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ESG Disclosure and Firm Performance: Evidence after the Revision of

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Article in International Journal of Academic Research in Business and Social Sciences · December 2023
DOI: 10.6007/IJARBSS/v13-i12/19140

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 Vol 13, Issue 12, (2023) E-ISSN: 2222-6990

ESG Disclosure and Firm Performance: Evidence

after the Revision of Malaysian Code of Corporate
Governance
Noor Hidayah Ab Aziz1, Ahmed Razman Abdul Latiff2, Sajead
Mowafaq Alshdaifat3, Mohammad Noor Hisham Osman4, Nurul
Azlin Azmi 5
1,2,3 Putra
Business School, UPM, Serdang, Malaysia, 4 School of Business and Economics,
Universiti Putra Malaysia, 1,5 Faculty of Accounting, Universiti Teknologi Mara, Johor
Malaysia
Corresponding Author Email: pbs21104067@[Link]

To Link this Article: [Link] DOI:10.6007/IJARBSS/v13-i12/19140

Published Date: 18 December 2023

Abstract
Environmental, Social and Governance (ESG) is one of the vital concerns in the current
corporate environment. Firms must be transparent on ESG issues to create sustainable value
and fulfill stakeholders’ rights. Since the late 2000s, many countries, including ASEAN
countries, have mandated ESG disclosure to increase transparency. This study aims to
examine the effect of ESG disclosure on firm performance measured by profitability indicators
among Malaysian public listed firms with the data collected from 2017 after the revision of
the Malaysian corporate governance code from ‘comply and explain’ to ‘apply and explain’
until 2021. The data was gathered from the Thomson Reuters Eikon Database, which consists
of ESG scores and firm profitability through ROA and ROE. Using OLS regression method, the
results indicate that ESG disclosure positively and significantly affects ROA and ROE. While,
the results of each individual pillar of ESG (environmental, social and governance) revealed
that only ROA was strongly impacted by all the pillars, whereas ROE was only affected by the
social pillar. Further analysis revealed firms with higher ESG disclosure perform superior to
those with lower ESG disclosure. This study helps to enrich the knowledge of ESG disclosure
and its effect on firm performance. Particularly this study will help Malaysian firms to
strategies on ESG disclosure to realise its impact on performance. Besides, capital market
regulators will also have a direction to impose regulations pertinent to ESG.
Keywords: ESG disclosure, Firm's performance, CG Code, Legitimacy Theory.

Introduction
The evolution of environmental, social and governance (ESG) in today's corporate
environment, has prompted significant attention from practitioners and regulators (Atif et al.,

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2022). Firms are also expected to improve their non-financial transparency through ESG
disclosure in order to improve their performance and gain more support from stakeholders
( Zawawi at al., 2023; Gholami et al., 2022). In addition, the need for ESG increased as a result
of an increase in sustainability investments, which reached $20.6 billion in the United States
in 2019 which is more than threefold increase from the previous year (Morningstar Inc, 2020).
ESG safeguards stakeholders' interests, as the firm is obligated to act in its best interest
through good governance, environmental and social rights preservation. To quantify ESG
performance, businesses seek to determine the most appropriate method for obtaining an
ESG score from rating agencies or third parties. This score is significant since it will improve
their market reputation and competitive advantage. Even though these scores are not
standardized because different agencies employ different scoring methods, firms strive for a
higher rating score from the agency (Svanberg et al., 2022; Yoo & Managi, 2022). Therefore,
all of the above factors will push ESG to gain momentum and grow in popularity due to the
necessity for firms to attract investors and restore their confidence to invest in them.
With the introduction of the FTSE good index in 2014 and the Bursa Malaysia
Sustainability reporting framework in 2016, Malaysian-listed firms have increased the
voluntary disclosure of ESG. Malaysia is an exceptional example of sustainability disclosure,
as evidenced by the fact that Malaysian listed firms scored the best on the voluntary
disclosure index (8/10) in ASEAN according to FTI consulting survey in 2019, in addition to
adhering to practically all global ESG standards (SSE, 2021). The Corporate Governance (CG)
code also plays a vital role as a specific section on sustainability reporting is part of the
requirement to be fulfilled by public listed firms. As public listed firms are expected to comply
with CG Code, the Malaysian CG code has shifted from "comply and explain" to "apply and
explain" in 2017 to increase compliance. "Apply and Explain" is similar to a mandatory in
which it is presumed that firms are already compliant, and they must explain how they meet
the standards. However, under “Comply or explain,” firms still have the option of complying
with the code or deviating from it, as long as they offer justification for not complying (Seidl
et al., 2013).
The issue might be the firm's desire to meet minimum regulatory requirements rather
than increase compliance and boost the firm’s value (Sadiq et al., 2020). Besides, ESG
disclosure may have a negative impact on a firm's value if investors view them as "cheap
talk."(Chouaibi et al., 2022). Cheap talk or Greenwashing has an effect on society and the
economy as a whole. It will undermine trust and reduce a firm's credibility because society
may believe that the firms are making false or misleading claims about ESG in their reporting.
The above arguments lead to the question of how ESG disclosure may affect a firm's financial
performance. Therefore, the study's objective is to assess how ESG disclosure affects
performance among Malaysian public listed firms.
Using multiple proxies, numerous studies have examined the relationship between
ESG disclosure and firm performance in various settings, from developed to emerging
economies. However, few studies examine the impact of ESG disclosure on performance
following changes in CG codes to determine whether firms put their total commitment to
comply or merely fulfilling a basic requirement of disclosure standard. Therefore, this study
will concentrate on Malaysian public listed firms, with data collected from 2017 to 2021,
following the implementation of the CG code in 2017. This study will assist Malaysian public
listed firms in increasing compliance with ESG disclosure to improve performance.

