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Effects of Environmental Disclosure on Financial
Performance of Manufacturing Companies in Nigeria
Adepoju, Jadesola Abiodun; & Adeagbo, Khadijat
Ayobami
Department of Accountancy, the Polytechnic, Ibadan
Corresponding Author: dotun4me@gmail.com
DOI: https://doi.org/10.70382/ajbdmr.v7i7.013
Abstract
The study focused on the effect of environmental disclosure on financial
performance of manufacturing companies in Nigeria. The research adopted the
ex-post facto research design. The study population comprised of all 43
manufacturing Companies on the Nigerian stock exchange. The study made use
of secondary data which was extracted from the annual reports and account of the
manufacturing companies for the years 2017 to 2023. Data was analysed using
multiple regression technique. Findings showed that environmental disclosure has
a positive and significant effect on firm performance. Based on the findings, the
study concludes that companies that prioritize environmental transparency are
better positioned to enhance their financial performance. The study therefore
recommended that there is need for companies to integrate sustainability reporting
into their long-term strategic planning to prevent fluctuations in environmental
disclosure practices. This can be achieved by adopting internationally recognized
frameworks such as the Global Reporting Initiative (GRI) or the Sustainability
Accounting Standards Board (SASB) to ensure consistency and comparability in
environmental disclosures across time and industries.
Keywords: Corporate responsibility, Environmental disclosure, Financial
performance, Manufacturing companies, Sustainability reporting.
Journal of Business Dev. and Management Res. (JBDMR)
African Scholar
Publications
& Research
International
www.africanscholarpub.com
VOL. 07 NO. 7,
FEBRUARY, 2025
E-ISSN 3026-9679
P-ISSN 3026-9423
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Introduction
Financial performance is a critical
consideration for every profit-making
company which is the bottom line for
assessing the goals set. It is used to
measure company’s overall financial
health and balance over a given period of
time. Furthermore, it is the process of
measuring the results of a company’s
policies and operations in financial terms.
In broader sense, financial performance
refers to the degree to which financial
objectives are being met. Financial
performance has attracted considerable
academic and professional discourse
because the overall financial performance
of various firms including banks, among
other institutions, determines to a large
extent the economic performance of
Nigeria. The market- based measures of
financial performance (price to earnings
ratio, earnings yield and dividend yield)
are considered as proxies for banks
financial performance. It is the process of
measuring the results of a company’s
policies and operations in financial terms
(Olasupo & Akinselure, 2017). In every
organizational context, performance and
production are measured to determine the
capability and growth of a business
enterprise within a given period of time.
The performance of an organization is
now being judged not only on the basis of
its financial results, but also with regards
to its contribution to protect and improve
environment. Thus, environmental
disclosure has become an important
variable in the models used by the
investors and creditors, to determine the
risk associated with their investment. As
a result, accounting of environmental
issues and the disclosure of such issues
with their associated cost in the annual
reports or by other medium has become
an important part of corporate accounting
and reporting system.
Environmental issues have increasingly
drawn the attention of the world at
different levels, and corporate social and
environmental responsibility has become
a major contemporary focus of business,
government and community attention
globally (Okpala & Iredele, 2018).
However, the increase has largely
influenced business to engage in
environmental management and practice
including environmental reporting,
Environmental accounting and reporting
has become one of the major issues that
organisations grapple with on daily basis.
The turn of events in corporate
sustainability and growth has brought
about demands for stakeholder-based
accounting and reporting. The success of
every corporate organisation is dependent
mostly on its operational environment as
no business can survive without the
environment. The role of the environment
and its proven immense contribution to
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the continued success of corporate organisations, have necessitated the concept of
environmental accounting as part of corporate accounting system (Wen &
Zhou, 2017). Furthermore, Adegboyegun, Alade, Ben-Caleb, Ademola, Eluyela, and
Oladipo opined that environmental accounting is the effort of accounting standard
setters, professional organizations and governmental agencies to get corporations to
participate proactively in cleaning and sustaining the environment and to describe
fully, their environmental activities in either their annual reports or stand-alone
environmental disclosure.
The performance of an organization can however be judged not only on the basis of
its financial results, but also with regards to its contribution to protect and improve its
environment. Thus, environmental disclosure has become an important variable in the
models used by the investors and creditors to determine the risk associated with their
investment. As a result, accounting of environmental issues and the disclosure of such
issues with their associated cost in the annual reports or by other medium has become
an imperative part of corporate accounting and reporting system (Okwuosa &
Amaeshi, 2017).
