International Journal of Engineering and Advanced Technology (IJEAT)

ISSN: 2249 – 8958, Volume-9, Issue-1, October 2019

Environmental, Social and Governance (ESG)

Disclosure and Its Impact on Financial
Performance of Top 100 Companies in Malaysia
and Australia
Sarannya Kengkathran

For example, Sauer [17] showed that there is no

Abstract: The definition of Environmental, Social and significant outperformance or underperformance of
Governance (ESG) is not obscure. ESG involvement is the sustainability indices over the market indices while Cheung,
proceeding dedication by commerce to act ethically and Jiang, Limpaphayom and Lu [7] argued that ESG disclosure
contribute to economic growth while improving the standard of
is positively correlated with company value. Barnett and
life of the employees and their families as well as the people
around them. In the attempt to investigate the impact of ESG Salomon [1] showed that the community relations screen
disclosure on financial performance of top 100 companies in yielded higher financial performance while the
Malaysia and Australia, this research scrutinises the annual environmental and labour screens reduced financial
reports of top 100 companies in Malaysia and Australia based on performance. This shows that different aspects of company
market capitalisation in 2017. This research has considered a social performance have different financial implications for
comparison between Malaysia, a developing country and companies and investors.
Australia, a developed country due to the purpose of evaluating Australia has specifically implemented a mandatory
the levels of disclosure based on different regulatory disclosure of ESG information in the ESG disclosure. ESG
requirements on ESG while assessing the impact of ESG
disclosure is mandatory for each company under the
disclosure on Company Financial Performance (CFP). The
reason being Australia is chosen as a benchmark for Malaysia to amendment to Section 99a of the Financial Statement Act in
enhance their regulatory requirement for level of ESG 2008. However, the act does specify topics on ESG that
disclosure. Overall, it is found that there is a positive impact of should be disclosed by the Australian companies, hence, it
ESG disclosure on CFP. gives significant freedom to the company to decide on the
relevant topics to be included in the ESG report. Besides
Keywords: Environmental, Social and Governance (ESG), that, information related to ESG together with the ESG
Company Financial Performance (CFP), annual report, policy, its actions and obtained results should be disclosed
stakeholder theory, agency theory in the ESG report. Australian‟s national policies also
encourage companies‟ adherence to international standards
I. INTRODUCTION such as the International Integrated Reporting Council (IIRC)
In Malaysia, the introduction of ESG disclosure started and the Sustainability Accounting Standards Board (SASB).
with the initiation of corporate responsibility practices. A Furthermore, if the companies opt to refer to the UN
clear guideline is available for companies to present the Global Compact, UN-supported Principles for Responsible
essential information related to ESG. Under Bursa Malaysia, Investment (UNPRI) or Global Reporting Initiative (GRI)
the CSR framework is applicable to all listed companies and standards via Communication on Progress report, Principles
it covers the main issues of environment, workplace, for Responsible Investment Report on Progress or
community, and marketplace. Sustainability Report, then these companies are exempted
Jitmaneeroj [11] shows that in the present years, investors from complying with the provisions of Section 99a to a
and policy makers have been seeking for the ESG certain extent. In conclusion, Australia requires mandatory
information attentively as they increasingly recognise that ESG disclosure however the companies are free to
the additional non-financial information contributes to the implement the reporting practices either by adherence to the
long-term sustainable performance of companies. Despite national ESG policies or the international reporting
having many companies conscious of the development of standards in disclosing ESG related matters.
ESG disclosure and striving to provide investors with non- Since there is uncertainty in the level of ESG disclosure
financial information, most companies have an alternative and limited descriptive study done in the past as
way of reporting because there is no specific disclosure communicated above, there is a gap found in which this
regulation for ESG information in Malaysia. research specifically decides to focus on the top 100
Some past studies compared the performance of socially companies in Malaysia and Australia. This is of particular
responsible investments and conventional investment. interest looking at current ESG issues surrounding the
industry, e.g. social issues with child labour, environmental
issues with product life-cycle problems, and even corporate

Revised Manuscript Received on September 22, 2019.

