Beyond compliance: evaluating the role of environmental, social and governance disclosures in enhancing firm value and performance

Tamasiga, Phemelo; Onyeaka, Helen; Bakwena, Malebogo; Ouassou, El houssin Article — Published Version Beyond compliance: evaluating the role of environmental, social and governance disclosures in enhancing firm value and performance SN Business & Economics Provided in Cooperation with: Springer Nature Suggested Citation: Tamasiga, Phemelo; Onyeaka, Helen; Bakwena, Malebogo; Ouassou, El houssin (2024) : Beyond compliance: evaluating the role of environmental, social and governance disclosures in enhancing firm value and performance, SN Business & Economics, ISSN 2662-9399, Springer International Publishing, Cham, Vol. 4, Iss. 10, https://doi.org/10.1007/s43546-024-00714-6 This Version is available at: https://hdl.handle.net/10419/316955 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/4.0/ Vol.:(0123456789) SN Bus Econ (2024) 4:118 https://doi.org/10.1007/s43546-024-00714-6 REVIEW Beyond compliance: evaluating therole ofenvironmental, social andgovernance disclosures inenhancing firm value andperformance PhemeloTamasiga1 · HelenOnyeaka2· MalebogoBakwena3· ElhoussinOuassou4 Received: 3 April 2024 / Accepted: 26 August 2024 / Published online: 23 September 2024 © The Author(s) 2024 Abstract The growing emphasis on sustainability has underscored the importance of environmental, social, and governance (ESG) factors in evaluating corporate performance. While research explores the connection between ESG scores and financial outcomes, the role of ESG disclosures in mediating this relationship remains unclear. This study bridges this gap by systematically reviewing the impact of ESG disclosures on firm value and profitability across various industries. We employed a rigorous selection process based on the PRISMA framework, searching Scopus and Web of Science databases for relevant studies. Ultimately, 52 studies were analyzed to determine the relationship between ESG disclosures and financial performance. The results reveal a nuanced dynamic. Industries like food and retail showed positive correlations between strong ESG disclosures and improved financial performance. The utility sector displayed high accounting performance linked to social metrics, with less focus on environmental disclosures. Interestingly, the connection between ESG and financial performance in developing economies was either negative or insignificant. The agriculture sector presented a unique case where governance disclosures specifically enhanced market performance. This multi-industry exploration underscores the need to move beyond a one-size-fits-all approach when analyzing ESG performance. We recommend policy measures that consider specific industry characteristics and contextual factors to enhance the quality and transparency of ESG disclosures. Keywords Environmental social and governance (ESG)· ESG rating· ESG Disclosure· Sustainability· Sustainable development goals (SDG)· Corporate social responsibility (CSR) Extended author information available on the last page of the article SN Bus Econ (2024) 4:118 118 Page 2 of 38 Introduction In line with the UN Agenda 2030 and the emphasis on the Sustainable Development Goals (SDGs), governments, institutions, and organizations face growing pressure to integrate environmental, social, and governance (ESG) measures into their disclosure systems and sustainable management practices (Taliento etal. 2019). There has been an increase in studies investigating the relationship between ESG scores and various financial outcomes, such as firm value and profitability (Abdi etal. 2022; Aboud and Diab 2018; Aydoğmuş etal. 2022; Parikh etal. 2023). Investors, regulators, and other stakeholders are increasingly recognizing the significance of non-financial metrics, which can be used to evaluate a company’s influence on the environment, its social initiatives, and the efficiency of its corporate governance practice (Li etal. 2021). Research at the intersection of ESG scores and firm value underscores the importance of prioritizing sustainability when allocating resources, emphasizing the enduring value of ESG considerations in corporate decision-making. Similarly, (Ademi and Klungseth 2022) revealed that companies with high ESG performance exhibit superior financial performance and higher market valuation than industry peers. ESG rating scores significantly influence both return-on-capitalemployed and Tobin’s Q, reflecting financial and market performance. A notable result of their study is that superior ESG performance led to positive impacts amidst the COVID-19 pandemic. This result suggests that ESG performance is not only a determinant of financial and market success but also a critical factor enabling firms to navigate and thrive amidst global crises. A substantial body of literature emphasizes