Literature Review

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ESG In Malaysia
Malaysia has been an essential sample for ESG research since Malaysian firms started
implementing their first Corporate Social Reporting (CSR) Framework in 2006 (Mohammad &
Wasiuzzaman, 2021). Besides, Malaysia is considered an emerging market that is anticipated
to be the key driver of future global economic growth (Shakil et al., 2019). The requirement
to put ESG as part of the disclosure inside CG code was started in the Malaysian Code of
Corporate Governance 2012 (MCCG, 2012), which recommends that directors fully disclose
the firm's policies and implementation of ESG in its annual report. Followed by, On April 26,
2017, the Securities Commission of Malaysia published the updated Malaysian Code of
Corporate Governance (MCCG, 2017). This updated CG code emphasizes ESG by requiring
firms to disclose relevant ESG information and adhere to ESG reporting standards such as the
Global Reporting Initiative (GRI) and the Sustainability Reporting Guidelines (MCCG, 2017).
Given that the updated MCCG 2017 code is now subject to the apply and explain concept, the
firm is anticipated to enhance ESG disclosure to comply with the code.
Few studies on the impact of ESG on firm performance have been conducted in
Malaysia, with inconclusive results. For instance, Mohammad & Wasiuzzaman (2021) found
that increasing ESG disclosure will improve firm performance among Malaysian public listed
firms. This positive association was due to better access to financing and increased ESG
investing. Moreover, with the introduction of the FTSE4 Good Bursa Malaysia Index in 2014
has encouraged the firm to disclose ESG. Furthermore, Qoyum et al. (2021) examine ESG
disclosure as individual pillars and found that environmental and social pillars significantly
and favorably affect performance among Indonesian and Malaysian Islamic firms but not
governance pillars. This is because Islamic firms have taken a strategy to improve
performance by integrating Islamic values into ESG.
In contrast, Md Nor et al. (2016) indicate no association between environmental
disclosures and firm performance in Malaysian public listed firms. The author mentioned that
the possible reason would be low environmental disclosure during that sample period. The
same finding is presented by Atan et al. (2018), who found no correlation between the
performance of public listed firms and their ESG disclosure. This is due to the short study
period, which may not yield meaningful results, as stakeholders do not yet have confidence
in ESG initiatives by the firms. From here, we can see that Malaysia requires more ESG studies,
which will be helpful for the capital market and regulators seeking to enhance ESG disclosure
and implementation among Malaysian public listed firms.

Legitimacy Theory
The study incorporates the Legitimacy theory to better understand the relationship between
ESG disclosure and firm performance. According to legitimacy theory, a business depends on
social approval; hence, businesses must explore strategies to demonstrate their legitimacy
and market relevance to be accepted by stakeholders (DiMaggio & Powell, 1983; DasGupta,
2022). Numerous researches in the field of ESG employs legitimacy theory as an underlying
theory to explain the relationship between ESG disclosure and firm performance (Khan,
2022). According to DasGupta (2022), who studied ESG with sample firms from around the
world, firms will seek new strategies to improve their performance through ESG disclosure.
Besides, to demonstrate that the business is legitimate, firms will therefore provide ESG
disclosure to enhance their reputation among stakeholders (Sadiq et al., 2020). It is supported
by Lorena (2018), who adds that when a firm discloses its ESG activities, its reputation
improves because customers become more confident and gain stakeholder trust.