Sarannya Kengkathran, College of Graduate Studies, Universiti
Tenaga Nasional, Malaysia

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3579 & Sciences Publication
Environmental, Social and Governance (ESG) Disclosure and Its Impact on Financial Performance of Top
100 Companies in Malaysia and Australia
governance scandals with polemic around CEO market value or share price to the company‟s fundamentals
remuneration and the non-respect of shareholders rights. of profitability and growth. Thus, this research has
The difference in regulatory requirement for ESG considered an accounting measure which is Return on
disclosure in Malaysia, an emerging country without Assets (ROA) to analyse the impact of ESG disclosure on
mandatory regulatory requirement and Australia, a large CFP.
mixed-market country with established regulatory
requirement as a measure of great ESG practices motivates III. UNDERPINNING THEORIES
to conduct this research in order to analyse the impact of
A. Stakeholder Theory
ESG disclosure on CFP. Thus, by evaluating the level and
type of ESG information disclosed in the companies‟ annual According to Barnet [2], ESG activities have been
report, the research provides a contribution to investigate the conducted by companies to improve their relationship with
impact of ESG disclosure on the financial performance of their stakeholders. Stakeholder theory actually prevails the
top 100 companies in Malaysia and Australia based on moral and ethical values in management of a company. It is
market capitalization for each country in the year 2017. This considered a significant theory which will help users to
research chose Australia as a benchmark for Malaysia to understand the nature of ESG.
enhance their regulatory requirement for level of ESG Based on the view of the shareholder of a company, only
disclosure. the owners or stockholders of the company are considered
important. Therefore, the company has a huge responsibility
II. LITERATURE REVIEW in which they account that their most significant duty is to
increase value for the company. Companies are not only
A. ESG Disclosure concern towards the profitability but they also show some
ESG disclosure is a mandatory business activity disclosed concern towards stakeholders. Thus, this social approach has
in developed countries offering many opportunities, and that a clearer view on ESG which correlates to this research by
businesses have the responsibility to address problems that focusing on the responsibility of companies involving in
developing countries face, such as poverty, violation of ESG activities.
human rights, environmental degradation, political
B. Agency Theory
corruption and inequality [9].
In order to know whether ESG disclosure brings an According to Jensen and Meckling [10] an agency
advantage or disadvantage for the companies, it all relies on relationship is defined as a contract underneath which one or
the effectiveness of companies participating in ESG more people the principal interacts every other people (the
activities. ESG disclosure is a dominant instrument to agent) to carry out some provider on their behalf which
support the companies‟ deliberateness to attain the image entails delegating some selection making authority to the
that the companies aim for and the business targets. agent. If both parties of the settlement aim to maximise their
very own welfare, it is to be assumed that choices made by
B. ESG Disclosure in Malaysia using the agent are not continually within the great interest
Companies in the ASEAN region are more aware of the of the principal. The theory is primarily based on a situation
ESG disclosure frameworks such as Global Reporting in which it cannot be predicted from a company‟s directors
Initiative (GRI), United Nations Global Compact (UNGC) (agents) who are handling other person‟s cash that they may
and International Organisation for Standardisation (ISO) be looking after it in an equal manner as they would do it
26000. These frameworks intend to institutionalize ESG on with their personal cash.
a global level through the creations of norms, rules and These agents, therefore, are retained by the shareholders
procedures for ESG. However, since sustainability to reduce risk or exposure, and costs, while increasing
disclosure is still a voluntary practice in Malaysia today, returns and value for the company which eventually relates
transnational regulatory bodies such as ASEAN face many to the aim of this research in assessing the impact of ESG
challenges in promoting ESG disclosure due to the lack of disclosure on CFP.
direct power to penetrate national law [6].
IV. THEORETICAL FRAMEWORK AND
C. CFP
HYPOTHESIS DEVELOPMENT
Measuring CFP is not simple because of the many debates
concerning which measurement should be applied. There are A. Theoretical Framework
opinions as regards the market measures being the right ones A framework is developed based on the literature review
while other researchers‟ considered the accounting measures of this research. The framework represents the ESG
are the good ones and some underlined that the use of both indicators extracted from ESG modified disclosure index
of these measures is appropriate for CFP [12]. Market and that influences the CFP among top 100 companies based on
accounting measures are debated in literature because each market capitalization in 2017 in Malaysia and Australia
evaluate CFP differently and have also different theoretical respectively. The control variable of this research is the size
meaning being each subject to a particular bias. According of company which is measured by assessing the total assets
to Masa‟deh, Tayeh, Al-Jarrah and Tarhini [15], in the of the companies in Malaysia and Australia.
recent past the accounting measures helped the analyst to
project its future profitability, and the expected return from
investing in the company‟s equity securities whereas the
market measure can be used to compare the company‟s

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3580 & Sciences Publication
 International Journal of Engineering and Advanced Technology (IJEAT)
ISSN: 2249 – 8958, Volume-9, Issue-1, October 2019

Meanwhile, the independent variable of this research are A schematic diagram developed to assist readers to
the ESG disclosures. The dependent variable of this research visualise the theorised relationships between variables in the
is the CFP measure which is ROA of top 100 companies in model, as shown in Fig. 1.
Malaysia and Australia respectively.