Environmental disclosure practice has grown significantly over the last years,
especially in developed countries (Morros, 2016). However, environmental disclosure
is still weak and evolving in developing countries including Nigeria. A survey made
by Price-Water House Coopers (PWC) in 2019, revealed that most investors are
dissatisfied with current environmental reporting practice and are seeking improved
sustainability disclosures. In regard to this, companies have a pressing need to provide
more reliable information about their environmental disclosure in their annual reports.
Companies are very conscious of involvement of controversial events that may
damage the company’s reputation and goodwill in the market, and on the other hand
negatively affect the financial, market performance and sustainable growth of the
company. The understanding that being socially and environmentally responsible, can
facilitate long-term growth goals, raise productivity and optimize both stakeholders
and shareholders’ value. This has made sustainability issue a major problem for
business of all size or age to preserve capital for future generations (Nor, Bahari,
Adnan, Qamaral, Kamal & Ali 2016). Thus, the study aims at examining the effects
of environmental disclosure on financial performance of manufacturing companies in
Nigeria for the period of 2017 to 2013,
Literature Review
Environmental Disclosure Reporting
The concept of environmental disclosure reporting gained greater publicity right from
the United National Conference on Environmental and Development (UNCED) held
in Rio de Janeiro in June 1992. Environmental disclosure is an environmental
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management strategy to communicate with stakeholders. Environmental disclosure is
as well commonly regarded as corporate social responsibility reporting (Ezeagba,
John-Akemelu, & Umeoduagu, 2017). It can also be defined as the provision of public
and private information, financial and non-financial information, and quantitative and
non-quantitative information regarding to the organization's management of
environmental issues. This information is provided in the annual report or in any other
form, most of the time a separate environmental report is issued (Eluyela & Ilogho
2016). This separate environmental report is often referred to as “environmental policy
report”. The World Business Council for Sustainable Development (WBCSD) has
helped in providing this definition of environment policy reports. Public reports by
companies to provide internal and external stakeholders with a picture of corporate
position and activities on economic, environmental and social dimensions. In short,
such reports attempt to describe the company's contribution toward sustainable
development (WBCSD, 2002).
An international survey of environmental reporting on the 100 largest companies by
revenue from a sample of 2200 firms in 22 countries concluded that, nowadays,
environmental reporting is widely adopted by organizations, as the 80 percent of the
world's largest company’s issues stand-alone reports. The Association of Chartered
and Certified Accountants (ACCA), described environmental disclosures as a mixture
of narratives, including objectives, explanations and numerical data, such as the
amount of pollution, resources consumed for a specific accounting period on the
environmental effect of a company. Environmental Disclosure is a formal statement
that defines the environmental burden and efforts of an organization, including the
objectives of the company, environmental policies and impacts regularly reported and
released to the public (Ezejiofor & Erhirhie, 2018).
Environmental accounting, in terms of moral, economic, legal, ethical and
discretionary standards is best defined as the achievement or perception of the
achievement of the desired ends of society (Falola, Alasia & Udochukwu, 2018).
Environmental performance is an asset that produces future rewards. It is the product
of a competitive mechanism through which businesses signal to constituents their main
characteristics with regards to their social standing. The primary purpose of
environmental disclosure is to examine and incorporate in the firm annual reports,
issues that bother on environmental hazard that are not taken cognizance of traditional
or conventional accounting function which stakeholders can use for decision making.
Disclosure of corporate environmental activities stressed the necessity for a close
monitoring of natural resources and the corporation’s harmful effect on the society
where it is operating. Environmental effects caused by activities of firms especially
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those in the manufacturing, oil and gas and banking include pollutions like noise,
waste, hazardous emission, spillages, degradation (Solikhah, Wahyudin, Yulianto &
Fathudin, 2018). In recent years, a belief has arisen in businesses and in society that
reporting has a wider role than that expressed in the traditional
‘stockholders/shareholders’ perspective.
Importantly, one need not hold to the ‘deep green’ end of the argument that: there are
strategic reasons why a wider view of accountability may be held and initiatives such
as environmental reporting may be supported; environmental consequences of an
organisation’s inputs and outputs. Inputs include the measurement of key
environmental resources such as energy, water, inventories (especially if any of these
are scarce or threatened), land use, etc. Outputs include the efficiency of internal
processes (possibly including a ‘mass balance’ or ‘yield’ calculation) and the impact
of outputs. These might include the proportion of product recyclability, tones of carbon
or other gases produced by company activities, any waste or pollution (Erlingsson &
Brysiewicz 2017).
Corporate Environmental Disclosures
Corporate environmental disclosures can be defined as an umbrella term that describes
various means by which companies disclose information on their environmental
activities to users. Corporate environment disclosure as the reporting by corporation
on the social impact of corporate activities, the effectiveness of corporate social
programs, as a way corporation’s discharging of its social responsibility and the
stewardship of its social (Akinmoladun, 2018).