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Using Asian public listed firms, Abdul Rahman and Alsayegh (2021) demonstrate that
the firms' existence on the market is legitimated when they justify their existence through
ESG disclosure. This is true because ESG is one of the most vital concerns for businesses today.
In his study of highly sensitive industries, Shakil (2021) also discovered that firms with good
ESG disclosure perform better and have lower risk than those without ESG disclosure.
Furthermore, ESG disclosure enables firms to demonstrate to investors what they have done
for stakeholders and what benefits they have provided. Besides, firms can restore investor
confidence through ESG disclosure after being affected by controversies or ESG issues
surrounding the firms. Therefore, increasing the ESG strategies including ESG disclosure will
help increase performance.

ESG and Firm Performance

ESG comprises three fundamental pillars of sustainability, namely environmental (E), social
(S), and governance (G). Environmental concerns encompass a range of issues, such as climate
change, waste minimization, and pollution mitigation. The field of Social is primarily focused
on the provision of employee benefits and welfare. While shareholder rights and corporate
risk result in establishing Governance mechanisms (Armstrong, 2020). ESG is an extension of
CSR that includes additional governance pillars (Gerard, 2019). According to Chen (2020), ESG
indicates that the firm is socially and environmentally conscious. Past research has
demonstrated that ESG may improve a firm's financial condition, sustain consumer loyalty,
enhance its reputation, and provide a competitive advantage (Buallay, 2021; Wong et al.,
2020; Alsayegh et al., 2020).
Firms are obligated to improve transparency through ESG disclosure due to
stakeholder expectations, notably those of investors. ESG disclosure contributes to the non-
financial aspects of a firm's reporting by publishing data on climate change, human rights, and
social responsibility (Lagasio & Cucari, 2019). It is believed that firms with ESG disclosure can
attract investors and have a more significant amount of capital than those without (Li et al.,
2018). ESG disclosure encourages firms to become more sustainable by enabling firms to
analyze ethical and sustainable practices while maximizing financial performance (Jonsdottir
et al., 2021). Therefore, this will help to achieve sustainable countries as less harmful activities
to the environment, such as pollution and deforestation, better social and institutional
environment (Buallay, 2018). Numerous rating agencies, such as Bloomberg and Thomson
Reuters assign firms a score based on ESG disclosure (Alareeni & Hamdan, 2020). Due to the
increased availability of data, researchers are increasingly turning to third-party scores to
assess ESG disclosure. A large number of empirical studies have been conducted to investigate
the relationship between ESG disclosure and firm performance, with varying results. As
supported by Fatemi et al. (2018), the empirical literature on the effects of ESG on financial
performance does not produce unequivocal results.
Recent studies conducted in both developed and developing nations demonstrate a
significant (positive, negative, and mixed) correlation between ESG disclosure and firm
performance. Past studies showing a significant relationship are presented in Table 1.

Table 1:
Past Studies Showing ASignificant Relationship Between ESG And Firm Performance
Sample
Authors (Year) ESG Proxy FP Proxy Country Findings
Period

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ROA, ROE, Tobin's

Thomson
(Chouaibi et al., Q market-to-book UK &
Reuters ESG 2005 - 2019 Positive
2022) value, and asset Germany
score
turnover
(Zhao et al., Sustainability ROCE (return on
2007 - 2016 China Positive
2018) index capital employed)
(Albitar et al., Bloomberg ESG 2009-2018
ROA and ROE UK Positive
2020) score exclude 2013
(Alareeni & Bloomberg's ROA, ROE and
2009 - 2018 US Positive
Hamdan, 2020) ESG scores Tobin's Q
(Ademi &
MSCI ESG ROCE and Tobin's
Klungseth, 2017–2020 US Positive
rating Q
2022)
Thomson
(Giannopoulos
Reuters ESG ROA and Tobin's Q 2010 -2019 Norway Positive
et al., 2022)
score
Environmental
(Saygili et al., ROA and Tobin's Q
Disclosure 2007-2017 Turkey Negative
2022)
Score
(Duque-
Thomson
Grisales & Latin
Reuters ESG ROA 2011 - 2015 Negative
Aguilera- America
score
Caracuel, 2021)
Many
Thomson
(Garcia & ROA and Free cash Nations
Reuters ESG 2007 -2014 Mixed
Orsato, 2020) flow (mainly
score
the US)
Many
(Kalia & Thomson Nations
Aggarwal, Reuters ESG ROA and ROE 2020 (mainly Mixed
2022) score US and
UK)

Hypotheses Development
Using data from United Kingdom and Germany, Chouaibi et al. (2022) discovered a
significantly positive relationship between ESG and firm performance. This positive
relationship was portrayed as the result of a more significant commitment to socially
responsible practices and the use of ethical behaviour. This finding was supported by Albitar
et al. (2020), who concluded that firms in the UK consider ESG disclosure as a strategy for
improving firms' image and reputation with the expectation of long-term value creation.
While in China, Zhao et al. (2018) also discovered a positive and statistically significant
relationship due to standards and authority enforcement. Moreover, Alareeni and Hamdan
(2020) and Ademi and Klungseth (2022), who conducted their research in the United States,
discovered that the significant and positive outcome is a result of firms' use of ESG disclosure
as a strategy to attract investors and create product value. The same significant and positive
effect can be found in the Norwegian study of Giannopoulos et al. (2022).