Fig. 1 Schematic Diagram

B. Hypothesis Development
this research. The first hypothesis (H1) aims to look at the
Concurrent to the framework developed, the hypotheses
total ESG disclosure and its relationship with CFP for both
are developed by reviewing the literature review that
countries. While H2 to H4 is looking at the individual
explains about the ESG information predicted to influence
elements of ESG; for example, H2, H3 and H4 are
the financial performance of top 100 companies in Malaysia
investigating the relationship between Environment, Social,
and Australia.
Governance disclosure and CFP of both countries
Boerner [4] demonstrated that without making ESG
respectively. Therefore, by aligning with the purpose of this
reporting compulsory, a company is still able to furnish
research, the hypotheses developed are as follows:
extensive information in meeting the stakeholders‟
H1: There is a significant relationship between ESG
expectations in ESG disclosure. A comprehensive ESG
disclosure and CFP among top companies in Malaysia and
disclosure and reporting among voluntary adopter
Australia.
companies reflect the transparency and accountability of the
H2: There is a significant relationship between
companies to its society in the market [3]. Zhang [18] found
Environmental disclosure and CFP among top companies in
that in China, as part of the basic requirement on ESG
Malaysia and Australia.
information disclosed, companies have incentives to
H3: There is a significant relationship between Social
voluntarily disclose additional information truthfully to the
disclosure and CFP among top companies in Malaysia and
readers, which increase the company‟s ESG disclosure level.
Australia.
Prastowo [14] claimed that there is a positive relationship
between CSR disclosure and ROA. On the contrary, these
previous studies also supported that the ESG disclosure
affects the ROA of top 100 companies in Malaysia and
Australia. Hence, there are four hypotheses developed in

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3581 & Sciences Publication
Environmental, Social and Governance (ESG) Disclosure and Its Impact on Financial Performance of Top
100 Companies in Malaysia and Australia
H4: There is a significant relationship between Governance listed on Australian Securities Exchange as at 1 December
disclosure and CFP among top companies in Malaysia and 2017.
Australia. Hence, a sample of top 100 companies from each
Total assets are directly associated to company size. country‟s stock exchange was chosen based on market
However, the latter still has an arguable effect on capitalization in 2017 to represent this population because it
performance of company. Company performance decreases is known that the higher the market capitalization of a
as a company becomes larger and more diversified. company, the higher the involvement of companies in ESG
Meanwhile, El Ghoul, Guedhami, Kwok and Mishra [8] activities [5]. However, from the total 100 sample
argued that larger companies attract large-scale media and companies, only 138 companies had sufficient data. A non-
analyst coverage, which reduces information asymmetry and probability sampling method which is purposive sampling or
improves company performance. In our background, we also known as judgement sampling is used to select the
suppose that a companies‟ size may also affect its visibility, sample of this research because it focuses on a selected
since smaller companies may be able to better avoid media sample to meet the objective of this research. Hence, content
scrutiny [16], [13]. This research therefore control for analysis method will be used in this research by obtaining
company size using the total assets because the higher the data from company annual report. Dichotomous scoring is
total assets of a company, the better the relationship between used in measuring the ESG disclosures. Scoring of „0‟ for
ESG disclosure and ROA [5]. non-disclosure and „1‟ for any disclosure namely
quantitative, qualitative or financial or all of them will be
V. RESEARCH METHODOLOGY granted. There are 3 main indicators and 17 sub-indicators
for environmental elements, 5 main indicators and 23 sub-
A. Sample Selection and Data Collection
indicators for social elements and lastly, 4 main indicators
The overall population of this research is 788 companies and 13 sub-indicators for governance elements in the
listed on Bursa Malaysia main market and 2,275 companies modified index.

