1. Introduction
Investors and stakeholders are putting increasing pressure on businesses to be more accountable for the impact of their operations and decisions on environmental sustainability in response to climate change, biodiversity loss, deforestation, resource depletion, water scarcity, agricultural land degradation, and pollution [
1,
2]. In the absence of strict mandatory regulation of sustainability reporting, Companies choose whether and to what degree to publish Environmental Sustainability (ESG) information in designated sustainability reports, as well as whether and how closely these reports follow generally recognized sustainability reporting standards and guidelines [
3]. The signaling hypothesis states that managers decide to talk about their sustainability practices with stakeholders and shareholders to draw attention to the company’s outstanding sustainability performance and to obtain competitive benefits, such as simpler financing [
4,
5], as well as cheaper equity capital expenses [
3,
6]. Compliance with sustainability reporting standards (SRS) can further increase stakeholders’ and shareholders’ confidence in the accuracy and truthfulness of the company’s voluntary sustainability disclosures by proving that a firm takes sustainable development seriously [
7]. However, the legitimacy hypothesis contends that voluntary sustainability reporting may also be advantageous for environmentally conscious businesses susceptible to external pressures and legitimacy issues, such as solar or clean energy providers [
8]. To lessen the negative effects of poor environmental sustainability on their legitimacy and brand recognition in an environmental sustainability-related area, company management uses sustainability reporting in business as a tool to manage investor and stakeholder attitudes and expectations [
9,
10,
11]. However, hiding or neglecting to disclose inadequate CSP will reduce the quality of sustainable reporting because it is not presented honestly in all material aspects (SRQ) [
12,
13,
14]. Environmental sustainability refers to appropriate interactions with the environment to ensure long-term environmental quality and to prevent the depletion or degradation of natural resources [
15]. This entails protecting the environment from deterioration, preserving ecological equilibrium, and maintaining natural resources. Acknowledging the interdependence of social, economic, and environmental systems, this notion seeks to foster equilibrium between human necessities and the conservation of the environment for posterity [
16].
As part of its aggressive efforts to diversify its economy and lessen its dependence on oil, Saudi Arabia has prioritized environmental sustainability and renewable energy [
17]. Saudi Arabia’s Vision 2030 strives for environmental sustainability through the use of renewable energy sources and reduction in carbon emissions, such as solar and wind power, conserving various natural resources, and motivating businesses to support the realization of Vision 2030 [
18]. Additionally, the nation wants to advance sustainable methods in a variety of sectors, including urban planning, agriculture, and water management [
19].
Businesses may choose to actively participate in environmentally responsible operations because of two main factors: first, to outperform competitors by obtaining the necessary resources [
11,
20]; second, to obtain support from the public for their activities to give them legitimacy [
21,
22]. Finally, stakeholder theory contends that a company’s reputation and image can be boosted by demonstrating higher accountability and transparency through a greater commitment to good environmental practices, thereby balancing the opposing interests of several stakeholders [
11,
23]. Thus, theories suggest that well-designed governance structures effectively protect the interests of several stakeholders, which may improve the environmental performance of firms [
24].
Corporate governance is the body of laws, norms, and guidelines governing how a company runs. It includes systems used to manage and control businesses and other organizations [
25]. Transparency, accountability, fairness, responsibility, independence, compliance, and strategic vision are essential traits for effective company governance [
26]. An audit committee is necessary to ensure that internal controls and financial reporting are accurate within the corporation [
27]. A corporation can boost its performance, improve its reputation, and foster stakeholder trust by implementing these traits in its governance system [
28]. Corporate performance is an assessment of a company’s success in achieving its goals and objectives, which are often planned [
29]. It includes a range of operational components such as a company’s profitability, efficiency, ability to generate cash flows, market share, and overall industry competitiveness [
30]. Key performance indicators (KPIs), such as revenue growth, profitability, return on investment, cash inflow growth, market share, customer happiness, and employee productivity, are often analyzed to evaluate a company’s performance [
31,
32]. To evaluate the success of a company’s strategies and management choices, stakeholders such as investors, shareholders, employees, and customers periodically evaluate the company’s performance [
33]. Strong business performance is typically associated with success and the ability to achieve sustainable long-term profitability and liquidity growth over the long-term [
32,
34]. A company’s substandard performance is also a sign of operational difficulties, strategic problems, or inefficiency that needs to be fixed to raise the company’s performance and enhance its liquidity [
35].