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In contrast to the aforementioned result for developed countries, Saygili et al. (2022)
found a significantly negative relationship between ESG and firm performance in Turkey-listed
firms. Similar findings are made in another emerging market in Latin America, where Duque-
Grisales and Aguilera-Caracuel (2021) highlight the negative relationship caused by ESG not
being executed appropriately and the lack of institutional support. However, when developed
and developing countries are combined, Garcia and Orsato (2020) highlight a mixed outcome.
The outcome is negative for developing nations and positive for developed nations.
Therefore, it is consistent with the initial findings, which apply to developed and developing
countries. This result was confirmed by Kalia and Aggarwal (2022) research on developed and
emerging markets, where the difference is due to different levels of market development.
Furthermore, based on the preceding data, we can conclude that the findings in many
developing countries are mixed, whereas it reveals a favorable relationship in developed
countries. The possible explanation could be related to the country's efforts to adopt rules
that encourage and make ESG disclosure mandatory.
Even though previous research has found a significant association between ESG and
performance, other studies have also found an insignificant relationship. In their study of 53
countries, El Ghoul and Karoui (2020) showed no significant relationship between
environmental disclosure and performance. Kalia and Aggarwal (2022) found that the
association between ESG and performance in developing countries is either insignificant or
unfavorable. This is supported by Gholami et al. (2022) in their study of Australian firms, which
found that the insignificant outcome was due to firms lacking resources to apply ESG due to
factors such as small firms. Velte (2017) also observed no significant association between ESG
and Tobin's Q. The lack of significance could be due to the small number of observations.
Farooq (2015) discovered that ESG disclosure does not significantly affect firm performance
in areas with greater information asymmetries. Thus, based on the above conflicting result, it
is necessary to examine ESG disclosure's influence on performance to comprehend its
relationship better.
The link between ESG and firm performance was identified after reviewing the
theoretical and empirical evidence. Some claim that ESG is helpful for performance, while
others argue that it is insignificant. These inconsistent findings raised the question of whether
ESG truly affects performance. Besides, past scholars also highlight the importance of
analyzing each pillar individually (Buallay, 2018; Drempetic et al., 2020; Giannopoulos et al.,
2022). Based on the above, the following hypotheses can be developed for this study:

H1: Environmental, Social and Governance disclosure significantly affects firm performance
among Malaysian public listed Firms.
H1a: Environmental disclosure significantly affects firm performance among Malaysian
public listed Firms.
H1b: Social disclosure significantly affects firm performance among Malaysian public
listed Firms.
H1c: Governance disclosure significantly affects firm performance among Malaysian
public listed Firms.

Methodology
In this section, the discussion on the sample of the study is presented first. Followed by
methodology, where the study's variables, measurements and models are described.
Sample

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The population of this study consist of public listed firms in Malaysia in which their score is
available in Thomson Reuters Database. This study excludes banking and financial institution
due to different regulation and high volatility. The final sample comprises 42 firms that were
assigned an ESG score consistently for five years from 2017 to 2021. The year 2017 was
chosen because the "apply and explain" concept of MCCG was implemented in 2017. The data
on the ESG scores and financial data were downloaded from Thomson Reuters Eikon
Database. Further, the final sample can be classified into nine industries. Table 1 illustrates
the distribution of 42 collected firms according to the type of industries.

Table 2:
Distribution of Firms by Industries
Type of industries Number of firms No. of Observations
Basic Materials 4 20
Consumer Cyclical 5 25
Consumer Non-Cyclical 9 45
Energy 5 25
Healthcare 3 15
Industrials 6 30
Real Estate 3 15
Technology 4 20
Utilities 3 15
Total 42 210

Variables And Measurement

Dependent variables
This study measures firm performance using two widely used performance proxies: Return
on assets (ROA) and return on equity (ROE). ROA is commonly used in the literature to
examine the effects of ESG on firm performance (Velte, 2017; Kim & Li, 2021; Fatemi et al.,
2018; Duque-Grisales & Aguilera-Caracuel, 2021; SokHun et al., 2023). This ratio can be used
to analyse and compare the performance of firms in the same industry over time (Garcia et
al., 2017). ROE is another indicator of its overall financial performance used by prior research
(Baran et al., 2022; Alareeni & Hamdan, 2020; De Lucia et al., 2020; Bunea et al., 2019; Buallay,
2018). ROE measures firms' performance in maximizing shareholder return (Febrianto et al.,
2022).