VI. RESULTS AND DISCUSSION

A. Descriptive Analysis
Table. I Descriptive Statistics: Australia
Variables N Min. Max. Mean Std. Deviation
Environmental Disclosure 94 16 17 16.98 .145
Social Disclosure 94 21 23 22.97 .230
Governance Disclosure 94 12 13 12.99 .103
ESG Disclosure 94 51 53 52.94 .286
Total Assets in AUD (000,000) 94 494 976,374 53,895 177,907
ROA in AUD 94 .0062 .5185 .094020 .0753857
Table. II Descriptive Statistics: Malaysia
Variables N Min. Max. Mean Std. Deviation
Environmental Disclosure 44 5 13 9.34 1.765
Social Disclosure 44 6 18 13.05 2.241
Governance Disclosure 44 1 10 6.52 1.874
ESG Disclosure 44 19 36 28.91 3.722
Total Assets in AUD (000,000) 44 273 241,606 24,439 46,809
ROA in AUD 44 .0032 .1932 .027591 .0355613

Table I and II provides the descriptive analysis on ESG ESG disclosure is 28.91. This explains that on average,
disclosure, total assets and ROA of Malaysian and they disclosed 28 items which is half of the total 53 items
Australian top companies. For Australian companies, the listed in the index on ESG information in their financial
mean value of social disclosure is 22.97 which is higher annual report.
compared to mean value of environmental disclosure of The descriptive analysis also shows that the mean value of
16.98 and governance disclosure of 12.99. Overall, the total assets among Australian companies is AUD
findings show that the mean value of ESG disclosure is 53,895,000,000 which is higher compared to Malaysian
52.94. This explains that on average, they disclosed 52 items companies showing mean value of AUD 24,439,000,000.
out of 53 items listed in the modified disclosure index on Meanwhile, the mean value of ROA among Australia
ESG information in their financial annual report. For companies is 0.94 which is higher compared to Malaysian
Malaysian companies, the mean value of social disclosure is companies showing mean value of 0.28.
13.05 which is higher compared to mean value of
environmental disclosure of 9.34 and governance disclosure
of 6.52. Overall, the findings show that the mean value of

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3582 & Sciences Publication
 International Journal of Engineering and Advanced Technology (IJEAT)
ISSN: 2249 – 8958, Volume-9, Issue-1, October 2019

Thus, comparatively Malaysian companies portray lower (000,000) Sig. .008

ROA. N 94
B. Normality Test
Table. VI Correlation Test: Malaysia
Table. III Normality Test: Australia
Pearson
Kolmogorov-Smirnov Independent/Control ROA in
Variables N Statistic Sig. Variable AUD
Environmental 94 .537 .000 ͨ Environmental Disclosure Correlation .042
Disclosure Sig. .787
N 44
Social Disclosure 94 .534 .000 ͨ
Social Disclosure Correlation .051
Governance Disclosure 94 .530 .000 ͨ Sig. .741
ESG Disclosure 94 .535 .000 ͨ N 44
Total Assets in AUD (000,000) 94 .407 .000 ͨ Governance Disclosure Correlation .141
Sig. .363
ROA in AUD 94 .126 .001 ͨ N 44
ESG Disclosure Correlation .122
Table. IV Normality Test: Malaysia
Sig. .432
Kolmogorov-Smirnov N 44
Variables N Statistic Sig. Total Assets in AUD Correlation -.305*
Environmental 44 .145 .021 ͨ (000,000) Sig. .044
Disclosure N 44
**. Correlation is significant at the 0.01 level (2-tailed).
Social Disclosure 44 .122 .100 ͨ *. Correlation is significant at the 0.05 level (2-tailed).
Governance Disclosure 44 .146 .020 ͨ
Since the data is normally distributed, Pearson test is used
ESG Disclosure 44 .123 .090 ͨ to test the correlation between ESG disclosure, total asset
Total Assets in AUD (000,000) 44 .326 .000 ͨ and ROA. Table V shows that there is a strong relation
ROA in AUD 44 .247 .000 ͨ between environmental, social, governance, overall ESG
disclosure and ROA among top Australian companies.
a. Test distribution is Normal. However, Table VI shows there is a positive relation
b. Calculated from data. between environmental, social, governance, overall ESG
c. Lilliefors Significance Correction. disclosure and ROA among top Malaysian companies. Table
V and VI also portrays that there is a significant control of
Kolmogorov-Smirnov test is used to observe whether the the company size on the correlation between ESG disclosure
data is normally distributed or not normally distributed. and CFP measured at total assets of the top companies.
Hence, table III and IV shows that each of the variables data
are normally distributed among Australian and Malaysian VII. CONCLUSIONS
top companies.
This research concludes that the objective of this research
C. Correlation Test is achieved by evaluating the levels of ESG disclosures,
Table. V Correlation Test: Australia examining the relationship between ESG disclosure and
CFP and investigating the differences of ESG disclosures
Pearson
among top companies in Malaysia and Australia. Hence, it is
Independent/Control ROA in AUD proven that there is a positive impact of ESG disclosure on
Variable CFP among top Australian companies and Australian
Environmental Correlation .058 companies‟ do extensively disclose their ESG information in
Disclosure Sig. .576 their annual reports. Thus, this can be benchmark for
N 94 Malaysia to enhance their regulatory requirement for level
Social Disclosure Correlation .001 of ESG disclosure.
Sig. .991
N 94 ACKNOWLEDGMENT
Governance Correlation .010
The author gratefully acknowledges the opportunity given
Disclosure Sig. .924
to present this research paper at the iGrad 2019 Conference
N 94
in September, 2019.
ESG Disclosure Correlation .034
Sig. .744
N 94
Total Assets in AUD Correlation -.273**