the significance of market value and profitability metrics in gauging firm performance (Novy-Marx 2013). Market value, captured through measures like Tobin’s Q and market-to-book ratio, is widely regarded as a reflection of the market’s assessment of a company’s overall worth and future growth prospects (Tambunan 2023). Profitability indicators, such as return-on-capital-employed (ROCE) and net profit margins, provide insights into a firm’s operational efficiency and ability to generate profits from its capital and business activities (Hnyp and Kolomiiets 2023; Varma 2023). These conventional financial metrics have been the primary focus of research investigating the determinants and consequences of corporate performance. However, there has been a growing recognition of the importance of Environmental, Social, and Governance (ESG) factors in evaluating corporate performance in recent years. This shift has been driven by increasing stakeholder awareness of the potential risks and opportunities associated with sustainability issues, as well as mounting evidence that ESG considerations can impact a company’s long-term financial performance (Alsayegh et al. 2020a, b; Kim and Li 2021). As such, a growing body of research has explored the relationship between ESG performance, measured by ESG ratings or scores, and various financial outcomes, including market value and profitability (Aouadi and Marsat 2018; Zhou etal. 2022). While numerous studies indicate a favourable link between ESG (environmental, social, and governance) performance and financial results, the specific ways SN Bus Econ (2024) 4:118 Page 3 of 38 118 ESG impacts these results are not thoroughly understood. A mainly overlooked area is the influence of disclosures in bridging the gap between ESG ratings and a company’s financial indicators. These disclosures are the primary avenue for companies to convey their ESG activities, potential risks, and achievements to outside parties. Delving into the role of disclosures can offer a crucial understanding of how openness and communication tactics shape the perceived worth and financial benefits of ESG endeavours (Evans and Peiris 2010) found that ESG disclosures had a significant positive effect on companies’ financial and market performance. Additionally, (Chauhan and Kumar 2019) showed a preference for companies that provided ESG (Environmental, Social, and Governance) information in their disclosures. This underscores the significance of transparency and accountability in ESG reporting. Furthermore, Bhattacharya and Sharma, (2019) observed a correlation between ESG scores and credit ratings, implying that businesses with higher ESG scores are perceived as more creditworthy. These studies suggest that ESG disclosures mediate the relationship between ESG scores, firm value, and profitability. The findings from these studies highlight the importance of having high ESG scores and effectively communicating and disclosing sustainability practices to stakeholders. Furthermore, disclosures are pivotal in enhancing corporate transparency, serving as a conduit through which companies disseminate pertinent information regarding their ESG practices, risks, and performance metrics. Transparent disclosures facilitate informed decision-making among stakeholders, enabling them to gauge a firm’s sustainability commitments, operational resilience, and long-term viability (Helfaya etal. 2023; Tsang etal. 2023). By providing clarity on ESG initiatives and performance, disclosures foster a culture of accountability and trust, strengthening the bond between companies and their stakeholders. Beyond transparency, disclosures act as dynamic mechanisms for stakeholder engagement. Companies utilize ESG disclosures to communicate with diverse stakeholders, including investors, employees, customers, and communities (Lokuwaduge and Heenetigala 2017; Manita etal. 2018; Sciarelli etal. 2021). This communication fosters a sense of inclusion, allowing stakeholders to understand how their interests align with the company’s sustainability agenda. Effective engagement through disclosures enhances relationships and enables companies to address concerns and incorporate valuable feedback (Utz 2019). Despite the prevailing narrative of a positive relationship between ESG scores and firm value, some studies have presented contradictory findings. For example, a study by Yoon etal. (2018) suggested that corporate governance practice negatively influences the firm value of environmentally sensitive firms. Similarly, Behl etal. (2022) observed that in certain sectors, such as the energy industry in India, ESG disclosures and the firm value negatively correlated in the last lag. These conflicting findings underscore the complexity of the ESG-firm value relationship and highlight the need for further research to elucidate the underlying mechanisms and contextual factors