The main reason for incorporating environmental information within the annual
reports is to increase stakeholders' awareness of the company's activities, performance
and interactions with the environment. It is hoped that stakeholders might use the
information to assist their decision-making process. Among the means of disclosing
environmental information include newsletters, press release, magazine and corporate
booklets but the usage of annual reports has grown and this practice has grown with
the introduction of "stand-alone" environmental reports (Morros, 2016).
Disclosure entails the release of a set of information relating to a company's past,
current and future environmental management activities, performance and financial
implications. It also comprises information about the implications resulting from
corporate environmental management decision and actions. They include issues such
as expenditures or operating costs for pollution control equipment and facilities, future
estimates of expenditures or operating costs for pollution control equipment and
facilities. These may also include sites restoration cost, financing for pollution control
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equipment or facilities present or potential litigation, air, water, or solid waste releases;
description of pollution control processes or facilities, compliance status of facilities;
among others (Anwer, 2021). By environmental disclosure, it meant all the
information that the company communicates to its stakeholders about its
environmental concerns.
Concept and Principles of Environmental Accounting
Environmental accounting covers information relating to all aspects of the
environment. It includes environment-related expenditure, environmental benefits of
products and details regarding sustainable operations. According to the world
conservative union consumption of natural capital - the depletion of natural capital -
forests, in particular is accounted for as income. Thus, the accounts of a country which
harvests trees very quickly will show quite high income for a few years, but nothing
will show the destruction of a productive asset, the forest. Whereas in accordance with
conventional business accounting principles, the gradual depletion of physical capital-
machines and other equipment are treated as depletion rather than income. However,
most experts on environmental accounting agree that the depletion of natural capital
should be accounted for in the same way as other productive assets (Adbullah 2018).
Environmental accounting is an inclusive field of accounting. It provides reports for
both internal uses, generating environmental information to help make management
decisions on pricing, controlling overhead and capital budgeting, and external use,
disclosing environmental information of interest to the public and to the financial
community. Environmental Accounting enables organizations to track their
environmental data and other greenhouse gas (GHG) emissions against reduction
targets, and facilitates environmental reporting to provide sustainability related data
that is comprehensive, auditable, and timely to advance and strengthen the
interdependent and mutually reinforcing pillars of sustainable development -
economic development, social development and environmental protection in Nigeria
(Ahmed, Waseer, Hussain & Ammara 2018). The consciousness and need to protect
the environment will make for environmental costs to be identified, accurately
measured and reported. The term environmental cost does not only refer to costs paid
to comply with regulatory standards, costs which have been incurred in order to reduce
or eliminate releases of hazardous substances but all other costs associated with
corporate processes which reduce adverse effect on the environment.
Green Accounting or Environmental Accounting is defined as: ‘identifying and
measuring the costs of environmental materials and activities and using this
information for environmental management decisions. It is the generation, analysis
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and use of monetarized environmentally related information in order to improve
corporate environmental and economic performance. Its purpose is to recognize and
mitigate the negative environmental effects of activities and systems (Yahaya, 2018).
In his opinion, environmental accounting does not only focus on internal and external
environmental information but links environmental and financial performance more
visibly. Environmental accounting assists in getting environmental sustainability
embedded within an organization’s culture and operations. It provides decision makers
with the information that enable the organization to reduce costs and business risks
and to add value (Kewo & Mamuaya 2019).
Companies are expected to engage in environmental accounting to:
i. reassure consumers that they take their responsibilities seriously.
ii. comply with national guidelines.
iii. comply with financial reporting requirements and
iv. express the company’s environmental concerns and communicate them to a
range of stakeholders.
In order to understand the rationale behind environmental reporting, and the basis on
which such reporting operates, it is necessary therefore to consider the principles upon
which environmental reporting operates (Lateef & Omotayo 2019).
There are three basic principles of environmental reporting as identified and it
includes:
i. Sustainability: Sustainability is concerned with the effect which action taken
in the present has upon the options available in the future. If resources are
utilized in the present, then they are no longer available for use in the future.
This is of particular concern, if the resources are finite in quantity. Thus, raw
materials of an extractive nature, such as coal, iron or oil are finite in quantity
and once used, are not available for future use. At some point in the future
therefore, alternatives will be needed to fulfill the functions currently provided
by these resources. These may be at some points in the relatively distant future
but of more immediate concern is the fact that as resources become depleted,
the cost of acquiring the remaining resources tends to increase and hence the
operational costs of organisations tend to increase. The principle of
sustainability in environmental reporting therefore implies that society must
not use resources more than it can regenerate. This can be defined in terms of
carrying capacity of the ecosystem and described with input-output model of
resource consumption (Momani, 2020).