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3583 & Sciences Publication
Environmental, Social and Governance (ESG) Disclosure and Its Impact on Financial Performance of Top
100 Companies in Malaysia and Australia
REFERENCES
1. Barnett, M. L. and Salomon, R. M. (2006), “Beyond dichotomy: the
curvilinear relationship between social responsibility and financial
performance”, Strategic of Management Journal, Vol. 27 No. 11, pp.
1101-1122.
2. Barnett, M. L. (2007). „Shareholder influence capacity and the
variability of finance returns to corporate social responsibility‟, The
Academy of Management Review, vol.22, no.3, pp.794-816.
3. Boerner, H. (2012), “Getting Ahead of Legislated Mandates: Through
Voluntary Disclosure and Reporting, Corporate Managements Have
Choices Today”, Corporate Finance Review, Vol. 16, No.4, pp. 29-35.
4. Boerner, H. (2014), “Public Companies Respond to Investor
Expectation, Expanding Voluntary Disclosure on ESG Issues”,
Corporate Finance Review, Vol. 19, No. 1, 32-36.
5. Boyd, J. H., Liu, Q., and Jagannathan, R. (2006). The stock market‟s
reaction to unemployment news, stock-bond return correlations, and
the state of the economy. Journal of Investment Management, 4(4), 73–
90.
6. Brammer, S., Jackson, G. and Matten, D. (2012), “Corporate social
responsibility and institutional theory: new perspectives on private
governance”, Socio-Economic Review, Vol. 10 No. 1, pp. 3-28.
7. Cheung, Y. L., Jiang, P., Limpaphayom, P. and Lu, T. (2010),
“Corporate governance in China: a step forward”, European Financial
Management, Vol. 16 No. 1, pp. 94-123.
8. El Ghoul, S., Guedhami, O., Kwok, C. C., and Mishra, D. R. (2011).
Does corporate social responsibility affect the cost of capital? Journal
of Banking & Finance, 35(9), 2388–2406.
9. Jamali, D. and Mishak, R. (2007). Corporate social responsibility
(CSR): Theory and practice in a developing country context. Journal of
Business Ethics, 72, 362.
10. Jensen, M. C. and Meckling, W. H. (1976) Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership Structure. Journal
of Financial Economics, 3, 305-360.
11. Jitmaneeroj, B. (2016), “Reform priorities for corporate sustainability:
Environmental, social, governance, or economic performance?”,
Management Decision, Vol. 54 No. 6, pp. 1497-1521.
12. McGuire, J.B, Sundgren, A. and Schneeweis, T. (1988) „Corporate
Social Responsibility and Firm Financial Performance‟ The Academy
of Management Journal, Vol. 31, Issue 4, pp. 854-872.
13. Meznar, M. B., and Nigh, D. (1995). Buffer or bridge? Environmental
and organizational determinants of public affairs activities in American
firms. Academy of Management Journal, 38(4), 975–996.
14. Prastowo, D. (2002), Analisis Laporan Keuangan: Konsep dan Aplikasi.
YKPN: Yogyakarta.
15. R. Masa‟deh, M. Tayeh, I.M. Al-Jarrah and A. Tarhini (2015)
Accounting vs. market-based measures of firm performance related to
information technology investments, International Review of Social
Science and Humanities, 9(1).
16. Salancik, G. R., and Pfeffer, J. (1978). A social information processing
approach to job attitudes and task design. Administrative Science
Quarterly, 23, 224–253.
17. Sauer, D. A. (1997), “The impact of social-responsibility screens on
investment performance: evidence from the Domini 400 social index
and Domini equity fund”, Review of Financial Economics, Vol. 6, pp.
23-35.
18. Zhang, X. J. (2012). “Information relevance, reliability and disclosure”,
Review of Accounting Studies, Vol. 17, No. 1, pp. 189-226.

Published By:
Retrieval Number: A2691109119/2019©BEIESP Blue Eyes Intelligence Engineering
DOI: 10.35940/ijeat.A2691.109119 3584 & Sciences Publication