The intersection of corporate governance and environmental sustainability practices is the area of unmet research needs for this article because little is known about the effects of particular corporate governance mechanisms (such as ownership structure, diversity, and board independence) on environmental sustainability practices in Saudi businesses. This may yield fresh insights into how governance features affect the uptake and efficacy of certain approaches. Recent legal changes and instructions from Saudi authorities (such as Saudi Vision 2030 and the Kingdom’s growing focus on sustainability) may have altered the corporate governance landscape in addition to the impact of changes on business performance. The manner in which these modifications affect the interplay among corporate governance, environmental sustainability, and company performance is not well understood.
Based on the above disunion, the objective is to evaluate and optimize the characteristics of the audit committee, such as its size, independence, frequency of meetings, and member commitment, to enhance financial transparency and corporate governance. Moreover, this study aimed to examine the relationship between ESG and BuPE. It attempts to improve the dependability and accuracy of financial reporting by placing a robust oversight framework and promoting effective communication, independence, and competence among committee members.
Our work contributes to existing studies on the audit committee characteristics as a mechanism for corporate governance and sustainability, as well as their impact on company performance in several ways. First, the audit committee and the effectiveness of board oversight on environmental sustainability have been recognized in previous research, but the underlying mechanisms are still poorly understood empirically [
36]. This is particularly true with regard to CG’s implications for environmental sustainability, which are only now starting to garner scholarly interest from researchers [
37].
Second, in contrast to studies that focus on variables related to corporate sustainability performance (CSP), SRQ, or SRS, we examine the effects of the determinants of audit committee characteristics and environmental sustainability, considering their interdependence. Thus, we add to the literature by revealing the potential indirect effects of sustainability reporting processes and performance. Third, previous studies have investigated how corporate governance (CG) processes influence environmental sustainability [
38]. Environmental sustainability was measured through text analysis using complex self-created scores that have proven difficult to implement in previous research. The most accurate and comparable indicators for this study come from the Transparency Benchmark, which is based on objective research evaluating the impact of sustainability and audit committees on performance. To ascertain whether Saudi businesses adhered to sustainability reporting standards, we collected information from the Sustainability Disclosure Database of the Global Reporting Initiative (GRI). Finally, most research on the variables influencing SRQ and ESG is cross-sectional [
39], which poses a problem in terms of causality. Our approach uses panel data that allow us to infer the causes.
This study sought to ascertain the effects of environmental sustainability practices and corporate governance traits on business performance among Saudi-listed companies. The research design included research methodology, data collection and analysis, result extraction, and the provision of useful and practical recommendations [
40]. The main inquiry for the research was [
41] What effect do corporate governance characteristics and environmental sustainability practices have on the financial performance of Saudi listed companies? The following sections explain the theoretical framework of the article, a section on methodology and analysis, from which the results are drawn and discussed, and a proposal for future research.
2. Literature Review and Research Hypothesis
Saudi Arabia’s population has expanded by 1.62% annually over the past 40 years because of a population explosion. Saudi Arabia, with 35,013,414 people, was the fourth-largest Arab country in 2018 [
42]. In addition, due to the recent expansion of the Saudi economy [
43], there are a large number (more than 200 companies) of companies listed in the Saudi market that publish their information annually [
44]. To our knowledge, there are no previous studies examining corporate governance and environmental sustainability and their impact on Saudi business performance. Thus, the main problem of this research is represented by the following question: Do corporate governance mechanisms obligate companies to publish sustainability reports on a regular basis to help enhance environmental sustainability and, thus, the performance of Saudi businesses?
Saudi Arabia’s corporate governance code prioritizes social responsibility programs undertaken by Saudi businesses, and the public reporting of these endeavors [
45]. Many previous studies and the literature have concluded that corporate governance and environmental sustainability positively affect company performance [
46,
47]. Corporate governance encourages sustainable actions [
48].