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ii. Accountability: Accountability is concerned with an organization recognizing
that its actions affect the external environment and therefore assuming
responsibility for the effect of its actions. This principle therefore implies a
quantification of the effects of actions taken, both internal to the organization
and external. More specifically, the principle implies that reporting of those
quantifications to all parties affected by those actions. This implies a reporting
to external stakeholders of the effects of actions taken by the organization and
how they are affecting those stakeholders. The principle therefore implies
recognition that the organization is part of a wider societal network and has
responsibility to that entire network rather than just to the owners of the
organization. Accountability, therefore necessitates the developments of
appropriate measures of environmental performance and reporting of the
actions of the firm. This necessitates costs on the part of the organization in
developing, recording and reporting such performance and to be of value, the
benefit must exceed the cost. Benefit must be determined by the usefulness of
the measure selected to the decision-making process and by the way in which
they facilitate resource allocation, both within the organization and with other
stakeholders (Moses, Ofurum & Egbe, 2016).
iii. Transparency: Transparency as a principle in environmental reporting, means
that the external impact of the actions of the organization can be ascertained
from organisations reporting and pertinent fact are not disguised within that
reporting. Thus, all the effects of the actions of the organization, including
external impact, should be apparent to all from using the information provided
by the organization’s reporting mechanisms. Transparency is of particular
importance to external users of such information as these users lack the
background details and knowledge available to internal users of such
information. Transparency therefore can be seen to follow from the other two
principles and equally can be seen to be a part of the process of recognition of
responsibility on the part of the organization for the external effect of its
actions (Grigoris, George, Eleni & Xanthi, 2016).
Financial Performance
Financial performance of a firm is reflected in its corporate success. It involves the use
of organization assets to generate revenue. Financial performance enables
management to give account of their stewardship to shareholders on firm profitability,
value and firm growth (Nguyen & Tran, 2019). Financial performance is the extent to
which organization objectives and policies have been achieved in monetary term.
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Company is assumed to be performing if it is able to meet its obligations as at when
due. In accounting literature, financial performance of firms has been measured as firm
growth, size of the firm, firm’s profitability or market share. Firm’s size is often
measured as Total Assets; profitability as Return on Assets (ROA), Return on Equity
(ROE), Net Profit Margin, Earnings Per Share, Gross Profit Margin or Profit After
Tax.
Financial performance is commonly used as an indicator of a firm's financial health
over a given period of time. The financial performance of a firm can be defined or
measured in various different ways including profitability, gauge return, market share
growth, return on investment, return on equity and liquidity. Financial performance
was measured by the development of revenues and profits (Alok, Nikhil & Bhagaban
2018). Financial performance in broader sense refers to the degree in which financial
objectives have been accomplished. It measures how well a company has fared in
monetary terms and its overall financial health for a particular period. Financial
performance is a subjective measure of how well a firm utilizes its assets from its
business operation to generate profit (Onyali & Tochukwu, 2018). However, financial
performance is used to predict the financial well-being of a company, over a period of
time. This can be measured in different ways such as Return on Capital Employed
(ROCE), Return on Asset (ROA), Return on Equity (ROE) and Markets Share Growth.
Furthermore, revenue development can be seen as a growth indicator of the firm and
also as a competitive strategy for consecutive firms. A firm can, by being
environmentally sustainable, differentiate its products and thus increase its revenue.
Similarly, a firm can save costs on resources, regulatory costs, capital and labour and
therewith increase its profits (Bednárová, Klimko & Rievajová 2019). In this study,
financial performance will be measured by, Net Profit Margin (NPM), Return on
Assets (ROA) and Return on Equity (ROE).
Net Profit Margin (NPM)
Net Profit Margin (NPM) is basically one of the ratios used to demonstrate a
company's ability to generate net income. Net profit margin is the ratio between net
income and sales. This ratio is one of the important ratios for operational managers,
because this ratio is able to reflect the sales pricing strategy that the company will
apply. This ratio is also able to control the operating expenses. To calculate the net
profit margin, divide the net income by total sales revenue. The result is the net profit
margin which can be multiplied by 100 to get a percentage.
Net Profit Margin (NPM) = (Net Profits ÷ Net Sales) x 100
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Return on Asset (ROA)
Return on assets (ROA) is a ratio that describes the assets measured by sales volume.
