Quality of Environmental Sustainability Reporting and FinancialPerformance: Evidence from Pakistan

Abstract

The study establishes a comprehensive environmental sustainability index of Pakistani companies. The environmental performance index has been built on the indicators taken from Global Reporting Initiative (GRI). Moreover, the environmental performance indicators have been scored by applying the criteria of quality of disclosures. A data set of 790 firm-year observations has been used for the period of seven years ranging from 2014 to 2020 based on the purposive sampling technique. Panel data random effects and the Generalized Method of Moments (GMM) have been used to test the relationship between environmental performance and financial performance assessed through return on assets (ROA). The system GMM has been applied to control for the endogenous nature of the relationship between environmental performance and financial performance. It has been found that environmental performance is positively and significantly related to financial performance in both the random effects and GMM estimations. Furthermore, it has been found that firms in the sample do not disclose too much monetary and quantitative data on environmental indicators. The quality of environmental disclosure is low among companies. The study relies on stakeholder and legitimacy theories, and it has been found that both theoretical perspectives are valid in the context of Pakistan. There is a strong need for efforts for enhancing the disclosure of non-financial environmental performance indicators. The study guides the regulatory authorities in enhancing environmental disclosure among companies.