Environmental Social Governance (ESG) Disclosures Ratings and Financial Performance in Southern Africa

Abstract

This study investigated the relationship between Environmental, Social, and Governance (ESG) disclosure and corporate financial performance among non-financial firms listed on major Southern African Development Community (SADC) stock exchanges. The research was guided by three primary objectives: to construct and validate a contextually relevant ESG disclosure index, to examine the relationship between ESG disclosure and corporate financial performance, and to analyse the moderating effects of firm-specific and institutional factors. A mixed-methods approach was adopted, combining quantitative panel data analysis of 128 firms yielding 640 firm-year observations and qualitative semi-structured interviews with seven ESG experts from the region. The SADC ESG Disclosure Index (SEDI) was developed using content analysis of annual integrated and sustainability reports and validated for reliability and construct validity, achieving a Cronbach’s alpha of 0.89. Descriptive analysis revealed that firms disclosed ESG information at a moderate level (mean SEDI = 52.14%), with the Social dimension being the most reported, while Environmental disclosure lagged due to resource constraints and weaker regulatory enforcement. Panel regression results indicate a statistically significant positive relationship between ESG disclosure and corporate financial performance, measured through accounting-based metrics (Return on Assets and Return on Equity) and a market-based metric (Tobin’s Q), confirming that ESG disclosure contributes to value creation, risk mitigation, and enhanced market perception. Moderation analysis demonstrates that firm size, sectoral characteristics, and the regulatory maturity of the firm’s home country significantly strengthen the ESG–financial performance relationship, with larger firms and high-impact industries benefiting most from ESG initiatives. Qualitative evidence supports these findings, highlighting that larger firms possess dedicated ESG teams, advanced data systems, and capital capacity to operationalise sustainability strategies, while firms in jurisdictions with strong regulatory frameworks enjoy enhanced credibility and market trust. The study concludes that ESG disclosure in the SADC region is both a strategic and legitimising tool, with tangible implications for firm value, stakeholder engagement, and long-term sustainability. The research contributes to the literature by providing a validated ESG measurement instrument for emerging markets, demonstrating the financial and market value of ESG disclosure, and highlighting the conditional nature of its impact based on firm-specific and institutional contexts. The findings carry significant implications for policymakers, regulators, corporate managers, and investors, advocating for strengthened ESG frameworks, capacity building, and integration of ESG strategies into core business operations to enhance transparency, accountability, and financial performance across the SADC region.