The greater this ratio will be better for the company. This means that the rate of return
will be greater (Diantimala, 2018). The greater the ROA, the higher the profits
generated by the company, so that investors will buy more shares of the company. It
was stated that return on assets shows the number of profits earned relative to the level
of investment in total assets. To calculate ROA the following formula can be used.
Return on Assets = Net Income ÷ Total Assets
The higher this ratio means the company is more effective in utilizing the assets to
generate net income. Thus, higher ROA means the company's performance is more
effective because the rate of return will be greater. This will further increase the
company's attractiveness to investors. Increased attractiveness of the company causes
the company increasingly in demand by investors because it can provide great benefits
(return) for investors. In other words, ROA will have an effect on stock returns that
will be accepted by investors.
Manufacturing sector is one of the backbones of the economy of any country. It
facilitates the achievement of sustained economic growth through provision of goods
which serve the needs of citizens of the country. It enables investment by making use
of available resources or funds from investors efficiently for productive business
opportunities. Manufacturing companies occupy strategic and important position in
the economic activities of Nigeria due to provision of necessary materials for both
individual and corporate consumptions. Therefore, manufacturing companies’
performance had attracted considerable academic and professional discourse because
the overall financial performance of various firms determine to a large extent, the
economic performance of Nigeria.
Financial performance is a factor that enables company management to flexibly report
on its social and environmental responsibilities. Companies that have high profits can
allocate their expenses to many aspects, including involvement in environmental
issues. Very profitable companies are more trusted by the public to increase
stakeholder accountability expectations. When companies are more involved in social
activities, they will have more information to disclose. The measurement of corporate
environmental aspects, such as the greenhouse effect, tends to significantly increase
company spending. Environmental disclosure also entails high costs, including the
costs of identifying, measuring, and reporting this information (Iredele 2020).
Therefore, only companies with high financial performance are willing to bear the
costs. Financial performance, which is often represented by profitability, affects
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corporate social responsibility (CSR). If the company makes a profit, the company will
allocate its funds for CSR activities. The allocations of funds for CSR activities will
certainly make the company have a CSR program and enable disclosures.
Environmental programs are part of the CSR program. Profitability is one of the
characteristics of a company that significantly makes companies to disclose their
social and environmental responsibility initiatives (Okafor 2018).
Financial performance consists of the financial health of an organization and is merely
used to compare firms from one industry to the other. Financial performance is usually
measured using financial ratios. Financial measures are influenced by non-financial
measures. Performance can be divided into financial and non-financial performance.
Above all, financial performance is the “degree to which financial objectives are met”,
that is assessing a firm’s policies and operations in monetary terms (Schrempf-Stirling,
Palazzo & Phillips, 2016). The three most important decisions in a firm are:
investment, financing, and dividend decisions, and are all related to firm performance.
Theoretical Review
This study is anchored on Legitimacy Theory. Legitimacy theory is central to the
social contract which can be implicit and explicit. It is a generalized perception or
assumption that the actions of an entity are desirable, proper or appropriate within
some socially constructed system of norms, values and definitions (Panda & Leepsa
2017). Legitimacy theory offers a powerful mechanism for understanding voluntary
social environmental disclosure made by organizations and that this understanding
would provide a vehicle for engaging a critical public debate.
The Legitimacy theory states that it is the moral obligation of companies to meet the
expectation of the societal members and if company fulfills the expectation of the
whole society, then it would be treated as legitimate otherwise its legitimacy would be
at risk (Ahmad, 2004). So, organizations are expected to respond to the changing
expectations of the society to maintain their legitimacy. First, the company can adopt
those goals, value and operations which are consistent to existing legitimacy
definition. Secondly, it can use the communication strategy to legitimize its present
practice by influencing legitimacy definition. Finally, the company can use
communication strategy to be known with those symbols (e. g. ISO 14000, ISO 9000
standards).
The Legitimacy theory argues that organizations seek to ensure that they operate
within the bounds and norms of society. It is considered as a generalized perception or
assumption that the actions of an entity are desirable, proper or appropriation within
some socially constructed system of norms, values, beliefs and definitions and so
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organizations attempt to establish congruence between the social values associated
with or implied by their activities and the norms of acceptable behaviour in the larger
social system of which they are part. The essence of legitimacy theory is to ensure that
environmental information is disclosed as a way of legitimizing the operations of the
firms (Guthrie & Parker, 1989). This theory is the most appropriate to explain social
and environmental disclosure since it entails conformity of an organization with the
value of the society within which it operates.
Empirical Review
Ikapel, Tibbs, and Nelima (2023) assessed the effect of Environmental Disclosure on
financial performance of listed firms at the Nairobi Securities Exchange, Kenya.