Independent variables
The independent variables are the total ESG score and the individual Environmental, Social,
and Governance score (Halid et al., 2023). The score is derived from the Thomson Reuters
Eikon database, which displays each score according to the used parameter. Thomson Reuters
ESG Scores (2017) uses 57 distinct parameters to establish an environmental score disclosure
for Environmental disclosure score. This category includes activities such as pollution control
and the use of renewable energy. While for the social score, 60 indicators provide information
on the policies and programs implemented by businesses in relation to health, safety,
workplace diversity, and other categories. As for the governance score, 48 indicators measure
the leadership team's transparency with stakeholders, such as the completion of

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sustainability reports and minority shareholder rights. The total ESG score was calculated as
the sum of each individual score. The score has a minimum value of 0 and a maximum of 100.

Control variables
Our model used the firm size and debt ratio as control variables. Size is another crucial factor
that can affect performance. In the literature, size is widely employed as a control variable to
investigate the effects of ESG on firm performance (Aydomuş et al., 2022; Oprean-Stan et al.,
2020; Wasiuzzaman et al., 2022). The debt ratio assesses a firm's financial structure and
reflects its riskiness. It significantly influences the firm's financial performance (Zhao et al.,
2018). Table 3 below shows the variables and the explanation on measurement.

Table 3:
Summary Of Variables
Dependent Variables Explanation Sources
ROA Net Profit/ Total assets Eikon Datastream
ROE Net Profit/ Total equity Eikon Datastream
Independent Variables Explanation Sources
ESG Environmental, Social and Governance Eikon Datastream
Performance Score
ED Environmental disclosure score Eikon Datastream
SD Social disclosure score Eikon Datastream
GD Governance disclosure score Eikon Datastream
Control Variables Explanation Sources
SIZE Measured by natural logarithm of total Eikon Datastream
assets
DR Leverage/ Total assets Eikon Datastream

Equation Model
The OLS regression method is used to investigate this study's research objectives. The data
consists of 42 public listed firms over five years. To investigate how ESG affects firm
performance proxied by ROA and ROE among public listed firms in Malaysia, the following
empirical model is developed as below:

Model 1 ROAit = β0 + β1 ESG it + β2 SIZE it + β3 DR it + ε

Model 2 ROAit = β0 + β1 ED it + β2 SIZE it +β3 DR it + ε
Model 3 ROAit = β0 + β1 SD it + β2 SIZE it + β3 DR it + ε

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Model 4 ROAit = β0 + β1 GD it + β2 SIZE it + β3 DR it + ε

Model 5 ROEit = β0 + β1 ESG it + β2 SIZE it + β3 DR it + ε
Model 6 ROEit = β0 + β1 ED it + β2 SIZE it +β3 DR it + ε
Model 7 ROEit = β0 + β1 SD it + β2 SIZE it + β3 DR it + ε
Model 8 ROEit = β0 + β1 GD it + β2 SIZE it + β3 DR it + ε
Where, ROAit and ROEit are the dependent variables for Firm (i) in period (t), and ESGit , EDit,
SD it and GD it are the independent variable "ESG score", "Environmental score", "Social
score", and "Governance score" for Firm (i )in period (t). Furthermore, the control variables
size and leverage are SIZEit and LEVit for Firm (i) in period (t), and ε is the error term.

Results And Discussion

The study's results and findings are presented in this section. The descriptive result is
presented first, followed by the empirical findings. The study's regression model is then
presented, indicating whether the null hypothesis should be rejected if the significance level
is less than 0.1 at 90% confidence interval.

Descriptive Analysis
Table 5 shows the descriptive statistics employed for this study to measure variables. The
average value for the ROA is 0.509, with ranging from -0.562 to 0.799. The average ROE is
0.181, with values ranging from -0.860 to 2.846. For the independent variable of ESG score,
the mean is 57.538, with value ranging from 12.193 to 90.544. The value of ESG reveals that
low ESG among the sample which is only 13%. Specifically, environmental disclosure (ED) has
a mean value of 52.383, with a minimum of 3.2189 and a maximum of 90.881. Social
disclosure (SD) has a mean value of 62.554, with a minimum of 23.088 to a maximum 97.397.
The Government disclosure (GD) has a mean value of 54.072, with a minimum of 10.437 to a
maximum 95.234. Furthermore, the control variables, the mean for firm size (SIZE) is 6.54,
with a range of 5.4 to 7.397. The mean value of debt ratio (DR) is 0.508, with a range from
0.053 to 1.32. The table 4 shows that the standard deviation for all the variables is within the
expected range.

