The Effect of Environmental, Social, and Governance (ESG) Disclosure on the Profitability of Saudi-Listed Firms: Insights from Saudi Vision 2030

Abstract

This study investigates the influence of Environmental, Social, and Governance (ESG) disclosure on the profitability of Saudi-listed non-financial firms in the context of Saudi Vision 2030. The study uses a sample of 100 non-financial organizations from 2019 to 2023 (500 firm-year observations). This study uses panel data analysis and a random-effects regression model to examine the relationship between ESG disclosure and firm profitability as assessed by return on assets (ROA). To assess ESG disclosure, this study developed a comprehensive ESG disclosure index based on worldwide ESG guidelines and Saudi-related regulations. The regression results show a significantly positive relationship between ESG disclosure and firm profitability, emphasizing the financial benefits of corporate transparency and sustainability. This finding is consistent with the stakeholder theory, implying that firms with strong ESG commitments boost investor trust, improve risk management, and increase operational efficiency. Thus, this study adds to the ESG literature by presenting empirical evidence from Saudi Arabia, a growing country that is undergoing regulatory transition. Additionally, this study’s notable contribution is the development of a comprehensive ESG disclosure index tailored for the Saudi corporate landscape, integrating global reporting standards with local regulatory requirements. This index enhances the assessment of ESG transparency and offers a thorough tool for examining business sustainability strategies. The results offer substantial insights for policymakers, investors, and corporate leaders, emphasizing the significance of ESG in sustainable financial performance.

1. Introduction

Environmental, Social, and Governance (ESG) disclosure has become central to sustainable corporate practices and is a vital indicator of firm transparency and accountability level [1]. ESG disclosure began as voluntary reporting through Global Reporting Initiative (GRI) initiatives in the late 1990s before becoming a standardized regulated framework worldwide [2]. Gradually, the process of ESG disclosure has evolved into a fundamental mechanism that organizations use to share their non-financial data with investors and regulators [3]. Stakeholders use ESG disclosure to assess organizational sustainability, as well as external shock resistance and global social and environmental alignment, including the United Nations Sustainable Development Goals (SDGs) [1]. ESG disclosure has gained prominence because sustainable investing has experienced rapid growth, which has resulted in ESG assets under management exceeding USD 3.9 trillion worldwide by 2021 because investors recognize sustainability as a key value creator. The growing trend in ESG disclosure receives additional momentum from shareholder activism because investors use proxy voting to enforce transparency and accountability [4]. In 2020, the S&P 500 saw 90% of its members release ESG reports, but shareholder proposals advocating enhanced social and environmental disclosure continued to rise, especially when focusing on climate change risks and racial equity results [5]. A total of 126 climate-focused proposals were filed in 2021, of which 26% required greenhouse gas reduction targets and 15% sought transparency in lobbying activities [6].

Notwithstanding the growing awareness and importance of ESG disclosure, such reporting presents a complex range of obstacles for firms attempting to counterbalance their perceived value with their attendant cost [7]. One of the key benefits of ESG disclosure is its potential to boost a corporation’s reputation, build investor confidence, and mitigate information asymmetry [2]. Empirical studies have confirmed that corporations with a strong ESG orientation have reduced capital outlays and increased valuations in the marketplace, with investors valuing transparency and sustainability efforts [8,9]. Firms with strong ESG performance have outperformed their peers in terms of financial performance, exhibiting increased effectiveness in terms of managing risks, complying with regulative requirements, and creating opportunities through improvement through sustainability [1,10]. Furthermore, ESG disclosure has been linked to a lower cost of capital, as investors increasingly favor companies that prioritize long-term value creation over short-term financial gains [11]. However, critics contend that the relationship between ESG disclosure and profitability is not straightforward because the costs of implementing robust ESG reporting systems can outweigh the potential benefits for certain firms [1]. These costs include investments in data collection, reporting frameworks, and third-party assurance as well as the opportunity cost of diverting resources from core business activities [7].

This debate is particularly pertinent in the context of emerging markets, such as Saudi Arabia, where ESG disclosure is gaining significant traction but is still in its early stages of development [12]. As part of its transformative Vision 2030 agenda, Saudi Arabia has prioritized sustainability, economic diversification, and transparency as key pillars to reduce reliance on oil revenues and position itself as a global leader in sustainable development [13]. Early evidence indicates that ESG disclosure in Saudi Arabia has the potential to enhance firm profitability by attracting foreign direct investment (FDI), improving market valuation, and strengthening competitive positioning [14]. Transparent ESG practices help Saudi firms appeal to an increasingly sustainable global investor base while also fostering trust among domestic stakeholders [2]. For example, sectors such as renewable energy and green technologies have witnessed growing interest from international investors because of the kingdom’s ambitious climate goals, including its commitment to achieving net-zero emissions by 2060 [15]. Additionally, ESG initiatives can drive operational efficiency and reduce long-term risks, further contributing to financial performance [9].

However, the adoption of ESG disclosure in Saudi Arabia is challenging. Regulatory fragmentation remains a key obstacle as firms must navigate evolving domestic regulations alongside a diverse array of international reporting standards [16]. Limited expertise in ESG reporting frameworks, particularly among small and medium-sized enterprises (SMEs), further complicates compliance and hinders the effectiveness of disclosures [17]. Moreover, sector-specific complexities such as the oil and gas industry’s reliance on carbon-intensive activities present unique challenges for integrating ESG practices without undermining profitability [18]. These challenges are exacerbated by the broader global debate on materiality and the difficulty of quantifying non-financial metrics, particularly in areas such as social and governance factors, which often receive less attention than environmental metrics [19]. In the academic realm, research has presented mixed results regarding the effect of ESG disclosures on firm profitability, reflecting the complex and multifaceted nature of this relationship. Some studies suggest that ESG disclosures positively influence profitability by enhancing corporate transparency, reducing information asymmetry, and attracting sustainability-focused investors [1,5,8].