influencing this relationship. By disclosing their ESG practices, companies can demonstrate their commitment to sustainability and corporate responsibility, leading to increased stakeholder trust and support. (Alsayegh etal. 2020a, b; Chouaibi and Affes 2021). Evidence supports the SN Bus Econ (2024) 4:118 118 Page 4 of 38 notion that higher ESG scores are associated with better economic results (Sila and Cek 2017; Taliento etal. 2019). These findings emphasize the importance of ESG disclosures in driving the positive impact of ESG scores on firm value and profitability. Therefore, the mediating role of ESG disclosures is crucial in translating high ESG scores into improved company value and profitability. Despite mixed findings on the relationship between ESG scores and firm value, a systematic review is warranted to understand how ESG disclosures impact firm performance (market value and profitability). Therefore, this research is guided by the following questions: 1. When considering the mediating effect of disclosures, is there a quantifiable relationship between ESG scores and firm profitability? 2. How do ESG disclosure quality and transparency variations impact stakeholder perceptions and trust in a company’s sustainability efforts? 3. To what extent do regulatory frameworks affect the quality and impact of ESG disclosures, and how do these regulations shape the relationship between ESG scores and firm value/profitability? A systematic review is suitable for examining the relationship between ESG scores, disclosures, and firm value/profitability due to the topic’s complexity and existing research. With an expanding body of literature on ESG’s impact on financial outcomes, a systematic review can collate, synthesize, and reconcile diverse findings in a structured manner. This approach is crucial given the contradictory results in some studies, highlighting the need for clarity and understanding of contextual influences. A systematic review offers insights into how transparency shapes stakeholder perceptions and financial results by emphasizing the pivotal role of disclosures. Analysing multiple studies provides a holistic understanding of ESG’s interplay with firm performance, aiding policymakers, regulators, and companies in enhancing ESG reporting practices. The decision to conduct a systematic review is thoughtful, given the complexities and nuances surrounding the relationship between ESG disclosures and corporate performance. A systematic review offers a rigorous and comprehensive approach to synthesizing the existing body of knowledge, enabling a holistic understanding of the current state of research on this multifaceted topic. Unlike traditional narrative reviews, which may be prone to bias and subjectivity, a systematic review follows a predefined protocol, ensuring a methodical and replicable process for identifying, evaluating, and synthesizing relevant studies (Smith 2011; Tranfield etal. 2003). The systematic nature of this review is particularly advantageous in navigating the diverse and interdisciplinary landscape of ESG disclosures, which span multiple domains, including finance, accounting, management, and sustainability. This review captures a comprehensive set of studies by systematically searching various databases and employing structured search strategies, minimizing the risk of overlooking crucial evidence. Furthermore, the rigorous screening and quality assessment procedures inherent in systematic reviews enhance the validity and SN Bus Econ (2024) 4:118 Page 5 of 38 118 reliability of the findings, ensuring that the conclusions drawn are based on the most relevant and methodologically sound studies (Pollock and Berge 2018a, b). A systematic review allows for identifying patterns, consistencies, and contradictions across the existing literature, providing a solid foundation for reconciling conflicting findings and elucidating potential moderating or mediating factors. This synthesis is particularly valuable in ESG disclosures, where the heterogeneity of reporting practices, industry contexts, and regulatory environments may contribute to varying outcomes. Methodology This systematic literature review examines the mediating role of disclosures in the correlation between ESG scores and firm value and profitability. A systematic literature review is appropriate for this study as it selects and evaluates all relevant empirical information on a specific subject (Bearman etal. 2012; Krnic Martinic etal. 2019; Pollock and Berge 2018a, b). The systematic literature review (SLR) adhered to the PRISMA protocol, establishing criteria for identifying, screening, and incorporating pertinent records. PRISMA, an evidence-based framework, ensures the completeness, transparency, and scientific integrity of systematic reviews and meta-analyses (Moher etal. 2015). The PRISMA flow diagram guided the search procedure, and