Effect of ESG Financial Materiality on Financial Performance of Firms: Does ESG Transparency Matter?

Transparency in ESG financial materiality disclosure by corporations is now in doubt due to the inconsistent ESG framework that governs ESG disclosures, particularly in developing nations like South Africa. This is evident in the financial performance of banks and manufacturing firms as a result of the higher rate of susceptibility to ESG issues. Hence, this study empirically investigated the effect of ESG financial materiality disclosure on the financial performance of banks and manufacturing firms in South Africa from 2015 to 2024. Also, the moderating role of ESG transparency on the relationship between ESG financial materiality disclosure and financial performance was investigated. Descriptive analysis, a correlation matrix, and panel regression analysis were employed for analysis purposes. The financial metrics include ROA, ROE, and Tobin’s Q, while ESG financial materiality disclosure and the ESG disclosure score of the firms were the independent variable and moderating variable, respectively. The results show that ESG financial materiality exerts a significant adverse impact on ROA and ROE but an insignificant positive effect on Tobin’s Q in banks. For manufacturing firms, the impact is insignificant and negative on ROA, ROE, and Tobin’s Q. Also, the interactive effect of transparency insignificantly weakens the effect of ESG financial materiality disclosure on financial performance in both banks and manufacturing firms. This concludes that the transparency in ESG financial materiality disclosure is not sufficient to improve financial performance in both sectors but should be integrated in the core business objectives of firms. Also, it suggests that over-disclosure and greenwashing of ESG reports should be avoided.