Sustainability Reporting, Firm Size and Financial Performance: Evidence from Listed Firms in Nairobi Security E

Abstract

This study empirically investigates how environmental, social, and governance disclosures influence firm financial performance, and whether firm size acts as a mediating channel through which ESG reporting affects performance among listed firms in the Nairobi Security Exchange. The analysis applies a path (mediation) model that decomposes ESG effects into direct, indirect (via firm size), and total effects. Firm size is modeled as an intermediate outcome affected by each ESG disclosure pillar, while firm performance is modeled as the final outcome influenced by both ESG disclosures and firm size. The results show that ESG dimensions relate differently to firm size: environmental disclosure and governance disclosure have negative and statistically significant effects on firm size, while social disclosure has a positive and highly significant effect on firm size. Firm size, in turn, has a negative and significant effect on firm performance, implying that larger scale is associated with lower performance in this specification. Regarding direct effects on performance, environmental disclosure is negative and significant, social disclosure is insignificant, and governance disclosure is positive and significant. The mediation results indicate that environmental and governance disclosures generate positive indirect effects on performance through their association with smaller firm size, while social disclosure produces a negative indirect effect by increasing firm size. In total effects, only governance disclosure remains positive and statistically significant, while environmental and social total effects are statistically insignificant. Practitioners should prioritize strengthening governance practices and disclosures, while managing environmental and social initiatives with efficiency-focused implementation to avoid short-run performance and scale-related cost burdens. Policymakers should improve ESG disclosure guidance and comparability especially for environmental and social reporting while incentivizing credible governance standards that reinforce accountability and performance.