the subsequent sections detail the steps organized under data collection and analysis (refer to Fig.1). Software applications used inthesystematic review. Biblioshiny (Aria and Cuccurullo 2017), an online user interface for R software, merged datasets retrieved from Scopus and WoS. Descriptive statistics were then generated from the merged data. Literature search strategy We conducted systematic literature using Scopus and Web of Science databases. The data was retrieved on 15.12.2023. The search utilized a combination of keywords and phrases, such as “ESG scores”, “Environmental, Social, and Governance scores”, “firm value”, “financial performance”, “profitability”, “stock performance”, “corporate valuation”, “disclosures”, “reporting”, “transparency” The search was further refined by applying inclusion and exclusion criteria to ensure the relevance and quality of the selected studies (see Table1). For this systematic review, we used a two-phase screening approach. In the initial phase, titles, keywords, and abstracts were evaluated to determine compatibility with the eligibility criteria. In the second phase, full-text articles deemed potentially relevant were carefully examined, and irrelevant articles were excluded from the search results. SN Bus Econ (2024) 4:118 118 Page 6 of 38 Inclusion andexclusion criteria This systematic review adheres to the most recent update of the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) statement, PRISMA 2020 (Page et al. 2021), to ensure transparency and methodological rigor throughout the selection process. This emphasis on transparency aligns with the approach taken in a recent paper by Shahid etal. (2024). Building upon existing knowledge, we employ a systematic review methodology to explore the impact of ESG disclosures on firm value and profitability across various Fig. 1 PRÍSMA flow chart of the systematic review SN Bus Econ (2024) 4:118 Page 7 of 38 118 industries. This approach allows for a comprehensive assessment by considering quantitative and qualitative research designs. We implemented a rigorous search strategy based on PRISMA guidelines to identify relevant studies. We included peer-reviewed articles and conference papers published in English that investigate the relationship between ESG disclosures and firm financial performance. We excluded grey literature (e.g., reports, dissertations, book chapters not part of edited volumes) and documents not published in English to maintain a focus on published, scholarly research directly relevant to our research question. Table 1 further details the specific eligibility criteria used for study selection. Data extraction Data extraction involved an examination of the selected studies to extract relevant information. Key data points included sector, methodology, geographical context (location) and key findings. The merged dataset initially comprised 133 documents, surpassing Scopus (66) and WoS (67), indicating a more comprehensive collection of publications in the combined data. After eliminating duplicates, 105 records remained, of which nine were inaccessible, resulting in 96 records for further Table 1 Inclusion and Exclusion Criteria Criteria Logical Statement Scopus TITLE-ABS-KEY ((“ESG scores” OR “Environmental, Social, and Governance scores” OR “sustainability metrics” OR “sustainable finance” OR “social responsibility metrics” OR “ethical investment”) AND (“firm value” OR “financial performance” OR “profitability” OR “stock performance” OR “corporate valuation”) AND (“disclosures” OR “reporting” OR “transparency” OR “corporate governance” OR “sustainability reporting”)) AND (LIMIT-TO (LANGUAGE, “English”)) AND (LIMIT-TO (PUBSTAGE, “final”)) AND (LIMIT-TO (DOCTYPE, “ar”)) Logical Statement WoS TS = ( (“ESG scores” OR “Environmental, Social, and Governance scores” OR “sustainability metrics” OR “sustainable finance” OR “social responsibility metrics” OR “ethical investment”) AND (“firm value” OR “financial performance" OR "profitability" OR "stock performance” OR “corporate valuation”) AND (“disclosures” OR “reporting” OR “transparency” OR “corporate governance” OR “sustainability reporting”)) Inclusion 1. Published in English language (LIMIT-TO (LANGUAGE, “English”)) 2. Document Type: Articles (LIMIT-TO ( DOCTYPE, “ar”)) 3. Publication Status: Final publications (LIMIT-TO ( PUBSTAGE, “final”)) Exclusion 1. Documents not written in English 2. Not relevant to the research topic, based on the absence of the following keywords: [ESG scores, Environmental, Social, and Governance scores, sustainability metrics, sustainable finance, social responsibility metrics, ethical investment, firm value, financial performance, profitability, stock performance, corporate valuation, disclosures, reporting, transparency, corporate governance, sustainability reporting] SN Bus Econ (2024) 4:118 118 Page 8 of 38 screening. Subsequently, 44 records