Effect of Corporate Sustainability Disclosure on Financial Performance: Evidence from Firms Listed at Nairobi Securities Exchange, Kenya

Abstract

Corporate environmental disclosure entails reporting impact of company activities such as waste management, recycling, carbon management, emission, pollution, wetland and wildlife conservation in natural environment. Conventional accounting systems are limiting since they fail to directly address sustainability concerns, as well as economic growth against social and environmental needs of various stakeholders. Sustainability has become a major pillar of today’s business activities. Reporting is voluntary in Kenya but is gaining popularity by many companies to enhance reputation, increase brand visibility, and show commitment to environmental protection. However, the value of the practice is still contentious and what really motivates environmental disclosure becomes vital. The Kenyan investment community and other stakeholders lag behind America, Europe and Australia in their willingness and ability to cross-examine sustainability reports for risk and financial modelling. This study consequently aimed at assessing the effect of corporate environmental disclosure on financial performance of listed firms at the Nairobi Securities Exchange. The study established the effect of environmental disclosure on financial performance. It made use of longitudinal secondary data from the annual reports and financial statements. Content analysis of sampled reports was done to examine environmental disclosure practices. A checklist of environmental disclosure items and categories was developed and environmental disclosure indices computed. Casual research design was employed to determine the cause-effect relationship between corporate environmental disclosure and financial performance. Target population of the study was 61 listed companies. Purposive sampling was employed in selecting firms whose annual reports were available, resulting in 32 firms. Coefficient of Skewness was used to test the normality of data. Homoscedasticity and auto-correlation assumptions of the regression model were tested using scatter plots and Durbin Watson test. Linear regression model was used to determine the casual relationship between environmental disclosure and financial performance. The overall model was found to be significant with F=27.016, P˂0.05. The predictor variable explained 47.4% of changes in financial performance. Environmental disclosure with P˂0.05 had a positive significant effect in the mean financial performance. Thus firms should engage in environmental disclosure because it leads to increased financial performance. The findings are useful to the government and managers to ensure policies are put in place to ensure present generations meet their needs without compromising the ability of future generations to meet theirs, and form a basis for further research and knowledge generation.