significant positive relationship between ESG and financial performance. Porter
(1991) assumed that sustainable firms are expected to have lower costs in relation to
performance. This result was supported by Friedman (1962), who stated that the main
purpose of a firm is solely to increase the wealth of its stakeholders, and any other
492 non-financial objectives will make the firm less effective. Furthermore, Aupperle et al.
(1985) and Marsat and Williams (2014) argued that ESG increases costs and has economic
consequences, resulting in lower values for firms.
Finally, for firm’s control variables, we found firm size to be positively and significantly
related to ROA, ROE and TQ models, as having more tangible assets in banks positively
affected performance. In theory, the relationship between firm size and performance is
equivocal. Large firms may perform better, as they have more resources and higher
efficiency. Contrasting results were found for financial leverage, which we found had a
negative and significant relationship with performance. More-leveraged firms were less able
to disclose sustainability information.
Finally, after testing the effect of country control variables, we found that GDP
negatively controlled the three models, while governance and unemployment had
significant, positive relationships with the three models.

6. Conclusion, recommendations and future research

Two arguments are found in the literature about sustainability reporting – the cost-of-capital
reduction perspective, which says that investing in ESG increases costs and has economic
consequences, resulting in lower values, and the value creation perspective, which says
that ESG is a tool to generate competitive advantage and improve financial performance.
This study attempted to answer questions about when disclosing ESG costs a firm and when
it benefits a firm. To do this, we investigated the relationship between ESG and several
indicators of a firm’s business performance.
The findings show that ESG positively affects market performance, an outcome which
supports the value creation theory. In contrast, ESG negatively affects current financial and
operational performance, which supports the cost-of-capital reduction theory.
In sustainable development goal achiever countries, it is clearly noted that different
governmental authorities began years ago to establish and implement sustainability
reporting in order to strengthen relations between society and the business community and
to move towards sustainability. However, the laws associated with sustainability reporting
are weak; therefore, we recommend that national regulators pay more attention to ESG in
firms to ensure more transparency in disclosure, which will aid nations in attaining their
sustainable development goals.
We suggest that financial institutions focus more on sustainability reporting as a driver
for better sustainable markets. Added to that, stakeholders such as investors, shareholders,
creditors and debtors should increase their knowledge of sustainability reporting and its
importance in business, which will allow them to make better investment choices. We also
suggest that central bank organisers, finance ministers, external auditors and stock
exchange organisers take sustainability reporting into consideration to ensure that reliable
information is available to all business parties.
Finally, we suggest that future research study how other factors, such as board
characteristics, audit committee characteristics, quality of financial reporting and
earning management, are affecting the disclosure of sustainability reports. More
interestingly, we suggest that future research has to be undertaken in emerging markets
such as MENA countries.
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Corresponding author
Amina Buallay can be contacted at: ameena.buallay.87@gmail.com

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