Conversely, other recent studies highlight the potential costs and challenges associated with ESG disclosures, which may dilute or even offset their positive impact on profitability [20]. The implementation of ESG frameworks often requires significant investments in data collection, reporting systems, and third-party audits, which can strain financial resources, particularly for smaller firms or those operating in industries with high regulatory scrutiny [21]. Additionally, sectoral and regional variations contribute to the mixed findings in the literature. For example, industries with high environmental impacts, such as energy and manufacturing, may face greater challenges in translating ESG efforts into profitability because of the higher costs of transitioning to sustainable practices [18]. Similarly, in emerging markets with developing regulatory environments, a lack of expertise and resources can hinder the effective implementation of ESG practices [19]. Given these dynamics and the mixed findings in the literature, there is a critical need for rigorous empirical research to unravel the nuanced relationship between ESG disclosure and firm profitability in the unique context of Saudi Arabia. This study contributes to the literature on ESG disclosure and firm profitability by examining the modality of ESG disclosure in Saudi-listed firms in several ways. First, it responds to recent scholarly demands for a deeper empirical exploration of ESG disclosure’s influence, particularly in emerging markets like Saudi Arabia, where regulatory and cultural contexts shape corporate transparency [17,22]. Thus, by focusing on this understudied region, this study addresses a critical gap in understanding how ESG practices intersect with profitability in resource-driven economies.

Second, while prior research reports mixed findings on the financial implications of ESG disclosure, some studies highlight positive returns [2,8], and others are neutral [23] or negative effects [24], this study explores the effect of ESG disclosure on firm profitability. Specifically, it examines how transparent and strategic ESG reporting enhances operational efficiency, reduces costs, and strengthens stakeholder trust, all of which positively influence profitability. Therefore, this study seeks to provide a nuanced understanding of how ESG disclosure drives firm performance under different organizational and market conditions by focusing on profitability as a key financial metric.

Third, considering increasing worldwide apprehensions regarding social and environmental issues, including carbon emissions and climate change, there exists a deficiency of empirical knowledge pertaining to ESG disclosure in emerging nations like Saudi Arabia [12,22]. Most ESG research has been conducted in developed nations such as the United Kingdom [25], the United States [26], and Canada [27]. ESG constitutes a component of corporate transparency, as exemplified by the relationship between sustainable accounting and reporting [28]. Despite the increasing focus on social and environmental disclosures by corporations and scholars owing to heightened awareness of social and ecological issues [29], limited research has been undertaken in developing nations [30]. The transferability of results from industrialized to emerging nations may be constrained due to disparities in policy, regulation, and many political, social, and economic aspects [31]. Consequently, this study, undertaken in Saudi Arabia, a developing country, offers a unique academic contribution to the domains of ESG disclosure and corporate profitability. It provides innovative insights and empirical data from emerging economies that can be extrapolated to other analogous markets with similar social, economic, and environmental characteristics to Saudi Arabia.

Finally, numerous previous studies have relied on checklists or score frameworks established by rating organizations to assess and quantify ESG-related information. Rating agencies such as Refinitiv and Bloomberg have established methodologies for evaluating and quantifying firms’ ESG disclosure [32,33]. However, these ratings often suffer from methodological inconsistencies, varying scoring criteria, and limited transparency, leading to significant discrepancies in ESG scores for the same firm [34]. For instance, Bloomberg’s ESG Disclosure Score focuses on reported transparency, while Refinitiv ESG Disclosure Scores incorporate risk-weighted factors and controversy tracking, resulting in inconsistent assessments. Such variations create confusion for investors and stakeholders, undermining the reliability of ESG rankings [33]. Moreover, these rating systems are primarily designed for developed markets, making them less effective in capturing ESG disclosures in emerging economies such as Saudi Arabia, where regulatory frameworks and sustainability priorities differ. Moreover, as most of these organizations rely on publicly accessible information, their ratings may fail to encompass the entirety of a firm’s sustainable management practices or the qualitative aspects of its operations [18]. Consequently, scholars have initiated a call for a defined set of criteria to enhance the reliability of ESG measurements, aiming for a more uniform evaluation of corporate ESG initiatives [35]. To address these limitations, this study develops a self-constructed ESG disclosure index in contrast to previous research, which predominantly depended on rating agencies for ESG evaluation. This score is based on the literature and encompasses Saudi and international frameworks and norms related to ESG reporting [18]. The ESG disclosure index indicates the extent of the ESG disclosure provided by Saudi firms. As a result, this study contributes significantly by providing further evidence on the efficiency, reliability, and credibility of various measurement channels (self-constructed index) for quantifying ESG-related information, thereby addressing a gap in the literature on ESG disclosure measurement.

The remainder of this paper is structured as follows. Section 2 presents the study’s Institutional Background. Section 3 reviews the literature on ESG disclosure and profitability. Section 4 introduces the theoretical frameworks underpinning this study and outlines the development of the research hypotheses. Section 5 details the research methodology and Section 6 presents and discusses the empirical findings. Finally, Section 7 offers concluding remarks, highlights the practical implications, and addresses the limitations of the study.

2. Institutional Background

The Saudi economy depends on oil as its main growth factor, which strengthens government financial resources while expanding export values and increasing the gross domestic product (GDP) [13]. Saudi Arabia is one of the world’s major petroleum producers and has derived constant advantages from its position in the global energy sector [12]. Fluctuating oil prices and international renewable energy momentum have revealed the necessity for Saudi Arabia to develop a more diverse economy [36]. Therefore, Saudi Arabia has started major economic reforms to build a modern economy, while reducing its dependence on hydrocarbons and driving innovation across multiple business sectors [12]. Saudi Vision 2030, launched in 2016, serves as a comprehensive strategic framework that works to diversify the economy and transform Saudi Arabia into a global investment leader [22]. The Saudi national agenda (Vision 2030) aims to advance economic diversification, together with sustainable development, and strengthen private sector leadership for national growth [37]. Through its investment focus on renewable energy, technology, and infrastructure development, Vision 2030 works to establish Saudi Arabia as an innovation leader while enhancing citizens’ lifestyle quality [22]. This vision includes national priority alignment with international sustainability standards and increased ESG disclosure requirements [38]. Under the Vision 2030 framework, the Saudi government has implemented multiple policies and initiatives through which it seeks to promote ESG practices among firms because it understands that international investments and long-term growth require sustainability [36]. The Capital Market Authority (CMA) has established governance guidelines to enhance transparency and accountability, and the Saudi Green Initiative aims to decrease carbon emissions and support renewable energy adoption [12].