Table 4:
Descriptive Statistics
Mean Median SD Min Max Skewness Kurtosis

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Dependent Variables
ROA .0509 .0338 . 121 -. 562 . 799 0.916 2.742
ROE .181 . 0606 . 437 -. 860 2.846 2.113 3.804
Independent Variables
ESG 57.538 58.116 13.829 13.193 90.544 -0.141 3.086
ED 52.384 53.190 18.793 3.2189 90.881 -0.350 2.660
SD 62.554 62.466 15.814 23.088 97.397 0.081 2.463
GD 54.072 54.859 20.760 10.437 95.234 -0.123 2.062
Control Variable
SIZE 6.540 6.637 . 450 5.400 7.397 -0.499 2.776
DR .509 .478 . 203 . 053 1.320 0.491 3.878
Notes: ROA is derived from net profit divided by total assets; ROE is derived from net profit
divided by total equity; ESG derived from Environmental, Social and Governance
performance Score; ED derived from Environmental disclosure score; SD derived from social
disclosure score; GD derived from Governance disclosure score; SIZE derived from natural
logarithm of total assets; DR derived from leverage divided by total assets.

Correlation Analysis
According to Hair (2010), the acceptable correlation value should not greater than 0.8 to
reduce multicollinearity issues. As presented in Table 5 below, we can see that the dependent
variables, which are ROA and ROE, and independent variables of ESG total score and
individual score, as well as control variables of firm size and debt ratio are not highly correlate.
However, for ESG total score and individual score the correlation is slightly high due to total
score of ESG is made up of individual score of ED, SD, and GD. But the correlation value is still
within the accepted level. The positive and significant correlation among variables is an early
prediction that the relationships among variables are positive. However, a negative and
significant correlation exists for control variables: size and debt ratio (Sharma et al., 2020).

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Table 5:
Correlation
Result

Variables ROA ROE ESG ED SD GD SIZE Debt

Ratio
ROA 1.000
ROE 0.560*** 1.000
ESG 0.246*** 0.275*** 1.000
ED 0.212*** 0.133* 0.697*** 1.000
SD 0.215** 0.249*** 0.857*** 0.466*** 1.000
GD 0.140** 0.191*** 0.712*** 0.168 0.478*** 1.000
SIZE - - - -0.122* -0.309*** - 1.000
0.338*** 0.330*** 0.272*** 0.134**
DR -0.170** 0.400*** 0.127* 0.086 -0.022 0.154** 0.001 1.000
Note(s): *, ** and ***denotes the significance level of correlation at 1, 5 and 10%, respectively.
ROA is derived from net profit divided by total assets; ROE is derived from net profit divided by total
equity; ESG derived from Environmental, Social and Governance performance Score; ED derived from
Environmental disclosure score; SD derived from social disclosure score; GD derived from Governance
disclosure score; SIZE derived from natural logarithm of total assets; DR derived from leverage divided
by total assets.

Regression Analysis
Tables 6 and 7 below present the OLS regression result for both proxies of performance: ROA
and ROE. The results indicate that total ESG disclosure positively and significantly affects ROA
and ROE. This is consistent with prior research that discovered a significant positive
relationship between ESG and firm profitability (Chouaibi et al., 2022; Albitar et al., 2020).
Therefore, it has been demonstrated that ESG disclosure boost company performance in
which regulatory enforcement may one of the contributing factors towards the increase in
disclosure that led to increase in firm performance (Zhao et al., 2018). Furthermore, ESG
dislosure is able to increase the firm's reputation and customer trust, attract investors and
create product value, all of which will lead to improved performance (Alareeni & Hamdan,
2020; Ademi & Klungseth, 2022). The result is also consistent with the legitimacy theory,
which posits that firms' ESG strategies, including ESG disclosure, can boost firm performance,
better stakeholder relationships, and legitimize their existence in the market. Therefore, the
first hypothesis H1 is therefore supported. Our findings also differ from previous studies
conducted in Malaysia, which showed mixed or non-significant results (Md Nor et al., 2016;
Atan et al., 2018).
Furthermore, this study looked at individual Environmental, Social, and Governance
pillars and found that each pillar affects performance differently. Based on Table 6, all ESG
pillars positively and significantly affect ROA. While based on Table 7, only social pillars affect
ROE positively and significantly. This discovery is intriguing and fascinating because it differs
from previous research that examined the pillars separately. For instance, in past studies
conducted by Buallay (2019) when reviewing the pillars individually, only the environmental
score significantly affects ROA, indicating that firms need to pay more attention to the
environment than social and governance (Yixi & Sharon, 2023). In another study, Tarmuji et
al. (2016) found that only social and governance pillars significantly impact performance, but

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the environment does not because environmental efforts require a huge investment.
Therefore, our result showed that all pillars significantly affect ROA, demonstrating that they
are all equally important. In addition, the social pillar needs further attention because it
significantly impacts both ROA and ROE. In conclusion, all H1a, H1b and H1c are supported
when performance is measured by ROA. However only H1b is supported when performance
is measured by ROE.
For the control variable, the outcome showed that firm size and debt ratio negatively
affect firm performance when measured by ROA. However, for ROE, only size is negatively
and significantly affecting performance. This is consistent with previous studies that
discovered a negative relationship between firm size and firm performance (Hirdinis, 2019;
Niresh & Velnampy, 2014).

