Moderating effect of financial strength on the relationship between corporate governance and environmental sustainability disclosures: Evidence from Nairobi securities exchange listed firms, Kenya

Abstract

Unprecedented human-induced climate change has been witnessed, majorly attributed to industrial-related activities that result in depletion of natural resources as well as harmful emissions. This has increased the global concern for the environment, with more stakeholders demand for corporate ecological reporting. However, reviewed studies indicate varying degrees of corporate ecological reporting, with others severely deficient of it. The objectives of the study were to evaluate the moderating effect of financial strength on the relationship between environmental sustainability disclosures and corporate characteristic, ownership structures as well as internal controls. The study was guided by stakeholders, legitimacy and agency theory. It study employed a correlational survey research design on a panel datacovering the period of five (5) years (2013 - 2017). The target population was sixty-five (65) firms listed in NSE, with a sample size was 56 firms, purposively selected. Data used was from firms’ annual reports, stand-alone reports, and website, collected using checklist. Analysis of data was done with the aid of Stata using environmental disclosure index, Pearson’s correlation, Fixed effect model and. Content analysis was used to attach scores on environmental information disclosures through a checklist developed under the guidance of the Global Reporting Initiatives. The study findings indicated that R² = 0.64 with board size (β= .01, ρ<.05), institutional ownership β= .05, p<.01), audit committee independence (β= .12, p< .05), board independence (β= .24, p<.05) and board qualifications(β= .07, ρ<.05) having a positive and significant effect onenvirnonmental sustainability disclosure. However, board diversity (β= -.01, ρ<.05) and ownership concentration (β= -.02, ρ<.05) had a negative but significant effect on environmental sustainability disclosure while board meetings had no influence on environmental sustainability disclosure. More findings showed that financial strength strengthenthe relationship between environmental sustainability disclosureand board independence (β = .23, ρ<.01), institutional ownership (β = .14, ρ< .05), and audit committee independence (β = .13, ρ<.01) However, the relationship is weakened with regard to board diversity (β = -.03, ρ<.05), board meetings (β = -.16, ρ<.05), ownership concentration (β = -.01, ρ< .05). The inclusion of the interaction term resulted in an R² change of 0.03 (board charcteristics*financial strength), 0.13 (ownership structures*financial strength) and 0.09 (internal controls*financial strength). The study concluded that, overall, financial strength has significant moderating effect on the relationship between corporate governance and environmental sustainability disclosure. It recommends;enactment of policies addressing corporate environmental reporting by firms as a result of different asset base, establishment of corporate environmental committee to spearhead ecological issues, and implementation of mandatory disclosures. Future studies need to focus on; specific dimensions such as directors’ experience, age, and nationality, cross-vii listing of the board, cross-country comparative analysis, and segment-wise analysis.