A company’s reputation is improved, and the risk of legal and regulatory repercussions decreases when the audit committee complies with pertinent legislation and standards, which has a beneficial effect on business performance [
49,
50]. Non-compliance can have negative effects on a company’s reputation and possibly impair its capacity to conduct business, including financial and legal ramifications [
51].
The field of sustainable or responsible business practices serves as a foundation for several theories that investigate the relationship between environmental sustainability and corporate governance traits in relation to company performance [
52]. Several frameworks and theories may be useful for understanding this relationship [
53]. First, stakeholder theory states that businesses must consider the interests of all parties, including consumers, employees, shareholders, and the general public [
54]. Second, the interaction between principals, such as shareholders and agents, such as firm executives, is the main emphasis of agency theory [
55]. This implies that corporate governance practices, such as executive salaries and board structures, are intended to balance the interests of principals and agents [
25].
Theoretical backgrounds:
Agency, stewardship, resource dependence, and institutional theories are theoretical frameworks and historical contexts used to study the impact of corporate governance on company performance [
56]. The idea of environmental sustainability is supported by many academic frameworks, including stakeholder theory, triple bottom line (TBL) theory, natural resource-based view (NRBV), and legitimacy theory [
57]. Contemporary research and empirical evidence on corporate governance and business performance frequently investigate how specific governance characteristics, such as board diversity, CEO duality, and ownership structure, affect performance measures (e.g., return on assets and market valuation) [
58]. In Saudi Arabia, research has yielded varied results, with some claiming that corporations with superior governance processes have greater market valuations, while others have found no such association [
59]. This could be attributed to different levels of governance maturity and enforcement across businesses. Environmental sustainability and business performance: Empirical research in numerous markets, including Saudi Arabia [
60], shows that enterprises devoted to environmental sustainability frequently perform better financially, particularly in the long run. These benefits can result from cost reductions (e.g., energy efficiency), improved brand reputation, and fewer regulatory concerns [
61].
2.1. Audit Committee Characteristics and Business Performance
The board of directors’ subcommittee, which oversees the management of the company’s financial reporting, is called the audit committee. The audit committee oversees several processes, such as facilitating communication between the board and the external auditor and financial reporting, including internal controls [
62,
63]. The performance of a company’s operations can be significantly impacted by the quality of its audit committee [
64]. Maintaining consistent and efficient correspondence with external auditors can improve the audit procedure and bolster the dependability of financial statements [
50,
65]. This promotes cooperation, which may result in improved risk assessment and reduction [
66]. Financial and operational concerns are proactively identified and addressed by an efficient audit committee [
32,
67]. This preventive strategy can lessen the effects of possible problems and improve business performance [
68]. The quality of an audit committee can have a significant impact on how well a corporation performs [
69]. A competent, impartial, and well-run audit committee has a greater chance of supporting accurate financial reporting, efficient risk management, and improved corporate governance, all of which can have a favorable effect on business outcomes [
70].
The findings of a few earlier studies supported the notion that corporate environmental social responsibility significantly improves business success [
68,
69,
71]. The findings of a few earlier studies suggest that having a director on both audit and nomination committees is important and has a negative impact on profitability [
64]. However, earlier research found no meaningful correlation between experience and business performance [
69].
2.1.1. Audit Committee Size and Business Performance
According to the best standards, the audit committee’s size and makeup should match the complexity and requirements of the company [
72]. A smaller audit committee would be more flexible and effective in reaching decisions [
73]. It is simpler to organize and communicate when there are fewer participants [
74]. However, a larger committee may include a wider range of knowledge and viewpoints, which could improve the standard of oversight [
75]. A smaller committee would find it difficult to include all areas of expertise required for efficient financial supervision [
76]. A broader committee may have members with a range of experiences and backgrounds, offering a more thorough understanding of risk and financial management challenges [
77]. Smaller committees may have simpler coordination and communication, which accelerates decision-making [
78]. Larger groups could have trouble coordinating and communicating effectively, which could delay the decision-making process [
79]. Smaller committee members might have more work to do, which could make it harder for them to carefully review financial data [
80]. In larger committees, workload distribution may be easier to manage, thus allowing members to concentrate on their areas of expertise [
81].