Saudi Vision 2030 establishes a policy framework that supports ESG disclosure because it motivates businesses to sustain their operations through environmental and social initiatives [22]. This vision underlines both environmental sustainability and social responsibility, as well as governance reforms [12]. Vision 2030 incentives encourage corporations to report on their ESG initiatives through transparent measures that create various profit-building pathways [15]. According to Vision 20230, achieving energy efficiency goals together with waste reduction activities reduces operational costs and workforce diversity, and community engagement drives brand reputation and customer loyalty [11]. Further, board diversity and ethical leadership initiatives within governance reforms support superior decision quality and better risk handling, leading to enhanced firm performance [31]. Indeed, the connection between ESG disclosure and Vision 2030 strategies has drawn domestic together with international investors who search for sustainable businesses [22]. The rising significance of sustainability drives better financing opportunities across Saudi-listed companies and marks them as sustainability practice champions for Gulf Cooperation Council (GCC) nations and worldwide markets [15]. Through Vision 2030, Saudi Arabia established an ESG reporting system that operates through strategic business tools that drive operational success and resilience across the competitive global market [38].

3. Literature Review

3.1. Environmental, Social and Governance

Firms use ESG disclosure to release publicly available data on sustainability practices and corporate social responsibility (CSR) programs along with governance frameworks [39]. The ESG disclosure standard includes numerous forms of data beyond financial figures, such as strategies for environmental preservation, social equality activities, and ethical CG practices [28]. ESG disclosure operates as a crucial assessment approach for both sustainability dedication and emerging risk handling of firms [2]. Moreover, ESG disclosure expands beyond traditional financial reporting because it links sustainability standards directly to operational activities to deliver full insight into long-term firm-value generation [3]. It is a modern standard of corporate performance that offers broader perspectives through non-financial metric analysis to shape both stakeholder perceptions and investor decisions [40]. Therefore, various stakeholders, such as investors, regulators, customers, employees, and communities, demand increased corporate reporting on ESG practices [28]. Institutional investors lead the way in demanding better ESG transparency because they understand that sustainability threats affect both company financial outcomes and their investment success [41]. In addition, multiple regulatory bodies worldwide have set mandatory ESG reporting requirements because they realize the importance of ESG disclosure for market stability and sustainable development [42].

Prior research on ESG disclosure evaluates its diverse effects on business operations, stakeholder interaction, and enduring value development [8,43]. Remarkably, the field of ESG disclosure research has progressed through studies that analyze its causes, results, and environmental conditions inside different sectors and international markets. In this regard, a study by Jucá and Muren (2024) [44] demonstrated that firms showing both sustainability dedication and clear ESG practices develop superior relationships with employees, customers, and regulatory entities. Accordingly, enhanced stakeholder engagement leads to a better corporate reputation and strengthened customer loyalty and employee satisfaction, which drives long-term value creation [39]. Recently, Alodat and Hao (2025) [45] established that ESG disclosure serves as a vital mechanism for firms to demonstrate their ethical commitments, leading to reduced reputational risks and boosting stakeholder trust. In line with this study, Wang et al. (2023) [41] reported that companies in countries with strict regulatory environments and robust institutional frameworks tend to implement full-scale ESG reporting systems. The authors demonstrate that government regulations, together with investor activism, act as fundamental external forces that push companies to increase transparency levels. Alahdal et al. (2024) [14] concluded that firms operating in nations where sustainability issues receive elevated public attention tend to embrace ESG disclosure because civil society and media organizations closely monitor their activities.

ESG disclosure provides abundant advantages, but faces multiple obstacles, as described by Adam et al. (2024) [7]. The process of comparing ESG performance across firms and industries is complicated because of the absence of standardized reporting frameworks [10]. The Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) have succeeded in developing standardized guidelines, yet ongoing differences in regional regulations and sector-specific practices obstruct harmonization [2]. Further, the voluntary nature of many ESG reporting requirements leads to selective disclosure practices that lower reliability and diminish the comparability of the information provided to stakeholders [43]. Moreover, the absence of standardization in ESG reporting frameworks creates challenges for stakeholders because it reduces the reliability and comparability of disclosed information [18]. This problem intensifies for companies that maintain operations across different jurisdictions because they must follow diverse regulatory frameworks [19]. In this regard, Saini et al. (2022) [3] observed that different regional ESG disclosure requirements generate inconsistent reporting practices that prevent worldwide sustainability reporting from harmonizing with SDGs and similar standardized goals.

Another significant challenge is inter-industry differences in ESG focus, with further impact on the industry standardization of disclosure practices [19]. For example, sectors with significant environmental risk (e.g., energy and manufacturing) are likely to give greater weight to environmental information (but not necessarily environmental transparency), while service-based sectors tend to place greater importance on social and governance elements [46]. This sparsification creates challenges for both investors and stakeholders who wish to evaluate and compare ESG characteristics across different industries [45]. Research by Padilla et al. (2024) [47] reported that such disparities often result in selective reporting, in which companies focus on the positive aspects of ESG dimensions rather than on others that could show them in a bad light. Greenwashing is a persistent problem that erodes the credibility and trustworthiness of ESG disclosures [43]. Oppong et al. (2023) [48] pointed out that companies may exaggerate or misrepresent their sustainability initiatives to look good in public, without addressing the underlying issues. This not only erodes stakeholder trust but also reduces the effectiveness of ESG as a tool for real sustainability [39]. More recently, Zhou et al. (2024) [49] found that greenwashing is more prevalent in industries with weaker regulations, so stricter monitoring and enforcement are needed to curb this practice.

