The Effect of Environmental, Social Governance (ESG) compliance on the financial performance of listed firms in Kenya

Abstract

In recent years, firms in Kenya have increasingly incorporated Environmental, Social, and Governance (ESG) disclosures into their annual reports to demonstrate their commitment to sustainability and attract investors. This study examines the impact of ESG compliance on the financial performance of firms listed on the NSE 20 index, using Return on Equity (ROE) as the key metric. Through multivariate regression analysis, the study explores the relationship between ESG compliance and ROE while accounting for factors such as firm size, industry, and market conditions. The findings indicate that ESG compliance has minimal impact on the financial performance of listed firms in Kenya. The study's primary objective was to assess whether ESG-compliant firms outperform non-compliant firms. This was evaluated by comparing the financial performance of firms that had consistently disclosed ESG information versus those that adopted compliance more recently. Results show that early adopters of ESG disclosures, those reporting before the NSE introduced its guidelines, experienced financial losses, while firms that only began compliance in recent years have yet to see any measurable impact on their performance. This research offers valuable insights for investors, policymakers, and corporate managers by shedding light on the financial implications of ESG compliance. It also provides guidance on integrating ESG factors into investment decisions and corporate strategies.

Keywords: ESG compliance, financial performance, return on equity (ROE), listed firms, Kenya, Nairobi Securities Exchange (NSE).