The results of earlier studies show a statistically significant and favorable relationship between the size of the audit committee and the organization’s success [
69,
82]. A few earlier studies’ findings showed that audit committee size had no appreciable effect on a company’s performance. For example, [
83]. Hence, the following hypothesis was formulated based on the conversation and analysis of earlier literature:
H1. There is a positive relationship between the size of the audit committee and business performance.
2.1.2. Audit Committee Independence and Business Performance
An independent audit committee is essential to guarantee impartiality and objective supervision, and an independent audit committee is essential [
84]. Since independent members are less likely to be involved in conflicts of interest, the financial reporting process may be more accurate and open [
85]. A weakened supervision process caused by a lack of independence could result in false financial reporting and lower investor confidence [
86]. Smaller committees may find it easier to preserve independence and objectivity because there are fewer possible conflicts of interest [
87]. A larger committee size may make it more difficult for members to remain impartial and independent [
88].
According to earlier research, there is a strong positive correlation between profitability and independent committee members [
64,
69]. Earlier research findings did not indicate that audit committee independence had any additional impact on financial performance [
89]. Thus, in light of the discussion and examination of previous literature, the following hypothesis is developed:
H2. The independence of the audit committee improves business performance.
2.1.3. Audit Committee Meeting and Business Performance
The audit committee guarantees the dependability and correctness of financial statements [
90]. Sustaining the confidence of creditors, investors, and other stakeholders is contingent upon this [
91]. Companies that present their finances accurately and transparently have a higher chance of drawing investment and keeping their names in the industry [
92]. The literature utilizes meeting frequency as a proxy to quantify audit committee activity, and the number of meetings represents the effectiveness of the committee’s monitoring [
69,
93]. Regularly meeting audit committees have a greater understanding of a company’s situation [
69,
94].
According to earlier research findings, there is a strong explanatory relationship between the performance of market-based enterprises and audit committee meetings [
95]. According to the findings of a few earlier studies, the performance of the company and audit committee meetings are statistically significantly negatively correlated [
71]. Earlier research on the frequency of audit committee meetings failed to find a meaningful correlation with business success [
69,
83,
89]. Thus, the following hypothesis was created in light of the discussion and analysis of earlier literature.
H3. There is a negative relationship between the frequency of audit committee meetings and business performance.
2.1.4. Audit Committee Commitment and Business Performance
A devoted audit committee ensures that financial statements are reliable and accurate. Consequently, this strengthens a company’s financial reporting trustworthiness [
96]. The committee’s commitment to understanding hazards plays a role in their identification and reduction and supervises the business’s risk management procedures [
97]. Thus, total business resilience may improve [
98]. An enthusiastic audit committee makes sure the company abides by all relevant laws, regulations, and corporate governance standards [
99]. The committee’s dedication to keeping an eye on and assessing internal controls aids in the prevention of financial reporting fraud and errors [
100]. It is crucial to remember that there are many moving parts and a complicated relationship between the AC’s dedication to the audit committee and business performance [
25]. The success of a company can benefit from an engaged audit committee [
84]. As a result, the following hypothesis was developed in light of previous literature’s analysis and discussion:
H4. There is a positive relationship between audit committee commitment and business performance.
2.2. Environmental Sustainability and Business Performance
Institutional theory examines how societal norms, beliefs, and expectations affect and are influenced by organizations [
101]. Within the framework of environmental sustainability, the institutional theory posits that proficient corporate governance methodologies are consistent with societal norms regarding conscientious and enduring business conduct, thus augmenting favorable business outcomes [
102].