Findings revealed that environmental disclosure has a positive significant effect on
financial performance. Environmental accounting disclosure has significant effect on
the performance of Nigeria listed firms. The study concluded that the disclosure of the
environment information resulted in an improvement in the organization financial
performance. Environmental accounting disclosure leads to an improvement in the
organization’s financial performance by improving the confidence of potential
investors and creditors, thereby enhancing the image of the organization. Also,
suggested that oil and gas producing companies should give preference to their
environment so as to improve their future performance and profitability of their
operations.
Erinoso and Oyedokun (2022) explained the impact of environmental disclosure and
audit on the financial performance of listed oil and gas businesses on the Nigerian
Exchange as of December 31, 2020, encompassing the years 2011 to 2020. The study
used an ex-post facto research design, with 11 companies picked from the 13 listed oil
and gas companies on the Nigerian Exchange. Panel data regression was used to
analyze the effect of environmental disclosure and environmental audit on financial
performance. The results of the analysis showed that environmental disclosure has a
significant effect on Returns on Assets (ROA), Profits After Tax (PAT), and Returns
on Equity (ROE) of listed oil and gas companies in Nigeria and environmental auditing
has no substantial effect on ROA or PAT but it does have a considerable impact on
ROE of Nigerian listed oil and gas companies. It was then determined that
environmental disclosure boost the financial performance of the selected oil and gas
firms. The report urged oil and gas corporations to create and execute ecologically
responsible practices to maximize profits.
Atang and Eyisi (2020) carried out a study on the association between the content of
corporate environmental disclosure and corporate financial performance. The study
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was concerned with a lack of corporate social responsibility disclosures in annual
reports due to their voluntary nature. The content analysis technique examined the
association between social sustainability reporting and characteristics of companies.
The authors scored environmental disclosures in 20 pre-selected content categories
along four dimensions; evidence, time, specificity, and theme. Proxies environmental
performance by a performance index devised by the Council on Economic Priorities
(CEP), a non-profit organization specializing in the analysis of corporate social
activities. Forty firms were selected from the 50 firms that were monitored by the CEP.
Regression results indicated no association between environmental disclosure and
environmental performance. Findings from the study suggest that a positive
relationship exist between firms’ financial leverage and the extent of voluntary
disclosure.
Ogunode and Adegbie (2020) investigated environmental accounting and financial
performance of Oil and Gas companies in Nigeria. The secondary data were made use
in the study for the periods 2015, 2016 and 2017 with the total sampled 11 companies
selected based on environmental information available in the annual reports. The data
were analyzed using multiple regression analysis through the use of econometric
model. The amount spent by each Oil company as their environmental costs (on air
pollution, water pollution, staff welfare, medical expenses) community welfare and
externalities were used as proxies for environmental accounting reporting while
Return on Capital Employed (ROCE), Net Profit Margin (NPM), Dividend Per Share
(DPS) and Earnings Per Share (EPS) were used as proxies for corporate performance.
The result revealed that the explanatory variables, ROCE, NPM, EPS, and DPS have
an insignificant relationship with ENVC with coefficients of .252, .011,.152 and .114
and P-values of .175, .950, .423 and .542 respectively. The 30.6% Adjusted R2
indicates the variation in ENVC margin and could be explained by variability in
explanatory variables as well as control variables in the model.
Tafadzwa and Ganda (2019) examined the relationship between corporate
sustainability disclosure and return on investment. The sample of the study consisted
of ten Johannesburg Stock Exchange (JSE) - listed mining companies, and the data
was extracted from sustainability reports for a period of five years from 2010 to 2014.
In this regard, data collection was undertaken by the adoption of a content analysis
approach. A multi-regression analysis was used to analyze the relationship between
environmental disclosure and return on investment. The same statistical mechanism
was employed to determine the association involving social disclosure and return on
investment. Results showed that there is a negative relationship between
environmental disclosure and return on investment. On the other hand, the research
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revealed that there is also a positive association between social disclosure and return
on investment. In conclusion, this implied that an increase in corporate reporting of
social issues results in heightened financial performance through an increase in return
on investment. The study recommended the adoption of corporate social disclosure as
it would encourage firms to be socially responsible, while also generating financial
benefits.
Methodology
This study adopts ex-post facto research design. The population of the study comprised
of all the 43 manufacturing Companies on the Nigerian Exchange for the year 2017 to
2023. Data was gathered using content analysis. The study relies heavily on secondary
data which was extracted from the annual reports and account of the manufacturing
companies for the years covered by the study. Data gathered were analysed using
multiple regression technique.
Presentation of Data
Presentation of Research Question
Does Environmental Disclosure have any effects on the Financial Performance of
Manufacturing Companies in Nigeria?