were deemed out of scope and removed, leaving 52 records for subsequent analysis. Results andanalysis In this section, the study findings are organized into three subtopics. First, a summary of the relevant studies is presented, showing the sectors, locations, methodology, and results (see Table2). This is followed by examining publication trends, leading journals, the distribution of industries, and implications for ESG. Summary ofrelevant studies This systematic review analyzed and synthesized 52 studies across various sectors: banking and finance, airlines, energy, construction, manufacturing, agriculture, telecommunications, and retail. The studies spanned countries from all continents, encompassing developed, emerging, and developing economies, to provide a comprehensive and representative analysis (see Table2). Publication Trends As shown in Fig.2, the publication trends within the context of ESG research highlight the dynamic nature of sustainable finance. The notable increase in publications from 2018 to 2022 reflects heightened interest and awareness surrounding ESGrelated issues. The decline in publications and total citations in 2023 is likely due to a temporary lag or adjustment period in scholarly output, rather than a waning interest in ESG topics. This is because there is mounting pressure from regulators and governments for firms to transition to environmentally, socially, and economically sustainable practices on the back fall of UN Agenda 2030. The significant total citations of 219 in 2022 underscore the impact and relevance of ESG research, solidifying its importance in both academic and policy settings. Distribution ofindustries inESG based onincluded studies Figure3 shows the distribution of industries included in the study. The largest percentage (52%) of studies come from the category “Mixed (Listed Firms)”. This could indicate a focus on companies listed on stock exchanges across various sectors. Banking and Finance (13%), Energy (11%), and Retail (4%) are the other sectors with a relatively high representation in the study. The banking and finance sector plays an important role in financing various businesses and has significant exposure to environmental and social risks. Sustainable finance practices and responsible investment considerations are also gaining traction, making ESG disclosures particularly relevant to this sector. On the other hand, the energy sector is undergoing a significant transformation due to concerns about climate change and the need for SN Bus Econ (2024) 4:118 Page 15 of 38 118 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Białkowski and Sławik 2022) New Zealand Ordinary Least Squares (OLS) regression The study investigates the association between ESG scores of New Zealand-listed companies and their stock performance during the COVID-19 pandemic. It reveals no evidence of a positive correlation between ESG scores and stock returns during the pandemic, despite the common acceptance of socially responsible investing in New Zealand 23 (Alduais 2023) China Two-Stage Least Squares (2SLS) regression analysis Findings reveal that environmental and social disclosures increase capital equity cost (COE), while governance disclosures don’t significantly impact it. Financially sound companies exhibit a stronger ESG-COE link, with strong ESG practices associated with lower capital costs, indicating rising investor appreciation for ESG 24 SN Bus Econ (2024) 4:118 118 Page 16 of 38 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Conway 2019) South Africa Ordinary least squares regressions Since mandatory reporting inception, South African firms have experienced decreased financial performance and risk, alongside increased institutional shareholding. Better quality reports correlate with reduced financial performance and risk, higher institutional shareholding, and elevated ESG scores 25 (Sharma etal. 2024) 34 stock markets Machine learning Firms with higher ESG scores demonstrate enhanced financial performance, yielding a 14% increase in return on equity. Additionally, the integration of ESG data into machine learning models enhances prediction accuracy 26 (Parikh etal. 2023) India linear regression model Positive impact of governance (G) on equity returns, while environmental (E) factors negatively affect returns, with social (S) factors showing insignificant impact 27 (Sinha Ray and Goel 2023) India dynamic panel regression While ESG scores influence financial metrics with time lags, a positive association exists between ESG disclosure and share prices in the long term 28 SN Bus Econ (2024) 4:118 Page 17 of 38 118 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Vinodkumar and Alarifi 2022) Kingdom of Saudi Arabia ESG analysis compares its current performance to the historical performance Analyzing ESG scores in the Tadawul All Share Index (TASI), underscores the importance