A company’s reputation, long-term survival, and many other aspects of its operations and performance can be significantly affected by environmental sustainability [
98]. Over time, adopting environmental sustainability practices, such as waste reduction strategies or energy-efficient technologies, can lead to significant cost savings [
103]. Reducing waste leads to lower disposal costs, whereas using renewable energy sources can reduce energy prices and improve company performance [
104]. Customers have become more aware of environmental sustainability issues and often choose companies that demonstrate a strong commitment to environmental sustainability [
105]. By implementing environmentally friendly measures, companies attract environmentally conscious customers, thus improving their performance [
106]. Companies with increasingly stringent environmental standards are subject to fines, penalties, or other negative impacts [
107]. Companies must stay ahead of regulatory requirements and reduce potential legal and financial risks by implementing environmental sustainability practices and improving their performance [
108]. Adopting environmentally responsible practices helps companies expand their existing customer base and reach new markets as sustainability becomes a top priority for consumers and companies globally, both generally and specifically in Saudi Arabia [
109]. Certain sectors can require or comply with sustainability certifications to enter new markets or supply networks [
110].
According to previous studies [
111,
112], investors boost a company’s social and environmental performance once stocks show financial returns on social and environmental advancements. Many previous studies have concluded that there is a positive relationship between environmental sustainability practices and company performance [
104,
106,
108,
111,
112,
113]. Few prior studies have yielded evidence to substantiate the association between environmental sustainability and business performance [
98]. The association between environmental sustainability and company performance has been discussed previously. In light of this, the authors propose the following hypothesis:
H5. There is a positive relationship between environmental sustainability and business performance.
5. Conclusions
This study endeavored to explore the impact of audit committee attributes on BuPE among Saudi-listed companies while concurrently examining the connection between BuPE and ESG measured by sustainability and climate risk SCR. To achieve these objectives, this study adopted 131 firms from 2015 to 2021 and used appropriate analysis to test the hypotheses of this study. This study also employed an additional analysis to verify the robustness of the preliminary results.
The preliminary findings of this study indicated that ACSE and ACIND have a favorable influence on BuPE, whereas ACMET has a detrimental impact on BuPE. However, no correlation was observed between ACCOM and BuPE in the present study. Furthermore, our analysis revealed a positive and statistically significant association between ESG levels and BuPE levels. The results of the additional analyses conducted in this study confirmed the validity of these findings.
The findings of this study are of great significance to both current and prospective investors in the Saudi market as well as government agencies in Saudi Arabia. These findings provide a thorough understanding of how audit committee attributes affect the degree of BuPE as well as the influence of ESG factors on BuPE. Examining the attributes of audit committees provides a more refined understanding of the connection between the characteristics of audit committees and ESG and BuPE, enriching the understanding of how these attributes function in various organizational contexts. Furthermore, this study contributes to the existing literature on SCR by providing insights into the effectiveness of SCR in the Saudi environment. SCR has received great attention among researchers because it has recently been applied in the Saudi context.
This study, like the rest of the research, has some limitations. First, it utilized non-financial businesses in the Saudi market. As such, the outcomes of this study cannot be extended to a broader market. Consequently, future research should focus on the financial sector, which is a crucial component of the Saudi market. Second, this research focused on a specific set of AC features of the audit committee, namely ACSE ACIND, ACMET, and ACCOM. Therefore, it is recommended that researchers conduct research that examines all characteristics of this committee. Finally, this study explored the influence of two variables, audit committee and ESG, on the level of BuPE. As such, it is suggested that future research should examine additional factors that may impact BuPE and address investors’ concerns, such as earnings management, value-added tax, and voluntary disclosure.
Environmental sustainability and corporate governance have a significant impact on the success of businesses. Organizations that fortify their governance structures and embrace sustainable methodologies may witness amplified fiscal outcomes, elevated prestige, and amplified investor attention, all of which can play a role in generating enduring value. These considerations are particularly important in the Saudi Arabian context, where there is a strong push for sustainable development and economic diversification.
Future studies on the effects of environmental sustainability and corporate governance on business performance should focus on the following, according to the author: The relationship between environmental performance and a company governance functions in ESG integration The effect of market performance on sustainability reporting analysis of governance and sustainability practices across time creativity in sustainability and corporate governance ESG ratings’ effect on investor behavior.