Additionally, the complexity and cost of implementing comprehensive ESG reporting systems also represent a significant hurdle [18], particularly for small and medium-sized enterprises (SMEs). Research by Drempetic et al. (2020) [50] revealed that smaller firms often lack the financial and technical resources to develop robust ESG disclosure mechanisms, leading to gaps in reporting quality and scope. This issue is exacerbated in developing economies, where firms may face additional challenges such as limited access to skilled labor and technology [21]. Similarly, the voluntary nature of ESG disclosure in many regions results in selective reporting because firms may choose to disclose only those aspects that align with their strategic goals, further limiting the utility of ESG data for stakeholders [43]. In summary, although ESG disclosure has gained considerable traction as a vital component of corporate reporting, significant challenges persist [39]. These include lack of standardization, industry-specific variations, risks of greenwashing, resource constraints, and stakeholder skepticism. Addressing these challenges will require concerted efforts from regulators, firms, and stakeholders to enhance the credibility, comparability, and effectiveness of ESG disclosure practices [17,22].

3.2. Firm Profitability

The concept of firm profitability has been a central focus in business and financial research because it directly reflects a firm’s ability to generate returns on investments and sustain operations over the long term [51]. Profitability is not only a key performance indicator for management but also serves as a critical metric for investors, creditors, and other stakeholders [52]. Defined as the ratio of a firm’s earnings to its costs or revenues, profitability encompasses measures such as return on assets (ROA), return on equity (ROE), and net profit margins [53]. These metrics are used to assess a firm’s operational efficiency, financial health, and capacity to create value for its shareholders [51]. Numerous studies emphasize the factors that influence firm profitability, including internal operational efficiencies, external market dynamics, and industry-specific conditions. For example, Lubis (2022) [54] highlighted the role of internal resources and capabilities, arguing that firms with unique and inimitable resources, such as proprietary technologies, skilled human capital, and robust brand equity, are more likely to achieve sustained profitability. Similarly, Jumono et al. (2019) [55] underscored competitive strategy as a determinant of profitability, where firms leveraging cost leadership, differentiation, or niche focus outperformed competitors in profitability metrics. Cost leadership involves achieving the lowest production and operational costs in the industry, thereby enabling firms to offer competitive pricing [53]. On the other hand, differentiation focuses on creating unique products or services that command premium pricing. Firms that excel in these strategies are better positioned to achieve superior financial outcomes. For instance, a study by Spanos et al. (2004) [56] empirically confirmed Porter’s framework, demonstrating that firms with well-aligned strategies achieve higher profitability compared to those without a clear competitive focus.

In addition to these foundational theories, external market dynamics also play a pivotal role in shaping firm profitability. Firms operating in markets with favorable economic conditions, stable regulatory environments, and strong demand elasticity tend to experience higher profitability [57]. Market competition, customer preferences, and supplier bargaining power further influence financial outcomes [58]. For example, Santoso et al.’s (2023) [59] Structure–Conduct–Performance (SCP) paradigm established that industries characterized by low competition and high entry barriers often exhibit firms with superior profitability due to the reduced threat of new entrants. Subsequent studies, such as those by Gonçalves et al. (2024) [60], confirm the link between market structure and firm performance, reinforcing the importance of external conditions in determining profitability. Industry-specific factors such as technological advancements, regulatory compliance, and innovation also significantly influence profitability [53]. Firms operating in highly innovative industries, such as technology and pharmaceuticals, often experience elevated profitability to first-mover advantages and intellectual property protection [61]. For instance, Brooks and Saltzman (2016) [62] emphasized that core competencies are critical for long-term profitability, particularly in industries where continuous innovation is a prerequisite for survival. Additionally, regulation compliance and industry-specific standards often dictate cost structures and competitive parity, as evidenced by Earnhart et al. (2016) [63] findings on the impact of regulations on firm behavior and profitability.

Recently, the growing emphasis on the non-financial determinants of profitability has further enriched the literature [8,24]. CSR and ESG activities have gained prominence as profitability drivers in recent years [46]. Studies suggest that firms with strong ESG practices tend to experience improved financial performance because of enhanced stakeholder trust, operational efficiency, and risk mitigation [43,45]. For instance, robust environmental management can reduce resource consumption and waste, thereby lowering costs, while socially responsible practices foster customer loyalty and employee satisfaction, both of which positively impact profitability [64]. Furthermore, sound governance mechanisms, such as transparent reporting and ethical leadership, attract investors and reduce capital costs, thus contributing to profitability [65]. Cerciello et al. (2023) [66] find that firms actively engaging in CSR and sustainability practices often experience enhanced profitability due to improved brand loyalty, employee satisfaction, and risk mitigation. These findings are further supported by Brulhart et al. (2019) [67], who identified a positive correlation between stakeholder management and shareholder value creation, suggesting that addressing broader societal concerns aligns with financial objectives.

Despite significant advancements in the literature, gaps remain in the understanding of the dynamic nature of profitability, particularly in the context of ESG practices [14]. While studies such as Ayem et al. (2024) [68] highlight correlations between ESG activities and profitability, causality and underlying mechanisms remain underexplored. This is especially critical in emerging markets, such as Saudi Arabia, where cultural and institutional factors uniquely shape profitability dynamics. Saudi Arabia’s collectivist culture, Islamic principles, and stakeholder expectations influence firm strategies, including ESG integration, and impact profitability [12]. Under Vision 2030, the Kingdom has prioritized sustainable practices, linking ESG to economic growth. Initiatives such as the Tadawul ESG Index and governance reforms aim to incentivize firms to align profitability with societal goals and foster opportunities for ESG disclosure to drive financial performance [13]. Saudi Arabia’s economic environment, underpinned by Vision 2030, further underscores the importance of exploring regional dynamics in profitability [16]. The nation’s transition from an oil-dependent economy to a more diversified economy has heightened emphasis on sustainable business practices and ESG integration as drivers of financial performance [17]. Vision the 2030s objectives explicitly link economic growth to sustainability, fostering a regulatory environment that incentivizes ESG disclosure and aligns profitability with broader societal goals [36]. However, challenges such as regulatory uncertainty and weak enforcement mechanisms may dilute the impact of ESG investments on profitability, amplifying risks, such as greenwashing [40].