of ESG reporting for stakeholders, indicating its potential for riskreturn trade-offs and sustainable development in Saudi Arabia 29 (Bifulco etal. 2023) Europe Panel regression The study examines ESG scores’ impact on market values, it reveals a negative ESG-stock price link, with CSR committees showing no significant influence on ESG scores’ market performance 30 (Cerciello etal. 2023) Europe Dynamic panel model The Euro Stoxx, 300 index results, suggest that sustainability practices reduce profitability, indicating potential strategic ESG disclosure involving overstated positive behaviors 31 SN Bus Econ (2024) 4:118 118 Page 18 of 38 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Fernando etal. 2022) Asian Countries Multiple linear regression This study investigates the impact of ESG Disclosure on Firm Performance in ASEAN countries, before and after the introduction of integrated reporting (IR). The findings reveal an insignificant effect of ESG Disclosure on Firm Performance, but a positive relationship with IR, suggesting potential benefits for firms implementing IR 32 (Yen-Yen 2019) Malysia Panel regression Positive association between ESG disclosure performance and firm value. Additionally, the study suggests that ESG disclosure enhances superior investors’ transparency and information processing abilities, impacting equity market valuation and reducing investment risk 33 SN Bus Econ (2024) 4:118 Page 19 of 38 118 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Minutolo etal. 2019) Global Panel regression ESG scores are indicators of firms’ strategic transparency choices, impacting performance measured by Tobin’s Q and return on assets. results show significant performance differences moderated by firm size, revealing varying ESG influences on financial performance metrics 34 (Cheng etal. 2023) China panel regression The COVID-19 pandemic accelerated ESG investing, and the results show that disclosing ESG data boosts firm value, especially post-pandemic. Environmental scores notably affect values, while social and governance scores do not Food Industry (Buallay 2022c) 31 different countries Linear Regression There is a significant relationship between ESG and financial performance (ROE). However, there is no significant relationship between ESG and operational performance (ROA) and market performance (TQ) 35 SN Bus Econ (2024) 4:118 118 Page 20 of 38 Table 2 (continued) Industry Studies Country Methodology Key Findings No Utilities Sector (Remo-Diez etal. 2023) Worldwide longitudinal fuzzy set qualitative comparative analysis (fsQCA) Strong social performance and a lack of emphasis on environmental factors lead to high accounting-based metrics. In contrast, market-based indicators emphasize the importance of environmental and social dimensions for achieving high financial performance 36 Retail (Buallay 2022b) 38 different countries regression analysis ESG has a significant correlation with financial performance (ROE), but not with operational performance (ROA) or market performance (TQ) 37 (Lee etal. 2018) Korea ordinary least square Higher ESG scores were associated with lower return on equity (ROE). The environmental score was found to have a negative impact on both ROE and Return on Assets (ROA). The effect of the social score was not conclusive, and the governance score was found to negatively influence Tobin’s Q, (measure of a firm’s market valuation) 38 SN Bus Econ (2024) 4:118 Page 21 of 38 118 Table 2 (continued) Industry Studies Country Methodology Key Findings No Airline (Abdi etal. 2022) Worldwide Panel regression The study investigates the impact of ESG initiatives on financial performance (FP) and firm value in the airline industry. It reveals that ESG efforts affect market-to-book ratio and FP differently, with significant moderation effects of firm size 39 Health (Kalia and Aggarwal 2023) Worldwide Multivariate regression While ESG activities positively influence FP in developed healthcare companies, the relationship is either negative or insignificant in developing economies, emphasizing the contextual nuances in ESG impact 40 Agriculture (Buallay 2022a) Worldwide regression analysis There is no notable correlation between ESG and operational, financial, or market performance indicators. Surprisingly, when individual ESG components are examined separately, governance disclosure positively influences market performance 41 SN Bus Econ (2024) 4:118 118 Page 22 of 38 Table 2 (continued) Industry Studies Country Methodology Key Findings No Energy (Baran etal. 2022) Poland Comparative analysis of ESG performance against accounting measures: ROE, ROA, and ROS profitability indicators The study finds no consistent pattern in the impact of ESG factors on financial performance across enterprises. Although some correlations exist between ESG scores and CFP, individual case studies vary significantly, possibly