Interpretation of the Effect of Environmental Disclosure on Financial
Performance
This analysis investigates the relationship between Environmental Disclosure (EDI)
and financial performance, utilizing two different models: Return on Assets (ROA), a
measure of profitability, and Tobin’s Q, a measure of market valuation.
For the ROA Model (Return on Assets). The study conducted the pre-estimation test
to assess the best model to interpret the result of the Hausman Test with a p-value of
0.2731 indicates that the random effects model is appropriate, as there is no significant
difference between fixed and random effects. The Lagrange Multiplier Tests for
Random Effects (22.7789, p = 0.0005) indicate the presence of random effects,
confirming the choice of a random effects approach.
The Panel Heteroscedasticity Test: ROA Model (p = 0.3731) shows no significant
heteroscedasticity, confirming that the variance of residuals is consistent across
observations. The Serial Correlation Test: ROA Model (p = 0.9373) suggests no
evidence of serial correlation, indicating that residuals are independent over time.
The variable of Firm Size (FS) with the coefficient value of 0.0172: The positive
coefficient indicates that as firm size increases, ROA slightly increases. However, the
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effect is minimal, suggesting that firm size does not have a strong influence on
profitability. More so, with the insignificant t-value, it was discovered that firm size
does not have a statistically significant effect on the ROA, as the p-value is greater
than 0.05. This reveals that variations in firm size do not significantly affect ROA in
this model.
Leverage (LEV) with the coefficient value of 0.3153: This positive coefficient
indicates that firms with higher levels of debt (leverage) tend to have higher ROA. It
implies that leverage may facilitate greater operational efficiency or the ability to
invest in profitable ventures. The leverage t-value (2.2243) and p-value (0.0278)
shows that the result is statistically significant at the 5% level, indicating that leverage
has a meaningful and positive effect on profitability. Higher leverage likely suggests
that firms are effectively using debt to enhance their returns.
The result of the Environmental Disclosure (EDI) reports a coefficient value of 0.0931:
A positive coefficient indicates that firms that provide more comprehensive
environmental disclosures are associated with better profitability. This suggests that
transparency in environmental practices can lead to improved financial performance.
The t-value of 2.4187 and p-value of 0.0170 shows that the result is statistically
significant at the 5% level, reinforcing the idea that companies that are more open
about their environmental impact tend to perform better financially. The model
explains approximately 11.8% of the variance in ROA. More so, after adjusting for the
number of predictors, the model explains about 10.4% of the variance, confirming a
modest explanatory power. The overall model is statistically significant, indicating
that at least one of the predictors (FS, LEV, or EDI) has a relationship with ROA.
Tobin’s Q Model
The study conducted the pre-estimation test to assess the best model to interpret. The
result of the Hausman Test with a p-value of 0.1771) indicates that the random effects
model is appropriate, as there is no significant difference between fixed and random
effects. The Lagrange Multiplier Tests for Random Effects indicate the presence of
random effects, confirming the choice of a random effects approach.
The Panel Heteroscedasticity Test with p-value greater than 0.05 shows no significant
heteroscedasticity, confirming that the variance of residuals is consistent across
observations. The Serial Correlation Test: Tobin’s Q Model also indicates that there is
no evidence of serial correlation, indicating that residuals are independent over time.
Firm Size (FS) with the Coefficient of -21.1013 shows that there is negative
relationship between firm size and the Tobin’s Q. The negative coefficient indicates
that larger firms tend to have significantly lower Tobin's Q. This suggests that larger
firms may be viewed less favorably in terms of market valuation. The result is
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statistically significant at the 5% level, indicating a strong negative relationship
between firm size and market valuation. Larger firms may face diminishing returns in
market perception compared to smaller, more agile firms.
Leverage (LEV) reports a coefficient value of 30.0922: A positive coefficient suggests
that higher leverage is associated with a higher Tobin’s Q, indicating that firms are
perceived positively by the market when they use debt effectively. The relationship is
not statistically significant at 5% levels, implying that while leverage may positively
influence market valuation, this effect is not strong enough to confirm a reliable
relationship.
Environmental Disclosure (EDI) reports positive coefficient of 42.0646 and a
significant t-value (2.6810) and p-value (0.0082). The large positive coefficient
indicates that firms with higher environmental disclosures have significantly higher
market valuations. This reflects that transparency in environmental practices may
enhance investor confidence and market perception. This result is highly significant at
the 1% level, underscoring the importance of environmental disclosure in positively
influencing market valuation.