4. Theoretical Framework and Hypotheses Development

4.1. Theoretical Framework

4.1.1. Stakeholder Theory

Research on ESG disclosure has increased significantly in recent years, with multiple theoretical frameworks underpinning the research. In this regard, stakeholder theory, first articulated by Freeman (1984) [69], provides a comprehensive framework for understanding the dynamic interactions between corporations and their stakeholders. This theory asserts that businesses do not operate in isolation; rather, they are embedded within a network of relationships with diverse groups including shareholders, employees, customers, suppliers, regulators, and local communities [70]. Unlike the traditional shareholder-focused perspective, stakeholder theory emphasizes the need for organizations to address the interests and expectations of all stakeholders to ensure long-term success and sustainability [18]. This approach highlights the interconnectedness of economic, social, and environmental responsibility. The stakeholder theory posits that firms that actively engage with their stakeholders and address their concerns are more likely to build trust, legitimacy, and goodwill, ultimately resulting in enhanced performance [7]. The integration of ESG initiatives aligns closely with stakeholder theory [31]. For example, addressing environmental sustainability concerns satisfies ecological stakeholders, while promoting social equity and governance transparency to meet the demands of employees, communities, and investors [71].

According to stakeholder theory, the disclosure of ESG practices is instrumental in enhancing corporate profitability by aligning organizational actions with the expectations of diverse stakeholders [19]. The stakeholder theory emphasizes that a firm’s success is contingent upon its ability to satisfy the interests of key stakeholder groups, including investors, customers, employees, and communities. ESG disclosure serves as a vital communication tool that reinforces trust and transparency, thereby fostering stronger relationships with stakeholders and yielding economic benefits [70]. From a stakeholder perspective, ESG disclosure strengthens customer loyalty and brand equity, both of which contribute to profitability. Customers are increasingly prioritizing products and services from firms that demonstrate environmental responsibility, ethical labor practices, and strong governance [72]. As noted by Lins et al. (2017) [73], firms with superior ESG practices experienced higher sales growth during periods of market uncertainty as stakeholders perceived them as trustworthy and resilient. In short, under stakeholder theory, ESG disclosure is a powerful mechanism for enhancing profitability by aligning corporate actions with stakeholder expectations. Through increased transparency, firms not only attract investors and customers but also foster employee satisfaction and mitigate risks, all of which contribute to financial success. Empirical studies consistently demonstrate that firms engaging in comprehensive ESG disclosures enjoy superior financial performance, highlighting the strategic importance of stakeholder-oriented practices in today’s sustainability-driven business landscape [70,73].

4.1.2. Legitimacy Theory

Legitimacy theory posits that firms operate within a broader societal system and must align their activities with prevailing social norms and expectations to maintain acceptance [18]. In other words, businesses have no inherent right to exist; they are granted a “social license to operate” by society only when their values and actions are perceived as congruent with societal norms and values [31]. According to Suchman (1995) [74], legitimacy is defined as a “generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs and definitions”. This perspective is highly relevant to corporate ESG disclosure, as companies often disclose environmental and social information to demonstrate that they meet society’s expectations and thus secure continued approval from stakeholders and the public [14]. Indeed, legitimacy theory has become one of the most widely used frameworks for explaining voluntary ESG disclosures, emphasizing that such transparency is a strategy for organizations to justify their operations and maintain societal support Legitimacy theory closely complements stakeholder theory in explaining why firms engage in ESG disclosure [75].

Stakeholder theory centers on addressing the needs and expectations of specific stakeholder groups with direct interests in the company, whereas legitimacy theory broadens the focus to include society at large as the relevant audience [70]. Despite this difference in scope, both theories share the premise that a firm’s accountability extends beyond shareholders to the wider social environment, recognizing that fulfilling external expectations is crucial for the firm’s survival and success [19,69,75]. In effect, the two theories are not contradictory but mutually reinforcing: by responding to the concerns of key stakeholders (as urged by stakeholder theory), a firm simultaneously aligns with broader societal norms, thereby upholding its legitimacy. Thus, integrating legitimacy theory alongside stakeholder theory provides a more comprehensive understanding of why companies disclose ESG information to meet stakeholder demands and to conform with the normative expectations of society.

4.2. Hypotheses Development

ESG Disclosures and Firm Profitability

ESG disclosures collectively reflect a firm’s commitment to sustainability, ethical practices, and responsible governance [2,9]. These disclosures drive profitability through mechanisms such as increased investor confidence, improved operational efficiency, and stronger stakeholder relationships [8,10]. A robust body of research over the past two decades has explored whether doing good (in ESG/CSR terms) leads to doing well financially. Systematic reviews and meta-analyses report a positive association between overall ESG (or CSR) activities and firm profitability or financial performance, albeit with variations across studies. For example, a classic meta-analysis by Orlitzky et al. (2003) [76] examined 52 studies (nearly 34,000 observations) and found that corporate social performance is positively correlated with financial performance, indicating that corporate virtue tends to pay off. They noted the relationship was stronger for accounting-based performance measures (such as ROI and ROA) than for market-based measures, and that good corporate reputations (an intangible resource aligned with RBV) mediate this positive link. Also, Gillan et al. (2021) [65] conducted a comprehensive literature review of ESG/CSR research in finance. While not a quantitative meta-analysis, it synthesizes findings from numerous studies and concludes that ESG factors are increasingly material to corporate finance and performance. More recently, Soesetio et al. (2024) [24] found that transparent ESG reporting positively influences investor trust, which in turn strengthens a firm’s financial position. Khanchel et al. (2022) [11] demonstrated that firms with material ESG disclosures experience superior financial performance by mitigating risks and fostering long-term stakeholder engagement. These studies highlight the strategic importance of ESG initiatives in aligning corporate practices with societal values and reducing reputational and regulatory risks, which directly enhances profitability [17].

