Impact of Environmental and Social Reporting and Performance on Financial Performance of a Firm: An Indian Study

Abstract

The article analyses the impact of environmental and social reporting on financial performance through two effects. First is the compliance mechanism, where the firm complies with the expected norms of the field, that is, transparency or unambiguity. Second is the disclosure mechanism, which states that the firm can choose what to disclose. We study how both these mechanisms work in the short and long term in the Indian context. We extensively study the sustainability reporting and sustainability performance of Indian firms. We analyse the impact of environmental disclosure/performance and social disclosure/performance on financial performance (accounting ratios, return on assets [ROA] and return on equity [ROE] of the firm). Analysing a sample of 56 companies for 2014–2021, we show that environmental and social sustainability disclosure positively impacts the ROA/ROE in the long run but not in the short run. Further, the environment and social disclosure positively moderate the positive influence of environment/social performance on ROA/ROE in the shorter run but not in the longer run. These results will help managers understand the strategic role sustainability disclosure can play and how environmental and social disclosure can be used to achieve higher legitimacy and reputation and hence maximize firm returns.