Does Environment, Social and Governance Practices Improve Firm Value in Sub Sahara Africa?

Abstract

Environmental, social, and governance (ESG) practices provide transparent information about a company's non-financial performance, thus ensuring accountability and aiding stakeholders in understanding a company beyond financial metrics. Such stakeholders may include investors, customers, employees, and regulators. Despite several studies, there is inconclusive empirical evidence regarding the connection between ESG practices and firm value. This research examines whether ESG practices enhances firm value in sub-Saharan Africa. The study analysed data from 45 quoted non-financial corporations in Kenya, Nigeria and South Africa between 2012 and 2022. Tobin's Q was used as a measure of firm value. The study employed both random and fixed-effects estimation methods to evaluate the relationship between ESG practices and firm value. The findings revealed that adopting ESG practices positively and significantly impacts the combined sample. Notably, adopting environmental and social practices in isolation does not significantly affect these firms' value. However, the same cannot be said for governance practices, which exhibit a negative and significant relationship with firm value. The study concludes that adopting positive ESG practices has the potential to enhance the value of non-financial firms listed in these Sub-Saharan African countries. Therefore, it is recommended that African regulators develop and enforce a standardised framework for ESG practices for non-financial firms. This can be achieved by adopting globally recognised frameworks, such as the Global Reporting Initiative (GRI).

Keywords: Environmental, Social, Governance, Stakeholders, Tobin’s Q