While several prior pieces of evidence point to a positive relationship, the literature reviews highlight important nuances, including instances where the impact is neutral or even negative under certain conditions. For instance, in their study, Singh et al. (2023) [77] examined the impact of emphasizing material versus nonmaterial ESG factors on firm value. They found that prioritizing nonmaterial ESG factors reduced firm value by 0.30%, whereas focusing on material ESG factors increased it by 0.14%. The negative effects of nonmaterial ESG factors intensified over time, particularly in regulated industries, indicating that emphasizing immaterial ESG aspects may weaken firm profitability. Similarly, a comprehensive study by Whelan et al. (2021) [78] analyzed over 1000 studies on ESG and financial performance published between 2015 and 2020. They found that only 26% of studies focusing solely on ESG disclosure reported a positive correlation with financial performance, compared to 53% for studies assessing ESG performance. This suggests that mere disclosure without substantive ESG actions may not enhance profitability and could potentially have neutral or negative effects. More recently, Huang (2024) [79] argued that excessive focus on ESG initiatives can impose additional costs on firms, particularly in the short term, owing to the significant investment required to implement and report sustainability practices. Furthermore, Ma (2024) [80] observed that the financial benefits of ESG disclosure vary by industry, firm size, and geographic location, suggesting that ESG outcomes are context-dependent. These mixed results highlight that ESG disclosure may not universally lead to profitability gains and that its financial implications can be influenced by both internal and external factors.

Further, ESG disclosures have emerged as a pivotal tool for firms to demonstrate accountability, align with stakeholder expectations, and enhance their financial performance [27,28]. By communicating their ESG practices transparently, firms can foster trust, improve their reputations, and achieve operational efficiency. However, the impact of ESG disclosure on profitability may differ depending on whether stakeholder objectives are focused on short-term gains or long-term sustainability goals [68]. The stakeholder theory posits that firms must address the needs of various stakeholders, including investors, employees, customers, and regulators, who often have competing priorities [18]. Short-term stakeholders, such as investors seeking immediate returns, may view ESG disclosures as costly initiatives that divert resources from profit-maximizing activities [70]. Conversely, long-term-oriented stakeholders, such as socially responsible investors and environmentally conscious customers, perceive ESG disclosures as value-enhancing [7]. Research shows that firms prioritizing long-term sustainability objectives through ESG practices experience greater resilience, reduced risk, and improved profitability over time [72]. Similarly, legitimacy theory posits that firms must align their actions with societal norms and expectations to maintain their legitimacy and secure continued access to critical resources [31]. This perspective suggests that ESG disclosures serve as a mechanism for companies to demonstrate accountability and reinforce their legitimacy, especially in evolving regulatory and social environments [19].

Indeed, this divergence is particularly evident in emerging economies, including Saudi Arabia, where firms operate in a dynamic environment shaped by regulatory reforms and societal expectations [36]. Notably, the context of emerging economies such as Saudi Arabia further highlights the critical role of ESG disclosure in achieving profitability [37]. Saudi Arabia’s Vision 2030 framework emphasizes the importance of sustainability and economic diversification, urging firms to adopt ESG practices that contribute to national development goals [16]. Firms that align their ESG disclosures with Vision 2030 objectives can attract domestic and international investments, thereby improving their financial outcomes [13]. Moreover, government-led initiatives, such as the Saudi Green Initiative and renewable energy projects, have shifted toward long-term sustainability goals [40]. These reforms incentivize firms to prioritize long-term objectives, aligning ESG practices with profitability-enhancing opportunities, such as green financing, enhanced regulatory compliance, and stakeholder trust [12]. However, the tension between short- and long-term objectives may create variability in the relationship between ESG disclosure and profitability [53]. Short-term-focused firms may underperform profitability due to the immediate costs of ESG initiatives, while long-term-focused firms reap financial benefits by fostering stakeholder loyalty and mitigating risks [18]. This mixed evidence necessitates further exploration of how stakeholder orientations influence the profitability outcomes of ESG disclosures.

Thus, the presented argument aligns seamlessly with stakeholder and legitimacy theories, which emphasize the critical importance of balancing the diverse and often competing interests of stakeholders while striving for profitability and legitimacy. Within this theoretical framework, ESG disclosures emerge as strategic instruments to foster trust, demonstrate accountability, and create value across a broad spectrum of stakeholders. Hence, by enhancing transparency and aligning corporate practices with stakeholder expectations, ESG disclosures play a pivotal role in strengthening relationships and mitigating risks, ultimately contributing to improved financial performance and maintaining firm legitimacy. Therefore, this study contends that ESG disclosure is positively associated with the profitability of Saudi-listed firms, a claim substantiated by robust theoretical foundations and empirical evidence.

Research Hypothesis:

Environmental, social, and governance disclosures exert a positive and statistically significant influence on the profitability of Saudi-listed firms.

5. Methodology

5.1. Sample Selection and Data Collection

To examine the impact of ESG disclosure on the profitability of Saudi-listed firms, this study employed a secondary data collection approach, utilizing the annual reports of sampled firms for the period 2019 to 2023. A systematic filtering process was applied to ensure the robustness and relevance of the data [7]. First, financial firms were excluded from the sample because of their distinct reporting frameworks and regulatory requirements, which differ significantly from those of non-financial firms. This exclusion aligns with previous studies to enhance comparability and validity [16]. The ESG and profitability data were extracted directly from the annual reports of the selected firms, sourced from the Saudi Stock Exchange’s official website (Tadawul).

