Sustainability, Governance, and Value Creation: Evidence from Financial and Non-Financial Firms in South Africa

Abstract

This study explores the relationship between environmental, social, and governance disclosure and firms' performance, taking into consideration the effects of corporate governance and the location of the firms in their respective countries for firms traded on the Johannesburg Stock Exchange. The paper draws on stakeholder theory, legitimacy theory, and agency theory to investigate whether sustainability disclosure is good or bad for firm value in an emerging market environment with institutional diversity. The research design adopted is quantitative research, which involves balanced panel data of listed companies over the years. Empirical analysis is based on a fixed effects regression model, in which macroeconomic trends and unobservables are controlled for through time effects, and on the use of robust standard errors to mitigate econometric concerns. Financial measures are used as a proxy for firm performance, while environmental, social, and governance scores, governance quality, firm size, leverage, earnings per share, growth, and firm location are used as key explanatory variables. The results indicate that there is a negative and statistically significant association between the disclosure of ESG and the financial sector firm performance, and a statistically insignificant and weak association in the non-financial sector. The impact of corporate governance on performance in the non-financial sector is quite insignificant, while in the financial sector it is significant. The size effect is always positive, and the leverage and ESG effects are both positive and negative in different sectors and across firm categories. A sub-sample analysis of environmental, social and governance disclosure and performance also reveals that this negative relationship holds for both small and large financial firms. The findings underline the significance of institutional context, pointing to the fact that sectoral and locational dynamics can have varying effects on outcomes of sustainability practices and governance mechanisms. The results have implications for policymakers and companies aiming to link sustainability actions with financial results in emerging markets.