The model explains approximately 32.5% of the variance in Tobin’s Q, suggesting a
better fit than the ROA model, but still indicates that additional factors might be
influencing market valuation. After adjusting for predictors, the model still explains
about 31.1% of the variance, indicating a good level of explanatory power. The overall
model is statistically significant, meaning that the independent variables collectively
influence Tobin’s Q.
Table 1: Effect of Environmental Disclosure on Financial Performance
ROA Model
TOBINSQ Model
Coefficient
t-value
p-value
Coefficient
t-value
p-value
FS
0.0172
0.7513
0.4533
-21.1013
-2.4980
0.0133
LEV
0.3153
2.2243
0.0278
30.0922
1.5925
0.1128
EDI
0.0931
2.4187
0.0170
42.0646
2.6810
0.0082
C
-0.4080
-1.0106
0.3134
401.1241
2.4575
0.0148
R-squared
0.1179
0.3253
Adjusted R-squared
0.1036
0.3111
F-statistic
11.5691
18.7880
Prob(F-statistic)
0.0000
0.0000
Hausman Test
3.8945(0.2731)
4.9284(0.1771)
Lagrange Multiplier Tests for
Random Effects
22.7789
(0.0005)
450.3664
(0.0000)
Panel Heteroscedasticity test
69.7463(0.3731)
75.6883(0.2911)
Serial Correlation Test
-0.0994(0.9373)
-0.1857(0.8121)
Discussion of Findings
The Effect of Environmental Disclosure on Financial Performance
The positive coefficient of ROA reveals that larger firms tend to experience a slight
increase in profitability (ROA). However, the effect is statistically insignificant, as
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indicated by the p-value greater than 0.05. This means that firm size does not
significantly influence profitability in this model. Larger firms may not inherently
perform better in terms of profitability, likely because of increased operational
complexity or inefficiencies. This finding supports the resource-based theory, which
suggests that the resources and capabilities within a firm, not just size are more
important determinants of profitability. While larger firms might benefit from
economies of scale, these advantages do not automatically translate into higher
profitability without effective resource utilization (Zango, 2021). The positive
coefficient indicates that firms with higher leverage (more debt) tend to have higher
profitability. The result is statistically significant at the 5% level, suggesting that
leverage positively influences profitability. This finding indicates that firms
effectively using debt can enhance operational efficiency or invest in profitable
ventures, thus boosting ROA. According to agency theory, debt can act as a
disciplinary mechanism, pushing managers to operate more efficiently under the
scrutiny of debt holders. Firms that manage debt well can generate higher returns, but
excessive debt might pose financial risks if not handled properly (Zango, 2021).
The positive and significant coefficient of Environmental Disclosure (ED) shows that
firms with higher environmental transparency tend to have better profitability. This
suggests that firms that engage in comprehensive environmental disclosure benefit
from improved financial performance.
This finding supports the idea that transparency in environmental practices can lead to
enhanced reputational standing, increased customer loyalty, and improved investor
confidence, all of which positively impact profitability. The result aligns with
stakeholder theory, which emphasizes that firms responding to stakeholder demands
for environmental accountability are more likely to benefit from enhanced financial
outcomes. As consumers and investors increasingly prioritize sustainability, firms that
are transparent about their environmental impact may enjoy competitive advantages
and improved financial performance.
Conclusion and Recommendations
The study highlights important trends in environmental disclosure practices among
Nigerian manufacturing companies and their effect on financial performance. Over the
analyzed period (2017-2023), there was a notable improvement in environmental
transparency, driven by growing stakeholder expectations and global regulatory
pressures. However, the fluctuation in disclosure scores, particularly the decline in
2023, underscores the challenges companies face in maintaining consistent
sustainability practices amid external pressures such as economic downturns.
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More so, it is obvious that major determinants of environmental disclosure include
leverage, profitability, and company’s size, with more profitable and larger company
showing greater commitment to sustainability reporting. However, highly leveraged
companies tend to limit their disclosures, likely to avoid increased scrutiny and
aligning with agency theory. This variation in disclosure practices across companies
emphasizes the influence of industry norms, regulatory pressures, and resource
availability on corporate sustainability strategies. It was evidenced that the findings
indicate that companies that prioritize environmental transparency are better
positioned to enhance their financial performance.
Based on the findings of this study, the study offered the following recommendations:
i. To prevent fluctuations in environmental disclosure practices, companies
should integrate sustainability reporting into their long-term strategic planning.
This can be achieved by adopting internationally recognized frameworks such
as the Global Reporting Initiative (GRI) or the Sustainability Accounting
Standards Board (SASB) to ensure consistency and comparability in
environmental disclosures across time and industries.
ii. It should not only be companies with high leverages and big firms’ sizes that
should prioritized disclosure of environmental issues in their reports.
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