Second, firms with substantial missing or incomplete data were excluded from the sample to ensure the integrity of the analysis [19]. The decision to focus only on firms with complete and reliable data reflects this study’s commitment to producing high-quality empirical results. After applying these criteria, the final sample consisted of a balanced panel dataset of 100 non-financial Saudi-listed firms (500 firm-year observations). The chosen sample size and time period were designed to capture trends and insights during a critical phase in Saudi Arabia’s economic transformation, driven by the Vision 2030 framework [36]. The balanced panel dataset not only allows for robust longitudinal analysis but also provides comprehensive insights into how ESG disclosure practices impact firm profitability in the context of a rapidly evolving economy [45]. Consequently, by leveraging this methodological approach, this study ensures that the findings are both generalizable and grounded in a solid empirical foundation. The detailed compositions of the study samples are presented in

Table 1. Sample composition.

Sample Selection	Number of Firms	Total Observations/Years
Total number of firms extracted from Saudi Exchange (Tadawul) as of 31 December 2023	131	655
Less
Firms with missing data	31	155
Final sample size	100	500

.

5.2. Data Analysis Procedures

In this study, data analysis was conducted using a systematic and rigorous process to ensure the validity and reliability of the findings. Initially, a detailed statistical description of the dataset was provided to offer an overview of the key variables, including their distribution, central tendencies, and variability [19]. This was followed by an examination of the correlation matrix, which assessed the relationships among all variables in the model to identify potential multicollinearity issues and provide preliminary insights into their interactions [7]. Subsequently, the study employed multiple regression analysis as the primary analytical tool to determine the direction, magnitude, and significance of the relationships between variables [18]. This approach allowed for a comprehensive evaluation of the impact of ESG disclosures on the profitability of Saudi-listed firms [81]. To ensure the robustness and reliability of the results, a series of robustness tests were conducted, including checks for heteroscedasticity, multicollinearity, and endogeneity as well as alternative model specifications [7]. These additional analyses were designed to validate the findings and confirm that they were not influenced by potential biases or methodological limitations [45].

5.3. Dependent Variable

Profitability is a critical indicator of a firm’s financial health, reflecting its efficiency and effectiveness in managing and utilizing assets to generate profits [51]. It serves as a benchmark for assessing a firm’s overall financial performance and operational success [52]. Profitability encompasses a firm’s ability to maximize revenue while minimizing costs, thereby delivering value to shareholders and maintaining sustainable growth [56]. Metrics such as return on equity (ROE) and net profit margin are commonly used to measure profitability, offering insights into different aspects of a firm’s performance such as asset utilization, equity efficiency, and operational effectiveness. In empirical studies, profitability has often been used as a dependent variable to assess how several organizational practices and external factors affect the level of financial performance, such as Saputra (2022) [53], Jumono and Mala (2019) [55], and Santoso et al. (2023) [59]. Further, return on assets (ROA) is a widely recognized and frequently utilized metric in financial analysis, offering valuable insights into a firm’s ability to generate profits relative to its total assets [53]. ROA reflects the efficiency with which a firm employs its assets to produce earnings, making it a key indicator of overall operational performance and resource utilization [82]. Given its relevance, ROA has already been widely applied in prior studies as a usual measure of profitability; for instance, refer to Earnhart and Rassier (2016) [63]. Following this trend, this study adopts ROA as the indicator of firm profitability to ensure consistency of results with those from the previous literature and comparability across empirical findings. ROA is used here, which justifies its practical benefits because it covers the firm’s profitability and reflects its ability to generate returns from its asset base a critical factor for corporate financial health and operational efficiency.

5.4. Independent Variable: Quantifying the ESG Disclosures

Definitions of disclosure level and quality are ambiguous and possess subjective attributes [18]. The absence of a theoretical framework constrains the advancement of proxies for this concept [31]. Consequently, researchers have employed methodologies to evaluate the quantity and quality of disclosure by presuming that the subject of assessment accurately reflects these attributes [83]. Studies employing a disclosure index to assess environmental disclosure presume that the quantity of released environmental information with quantitative issues can offset the quality or level of disclosure [84]. Nonetheless, quantitative disclosure is a facet of information quality, as numerical data offers nearly incontrovertible facts and guarantees trustworthiness [85]. Consequently, a reporting score system is employed to convert the quality and extent of information generated by firms in their annual reports into variables [86]. Therefore, in contrast to earlier empirical studies that employed checklists or scores derived from rating agencies such as Bloomberg ESG Disclosure Scores, and Refinitiv ESG Disclosure Scores [32,33], this study operationalizes the independent variable by developing an ESG disclosure checklist aligned with various international and Saudi ESG reporting standards, as well as the established literature [18]. Typically, the number of items requiring disclosure is extensive and nearly boundless [19]. Accordingly, the efficacy of the scoring index as an indicator of disclosure depends on the methodology chosen [87]. This study employed a content analysis of annual reports. This was accomplished through the selective incorporation of elements endorsed by several Saudi and international frameworks and standards. This aligns withAbdelrahman et al. (2024) [18].

The management procedure resulted in the creation of a new ESG disclosure index derived from 80 disclosure items categorized into three groups (ESG). Validity and reliability are two fundamental and essential elements in evaluating the quality of measurement instruments used for research [19]. Thus, for the disclosure index to serve as a valid and reliable metric for assessing disclosure quality or level, it is essential to validate the measurement instrument [7]. To enhance the validity and reliability of the ESG disclosure index, an initial compilation of the ESG disclosure items was presented to specialists in sustainability, pollution, and carbon emissions. Furthermore, the preliminary list was disseminated to two scholars specializing in CG, CSR, environmental and sustainability accounting, and ESG reporting. Eighty preliminary ESG disclosure items were submitted for confirmation. An expert and two academicians recommended the removal of five items from the preliminary index items. This aligns with Abdelrahman et al. (2024) [31], who provided an expert with a preliminary list of disclosure items to gather their opinions on the assigned scores to assess the degree of voluntary disclosure.