Table 6:
Regression Model (ROA)
Model 1 Model 2 Model 3 Model 4
Intercept 0.5170 0.5998 0.5778 0.6363
3.99*** 5.08*** 4.30*** 5.33***
ESG 0.0017 - - -
2.92***
ED - 0.0012 - -
2.98***
SG - - 0.0009 -
1.76*
GD - - - 0.0007
1.94**
SIZE -0.0771 -0.0851 -0.0814 -0.0868
-4.35*** -4.96*** -4.49*** -4.99***
DR -0.168 -0.1112 -0.1005 -0.1137
-3.07*** -2.95*** -2.63** -2.94***
Adj. R2 (%) 16.59 16.73 14.41 14.68
N 210 210 210 210
Notes: Note(s): *, ** and ***denotes the significant level of correlation at 1, 5 and 10%,
respectively.
ROA is derived from net profit divided by total assets; ESG derived from Environmental,
Social and Governance performance Score; ED derived from Environmental disclosure score;
SD derived from social disclosure score; GD derived from Governance disclosure score; SIZE
derived from natural logarithm of total assets; DR derived from leverage divided by total
assets.

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Table 7:
Regression Model (ROE)
Model 5 Model 6 Model 7 Model 8
Intercept 1.3345 1.7235 1.1948 1.6742
3.08*** 4.31*** 2.71*** 4.21***
ESG 0.0047 - - -
2.40**
ED - 0.0014 - -
1.00
SG - - 0.0048 -
2.81***
GD - - - 0.0019
1.48
SIZE -0.2812 -0.3131 -0.2683 -0.3085
-4.75*** -5.39*** -4.50*** -5.32***
DR 0.8204 0.8495 0.8692 0.8310
6.44*** 6.62*** 6.91*** 6.44***
2
Adj. R (%) 27.88 26.23 28.61 26.65
N 210 210 210 210
Notes: Note(s): *, ** and ***denotes the significant level of correlation at 1, 5 and 10%,
respectively.
ROE is derived from net profit divided by total equity; ESG derived from Environmental,
Social and Governance performance Score; ED derived from Environmental disclosure score;
SD derived from social disclosure score; GD derived from Governance disclosure score; SIZE
derived from natural logarithm of total assets; DR derived from leverage divided by total
assets.

Additional Analysis
Based on the result from Table 6, since ROA showed a positive and significant relationship
with ESG disclosure, further analysis is needed to see whether those firms above or below the
median score (58.12%) improve performance or fulfilling basic requirement. Table 8 shows
that if the firms get a higher ESG disclosure score above the median score, they will have
superior performance in, which is significant at 1%. This indicates that firms with higher ESG
disclosure improve significantly compared to those below the median score, which will only
improve slightly, which is only significant at 10%.

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Table 8:
ESG Disclosure Score Median Analysis.
ROA ROA
Above median ESG score Below Median ESG score
(> 58.12%) (<58.12%)
Intercept -0.2117 0.0363
-1.99** 0.60
ESG 0.0051 0.0022
3.52*** 1.97*
SIZE -7.25 -2.34
-3.04*** -1.17
DR -0.0697 -0.1822
-1.27 -3.38***
Adj. R2 (%) 18.29% 13.11
N 210 210
Notes: Note(s): *, ** and ***denotes the significant level of correlation at 1, 5 and 10%,
respectively.
ROA is derived from net profit divided by total assets; ESG derived from Environmental,
Social and Governance performance Score; ED derived from Environmental disclosure
score; SD derived from social disclosure score; GD derived from Governance disclosure
score; SIZE derived from natural logarithm of total assets; DR derived from leverage divided
by total assets.

