The Effect of Environmental, Social and Governance Reporting on Stock Returns of Firms Listed at the Nairobi Securities Exchange

Abstract

In the aftermath of global financial scandals and increased stakeholder pressure, companies are now more sensitive towards ESG reporting. ESG entails voluntarily reporting a firm's ethical values, long-term sustainability performance, and reputation. Presently, the board not only monitors and controls managers' behaviors but also ensures that the company meets societal and environmental needs, which is best captured by ESG reporting. Recent studies reveal that ESG reporting reduces information asymmetry between the principal and the agent; thus, mitigating opportunistic managerial behaviors’ and this is expected to enhance the stock returns of firms. The main research objective was to establish ESG reporting effect on stock returns of listed firms at the Nairobi Securities Exchange. The independent variable for the research was ESG reporting measured using environmental reporting, social reporting and environmental reporting while the control variable was trading volumes. The dependent variable was stock returns measured using annual change in share price. The research was anchored on stakeholder theory, the agency theory and behavioral finance theory. Descriptive research design was utilized in this research. The 63 listed firms in Kenya as at December 2021 served as target population. The research obtained secondary data for five years (2017-2021) on an annual basis from CMA and individual listed firms’ annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research discovered a 0.2528 R square value implying that 25.28% of changes in listed firms’ stock returns can be described by the four variables chosen for this research. The multivariate regression analysis further revealed that individually, environmental reporting exhibited a positive and significant influence on stock returns of Kenyan listed firms (β=0.1222, p=0.000). Social reporting and governance reporting exhibited positive but not significant effect on stock returns of listed firms as shown by (β=0.0392, p=0.594); and (β=-0.0618, p=0.392) respectively. Trading volumes exhibited a positive and significant influence on stock returns of Kenyan listed firms (β=0.2314, p=0.000). The research recommends the need for listed firms to enhance environmental reporting as this will enhance their returns. The policy makers such as CMA can hasten the implementation of GRI-G4 guideline. Future research ought to focus on other listed firms in East Africa community member countries to corroborate or refute the conclusions of this research.