Sustainability Reporting and Financial Performance: Evidence from Sri Lankan Material and Capital Goods Sectors.

Abstract

Sustainability reporting is likely to increasingly be the application of a corporate reporting practice, and stakeholders are seeking greater transparency about the Environmental, Social and Governance (ESG) performance of companies. The study looks at the effect of sustainability reporting on the financial performance of the companies listed in the Material and Capital Goods sectors of the Colombo Stock Exchange for the period 2020 to 2024. The ESG disclosure indices and the integrated Sustainability Reporting Disclosure Index are used to measure sustainability reporting, while Return on Equity (ROE) and return on assets (ROA) are used to measure financial performance. For the listed companies, the data were collected using a census approach; thus, 100 firm-year observations are included. The results were analysed through multiple regression analysis, and they indicate that environmental disclosures and governance disclosures do not significantly affect ROE or ROA. However, the effect of social disclosures is a significant positive effect on both ROE and ROA. The Sustainability Reporting Disclosure Index has a very strong positive correlation with both performance measures. Stakeholder theory appears to be supported by the findings, which indicate that stakeholders consider firms in terms of their broad sustainability efforts, not just individual measures, such as ESG. The research helps bridge the gap in the literature surrounding sustainability reporting by offering sector-specific evidence from Sri Lanka and emphasises how integrated sustainability reporting supports firms’ financial performance.