preprints.org > business, economics and management > accounting and taxation > doi: 10.20944/preprints202407.1296.v1 (registering DOI)

Preprint Article Version 1 This version is not peer-reviewed

Version 1 : Received: 15 July 2024 / Approved: 16 July 2024 / Online: 16 July 2024 (10:38:02 CEST)

This study aimed to analyse the relationship between environmental, social, and governance disclosure (ESG disclosure) and the performance of Saudi Arabian companies. Looking at the Saudi Arabian context, ESG disclosure guidelines were issued in 2018 to encourage Saudi companies to disclose their ESG practices. Grounded in the frameworks of agency and signalling theory, this study bears profound implications for stakeholders, decision makers, policymakers, and academics alike. Our findings underscore the paramount significance of ESG disclosure practices in enhancing corporate performance and creating long-term value for stakeholders within the Saudi Arabian context. The analysis is based on panel data spanning from 2017 to 2022. Rigorous econometric methods, including fixed effects (FEs), random effects (REs), the Hausman test, and the Generalised Method of Moments (GMM), were employed in the analysis. Furthermore, to evaluate corporate performance, we also used vital indicators, such as the return on assets (ROA), return on equity (ROE), and Tobin’s Q. To score companies’ sustainability practices, we created an ESG index that was obtained through a principal component analysis of individual environmental, social, and governance scores using a sample extracted from the annual reports of the top 100 non-financial listed companies in the Saudi Arabian stock exchange (Tadawul). The results of this study provide a strong confirmation of the significantly positive relationship between ESG disclosure and companies’ key performance variables. These results are consistent with stakeholder theory, which argues that companies that actively manage their stakeholders through comprehensive ESG practices have better financial performance; this is also in agreement with signalling theory, which argues that the positive relations found in this study can be a signal sent to policymakers and decision makers. This finding should instil confidence in the potential of ESG practices to drive companies’ success. Recommendations include strengthened regulatory frameworks, awareness-raising campaigns for ESG philosophies among investors and potential target companies, capability enhancement programs, arrangements for engagement with stakeholders, and effective reward/confirmation mechanisms in credit/debit plans, if possible, to encourage more companies to adopt ESG disclosure and to help stakeholders, decision makers, policymakers, and academics improve their awareness. These measures, if implemented, can significantly enhance the ESG landscape in Saudi Arabia, inspiring a more sustainable and responsible business environment. This research sheds light on the complex processes by which ESG considerations and corporate strategy remain integrated by using advanced econometric methodologies that suggest important policy implications. The findings of this study underscore the critical role of sustainable business practices in enhancing corporate performance, fostering societal development, and ensuring sustainability within the context of Saudi Arabian enterprises

ESG disclosure; Generalised Method of Moments (GMM); Saudi stock exchange; sustainability practices; stakeholder engagement

Business, Economics and Management, Accounting and Taxation

* All users must log in before leaving a comment