The Moderating Effect of Board characteristics in the Relationship Between ESG Disclosure and Financial Performance: Evidence from KSA

Abstract

With the increasing shift toward sustainable development and heightened societal scrutiny, companies are placing greater emphasis on environmental, social, and governance (ESG) disclosures. This study investigates the association between ESG disclosures and financial performance among companies listed on the Saudi Stock Exchange, focusing on how board characteristics influence this relationship. By analyzing a sample of Saudi-listed firms, the research assesses the impact of ESG disclosures, as well as their individual environmental, social, and governance components, on key financial performance indicators: Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS). The findings reveal a positive association between overall ESG disclosures and financial performance metrics. Environmental disclosures are particularly effective in enhancing ROA, social disclosures positively affect ROE, and governance disclosures significantly improve EPS. Additionally, the study highlights how board characteristics—such as ownership, size, and independence—moderate the relationship between ESG disclosures and financial performance. Specifically, board ownership has a positive moderating effect, while the impacts of board size and independence vary depending on the financial metric in question. These results emphasize the importance of ESG disclosures in influencing financial performance and underscore the significant role of board governance in strengthening this relationship. The study provides valuable insights from the Saudi context, offering both theoretical and practical implications for policymakers, investors, and corporate managers aiming to optimize ESG practices and enhance financial outcomes.