due to unique sectorspecific characteristics 42 (Zehir etal. 2023) Istanbul, Turkey Panel regression Results indicate larger boards correlate with higher ROI and ROA, suggesting diverse, experienced boards improve financial performance. However, combining CEO and Chairman roles may lead to unfavourable financing preferences 43 (Wieczorek-Kosmala etal. 2021) European countries Weighed least square (WLS) regression Empirical evidence suggests a positive link between sustainable performance, measured by ESG scores, and financial returns, highlighting the significance of sustainability reporting in driving sustainable performance in the energy sector 44 SN Bus Econ (2024) 4:118 Page 23 of 38 118 Table 2 (continued) Industry Studies Country Methodology Key Findings No (Wanday and Ajour El Zein 2022) Europe SARIMA (seasonal autoregressive integrated moving average) model A positive correlation exists between a company’s ESG activities and investor returns, as firms investing in ESG activities often demonstrate higher financial performance 45 (Behl etal. 2022) India Panel structural equation modeling Assesses bidirectional causality and autoregression effects between ESG disclosures and firm value in Indian energy sector companies. Negative associations are observed in the first two lags, with a positive association in the final lag 46 (Alhawaj etal. 2023) Developed and Emerging countries Regression analysis ESG correlates significantly with operational performance (operation ratio) but not with financial performance (return on equity) or market performance (Tobin’s Q) 47 Non-financial firms (Özer etal. 2023)Turkey Panel regression Results indicate a positive relationship between ESG scores and performance indicators, with environmental factors showing consistent positive effects while some social and governance sub-components lack statistical significance 48 SN Bus Econ (2024) 4:118 118 Page 24 of 38 Table 2 (continued) Industry Studies Country Methodology Key Findings No Construction (Siew etal. 2013) Australia Regression analysis Most publicly listed construction companies exhibit low reporting levels. Those issuing non-financial reports generally outperform their counterparts in various financial ratios, although the correlation with ESG scores is weak 49 Telecommunications (Buallay and Al Marri 2022) Worldwide Regression analysis Results show an inverse relationship between ESG and market performance (TQ), yet no significant impact of ESG on operational (ROA) and financial performance (ROE) was found. A stronger link between ESG and ROA was reported in emerging economies than in developed ones 51 Tourism (Buallay etal. 2022) 37 different countries Panel regression There is a significant link between ESG and operational and market performance but not with financial performance. Nonlinear models indicate an inverted U-shaped relationship between sustainability performance and profitability and valuation, highlighting complexities in the ESG-profitability nexus 52 SN Bus Econ (2024) 4:118 Page 31 of 38 118 Lastly, a comparative regulatory analysis reveals the nuanced nature of the relationships between regulatory frameworks and firm performance in emerging markets. This suggests that in these markets, the impact of regulations is contextdependent, acknowledging both positive and negative influences on various aspects of corporate performance (Buallay 2022d; Conway 2019; Dzingai and Fakoya 2017; Lee etal. 2018; Mans-Kemp and van der Lugt 2020; Vinodkumar and Alarifi 2022; Yoon etal. 2018). The findings underscore the pivotal role of regulatory frameworks in shaping the dynamics between ESG disclosures and firm value/profitability, with nuances observed based on regional contexts and stringency levels. These insights contribute to the ongoing discourse on the effectiveness of ESG regulations in promoting sustainable practices and financial success. Conclusion On the global stage of international business, the interplay among ESG scores, disclosures, and corporate performance has emerged as a pressing concern. This study conducts a systematic review to examine the role of ESG disclosure in moderating the connection between ESG ratings and the value and profitability of firms. Our analysis reveals a multifaceted relationship highly influenced by industry dynamics and geographical considerations. Our findings support the proposition that governance disclosures positively correlate with market performance, thus highlighting their significance as a crucial determinant of transparent and effective corporate governance practices, ultimately contributing to firm value enhancement. Based on the insights gained from the systematic review, firms should develop and incorporate context-specific ESG strategies aligned with their core business and stakeholder expectations. Secondly, they should ensure compliance with existing regulations while