The impact of environmental, social and governance (ESG) disclosure on firm financial performance: evidence from Hong Kong

Purpose This study investigates the impact of environmental, social and governance (ESG) disclosure on firm financial performance under a mandatory disclosure regime in Hong Kong. Design/methodology/approach The authors examine the largest 109 firms listed on the Hong Kong Exchange (HKEX) as of the financial year of 2019. The authors use a manually constructed index based on the most current 2019 ESG Reporting Guide launched by HKEX, followed by quantitative statistical methods using a model that follows the valuation framework by Ohlson. Findings The authors find a significant positive association between total ESG disclosure level and firm financial performance in the main tests. However, when the total ESG scores are partitioned into environmental and social subscores, the results show that only social disclosures are value relevant. Moreover, the results demonstrate that environmental and social subscores are both significant when return on assets (ROA) is used as a dependent variable. Furthermore, the robustness tests show that only qualitative ESG information is value relevant to share prices, while both quantitative and qualitative ESG information are relevant to ROA. In addition, the disclosure quality of annual reports alone is good in explaining the firm financial performance in this study. Originality/value This study contributes to existing non-financial reporting literature using hand-collected data as well as examining the firm financial performance of ESG reporting under the mandatory disclosure regime in the Hong Kong context.