Conclusion
This study added to the growing literature by highlighting the potential association between
ESG disclosure and firm performance in the Malaysian setting, one of the developing markets
in ASEAN. Previous studies have highlighted the gap in ESG studies, primarily conducted in
developed countries (Abdul Rahman et al., 2021). According to Nirino N. et al. (2021), the
researcher should ought to investigate the development of ESG in Asia and other developing
countries. Besides, this study focuses on one country in which the result is unique to the
Malaysian case. This study examines the impact of ESG on the financial performance of public
listed Malaysian firms. The data sample consists of 42 firms between 2017 and 2021. A pooled
data regression model is applied to test the research objectives and hypothesis using the two
most prevalent accounting proxies, ROA and ROE, as dependent variables. The results
demonstrated that it is worthwhile for the firm to implement ESG, despite inconsistent
findings in the past literature regarding how ESG can enhance performance. Due to the
conflicting results of previous researchers, the hypotheses of this study are presented in a
positive and significant manner, as ESG is expanding in Malaysia and regulation on ESG is
prevalent. The results conclusively demonstrate that both ROA and ROE, two performance
indicators, are significantly impacted by total ESG disclosure. This result showed that the firms
had fully committed to complying with ESG rather than fulfilling basic requirements,
evidenced by good performance. Therefore this relationship suggests that firms should
consider ESG as one of the critical elements that could improve performance. Moreover, the
results of each individual pillar revealed that ROA was strongly impacted by all of the pillars,
whereas ROE was solely affected by the social pillars. The reason could be that all pillars are
equally significant and help firms perform better as measured by ROA. Additionally, since it
influences both performance measures, the social pillar requires extra attention. Further

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analysis revealed that firms with higher disclosure scores above the median would perform
noticeably better than those with lower scores below the median. This finding suggests that
firms with greater ESG disclosure will outperform those with lower disclosure levels. Since
this study focuses solely on Malaysian public listed firms, it benefited specifically to the
Malaysian context. These results are also crucial for policymakers, such as the security
commission, as they will help them implement ESG-related policies to boost ESG participation
among businesses and address potential challenges.
Despite the fact that this study adds to the literature by focusing on Malaysian firms,
it is noted that Malaysian firms need to put in more effort in disclosing ESG. This study has
some limitations that provide an avenue for future research. Firstly, only a limited number of
samples can be obtained through the database. Thus, it would be more meaningful if the data
set were more extensive. As the sample is limited, this study employed pooled regression
method. Therefore future studies can employ different analyses for a bigger sample. Another
limitation of the study is that we focus on accounting-based measurement for the proxies of
firm performance when other proxies such as Tobin's Q exist. Therefore this is an opportunity
for future research to increase more samples with better proxies involving more years since
ESG issues are evolving and still relevant. Besides, the emphasis on ESG issues has risen in the
Malaysian Code of Corporate Governance 2021. As a result, studying the sample after 2021
could be interesting for future research. Our research provides valuable information to
stakeholders to better understand how ESG influences firm performance to help their
investing decisions. Additionally, assist capital market regulators in imposing regulations
pertinent to ESG.

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Appendix A
Firm Name Sector
Lynas Rare Earths Ltd Basic Materials
Press Metal Aluminium Holdings Bhd Basic Materials
Kuala Lumpur Kepong Bhd Basic Materials
Petronas Chemicals Group Bhd Basic Materials
Astro Malaysia Holdings Bhd Consumer Cyclicals
UMW Holdings Bhd Consumer Cyclicals
Media Prima Bhd Consumer Cyclicals
Genting Malaysia Bhd Consumer Cyclicals
Genting Bhd Consumer Cyclicals
Sime Darby Bhd Consumer Non-Cyclicals
Fraser & Neave Holdings Bhd Consumer Non-Cyclicals
British American Tobacco (Malaysia) Bhd Consumer Non-Cyclicals
FGV Holdings Bhd Consumer Non-Cyclicals
Nestle (Malaysia) Bhd Consumer Non-Cyclicals
IOI Corporation Bhd Consumer Non-Cyclicals
Genting Plantations Bhd Consumer Non-Cyclicals
Hap Seng Consolidated Bhd Consumer Non-Cyclicals
PPB Group Bhd Consumer Non-Cyclicals
Bumi Armada Bhd Energy
Petronas Dagangan Bhd Energy
Sapura Energy Bhd Energy
Dialog Group Bhd Energy
Malaysia Marine and Heavy Engineering Holdings Bhd Energy
Hartalega Holdings Bhd Healthcare
IHH Healthcare Bhd Healthcare
Top Glove Corporation Bhd Healthcare
Misc Bhd Industrials
Capital A Berhad Industrials
Westports Holdings Bhd Industrials
IJM Corporation Bhd Industrials
Malaysia Airports Holdings Bhd Industrials
Gamuda Bhd Industrials
UEM Sunrise Bhd Real Estate
S P Setia Bhd Real Estate
IOI Properties Group Bhd Real Estate
Axiata Group Bhd Technology
[Link] Bhd Technology
Telekom Malaysia Bhd Technology
Maxis Bhd Technology
YTL Corporation Bhd Utilities
Petronas Gas Bhd Utilities
YTL Power International Bhd Utilities

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