exploring proactive measures to exceed minimum requirements and enhance operational sustainability. Furthermore, firms should increase transparency and coverage of ESG disclosures by improving the quality of ESG reporting to enhance the company’s value and build trust among investors and stakeholders. Additionally, firms could utilize established frameworks such as the GRI and the SASB to ensure consistency and comparability in reporting practices. Policymakers can take two key steps to establish a functioning and transparent ESG landscape. Firstly, they can encourage high-quality ESG reporting by implementing regulations that require detailed disclosures on material ESG metrics relevant to specific industries. This approach should consider and build upon the existing international reporting framework. Secondly, policymakers can promote uniformity by supporting the development and adoption of standardized ESG reporting practices. This fosters meaningful comparisons across firms and industries, enhancing trust and clarity for investors and stakeholders. Finally, investors should actively integrate ESG disclosures into their decision-making processes. Recognizing the link between strong ESG performance and long-term value, coupled with reduced risk, it’s crucial to pay close attention to these disclosures. SN Bus Econ (2024) 4:118 118 Page 32 of 38 However, several gaps remain that warrant further investigation. Future research should explore the longitudinal effects of ESG disclosures on firm performance to determine whether the observed benefits are sustained over time. Moreover, there is a need to examine the role of regulatory frameworks in different regions to understand how varying enforcement and guidelines impact the efficacy of ESG disclosures. Another promising area for future studies is the exploration of the specific mechanisms through which different components of ESG—environmental, social, and governance—individually and collectively influence financial outcomes. Lastly, more granular research focusing on small and medium-sized enterprises (SMEs) and their ESG practices could provide insights into how smaller firms can leverage ESG disclosures to enhance their competitiveness and financial performance. By addressing these gaps, future research can provide a more comprehensive understanding of the nuanced relationship between ESG practices and firm performance, guiding policymakers and corporate leaders to promote sustainable business practices. It is essential to acknowledge the limitations of this study, including the dynamic nature of methodologies and sectors, which may pose challenges to generalization. Future research endeavors should focus on longitudinal studies to establish causality between ESG practices, disclosures, and performance while closely monitoring the evolving regulatory landscape, as changes in ESG reporting requirements could significantly influence the dynamics under examination. Author contributions Phemelo Tamasiga: conceptualization, methodology, screening of relevant studies to be included in the systematic review, results analysis, and visualization and submission of the manuscript. Helen Onyeaka: conceptualization, screening of relevant studies, introduction, supervision, and writing and revision of the first draft and writing of the final draft. Malebogo Bakwena: screening of relevant studies, discussion and conclusion. El houssin Ouassou: screening of relevant studies, reference citations, writing and revision of first draft and final version. Funding This study did not receive any funding. Data availability All data supporting the findings, discussions, and conclusions is contained in the manuscript. Declarations Conflict of interest The authors confirm the absence of competing interests. Ethical approval This study does not require ethical approval. Consent to participate The authors confirm the accuracy of all data and findings utilized in this study, and consent to participation. Consent to publish The authors consent to publishing personally identifiable information in the journal. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission SN Bus Econ (2024) 4:118 Page 33 of 38 118 directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/ licenses/by/4.0/. 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Bus Strat Environ. https:// doi. org/ 10. 1002/ bse. 3089 SN Bus Econ (2024) 4:118 118 Page 38 of 38 Authors and Affiliations PhemeloTamasiga1 · HelenOnyeaka2· MalebogoBakwena3· ElhoussinOuassou4 * Helen Onyeaka H.On[email protected] Phemelo Tamasiga [email protected] 1 German Institute ofDevelopment andSustainability, Bonn, Germany 2 Birmingham Institute ofSustainability andClimate Action, University ofBirmingham, Birmingham, UK 3 Department ofEconomics, University ofBotswana, Gaborone, Botswana 4 Laboratory ofApplied Economics (LAE), Mohammed V University inRabat, Rabat, Morocco