Furthermore, to mitigate bias in assessing the pertinence of the study instrument, inter-observer reliability was ensured. Initially, firm annual reports are used in the analysis prior to any actions being implemented, and a pilot study is executed to ensure that all disclosure issues across organizations receive equivalent attention and treatment [88]. Three items that none of the chosen firms had reported in the five years prior to the survey were omitted from the index. Consequently, the final ESG disclosure index consists of 72 items. Consequently, this ESG disclosure index is comparatively more extensive and inclusive than that proposed by Michelon et al. (2015) [89] and Bezerra et al. (2024) [90]. Furthermore, to score the index items, the present study used an unweighted method, as no additional preference was assigned to any specific user type or index item [91]. Moreover, the unweighted method avoids subjectivity issues inherent in the weighted approach and eliminates any bias that may arise from the application of an incorrect weight [75]. Finally, the scores were recorded for all items on the list. If an item was reported, each firm was assigned a value of one; otherwise, a value of zero was assigned to each firm. The extent of ESG disclosure is measured by the total number of ESG items reported by firms. This aligns with Abdelrahman et al. (2024) [19].

5.5. Control Variables

This study investigates the effect of ESG disclosure on firm profitability by incorporating the key control variables identified in prior research as critical to financial performance. As shown in

Table 2. Definition of variables.

Variable	Acronym	Measurement
Dependent Variable
Firm Profitability	FPRO	Net income divided by total assets (ROA)
Independent Variable
ESG disclosures	ESGD	The checklist consists of a minimum of 0 items and a maximum of 72 items.
Control Variables
Firm size	SIZE	The logarithm of total assets
Firm age	AGE	The total years of operation for the firm up to the end of 2023
Leverage	LEV	Total debt divided by total assets
Liquidity	LIQ	Current assets divided by current liabilities
Female representation	FEMALE	The number of female board members by the total number of board members and multiplying the result by 100%.
Intuitional Ownership	IO	The proportion of dividing the total number of common shares held by all institutional owners by total common shares outstanding at year-end

, these variables include firm size, firm age, liquidity, leverage, and corporate governance factors such as female representation on the board and institutional ownership. Accordingly, including these factors, the analysis offers a more thorough understanding of the determinants of firm profitability. The inclusion of these control variables is in line with Alahdal et al. (2024) [14], Khemakhem et al. (2023) [27] and Alodat and Hao (2024) [45]. The study econometric model is as follows:

FPROit = β0 + β1ESGDit + β2SIZEit + β3AGEit + β4LIOit + β5LEVit + β6femaleit + β7IOit + εit

6. Empirical Results

6.1. Descriptive Analysis

Table 3. Descriptive statistics.

Variables	Mean	Standard Deviation	Minimum	Maximum
FPRO	0.1307	0.1190	0.0029	0.3351
ESGD	0.1655	0.1605	0.0000	0.8865
FSIZE	7.4434	1.3290	4.4890	9.5186
AGE	30.8517	13.3152	6.0000	55.0000
LIQ	2.4362	2.5353	0.06348	21.3747
LEV	0.4532	0.2081	0.0491	1.4111
FEMALE	23.2197	12.9437	0.000	0.6000
IO	0.6182	0.2017	0.03160	0.9900

Notes: the variables used in this study are defined as follows: FPRO refers to firm profitability, ESGD refers to Environmental, Social, and Governance Disclosure, FSIZE denotes the size of the firm, and AGE reflects the number of years the firm has been in operation, whereas LIQ measures the firm’s liquidity. LEV captures the firm’s leverage; FEMALE refers to the proportion of female members on the board and IO represents institutional ownership.

provides an overview of the descriptive statistics for the variables used in this study. The mean value for firm profitability (FPRO) is 0.1307 with a standard deviation of 0.1190, indicating moderate variability among firms. Profitability ranged from a minimum of 0.0029 to a maximum of 0.3351, highlighting substantial differences in the financial performance of the sampled firms. The ESG disclosure exhibited a mean of 0.1655, with a standard deviation of 0.1605. The range, extending from 0.0000 to 0.8865, shows that, while some firms provide no ESG disclosures, others demonstrate significant transparency. This wide dispersion suggests variability in firms’ commitment to ESG activities. Regarding the control variables, Table 3 reports that firm size (FSIZE) has a mean of 7.4434 and a standard deviation of 1.3290, with values ranging between 4.4890 and 9.5186. This indicates the inclusion of both small and large firms in the sample, which could contribute to differences in other variables such as profitability or ESG disclosure. Similarly, firm age (AGE) averages 30.8517 years, with a wide range from 6 to 55 years, reflecting a mix of well-established firms and relatively newer entrants. Further, liquidity (LIQ) shows a mean of 2.4362 but with a high standard deviation of 2.5353 and values ranging from 0.0635 to 21.3747. This suggests that some firms maintain substantial liquidity, whereas others operate with more constrained financial resources. Leverage (LEV) has a mean of 0.4532, with a narrower range (0.0491 to 1.4111) and a standard deviation of 0.2081, indicating moderate variation in firms’ reliance on debt financing. As for CG factors, the proportion of female members on the board (FEMALE) averaged 23.2197%, with a standard deviation of 12.9437. This range extends from 0.0000 to 60.0000, suggesting significant differences in gender diversity across firms. Finally, institutional ownership (IO) has a mean value of 0.6182, with a standard deviation of 0.2017. The values range from 0.0316 to 0.9900, indicating varying levels of institutional investor presence, which may influence firms’ governance practices and decision-making processes.

6.2. Correlation Matrix

Table 4. Correlation matrix.

	FPRO	ESGD	FSIZE	AGE	LIQ	LEV	FEMALE	IO	VIF
FPRO	1.0000								***
ESGD	0.4139 *	1.0000							1.19
FSIZE	−0.1636 *	−0.1757 *	1.0000						1.07
AGE	−0.0521	0.1519 *	−0.1720 *	1.0000					1.06
LIQ	−0.0822 *	−0.0088	0.0455	−0.0252 *	1.0000				1.63
LEV	0.1197	0.0046	−0.0429 *	−0.0628	−0.6185	1.0000			1.66
FEMALE	0.1312 *	0.1589 *	−0.0701	0.0871 *	−0.0576	0.1192 *	1.0000		1.05
IO	0.1744 *	0.3458 *	−0.1632 *	0.0628	−0.0217	0.0304	0.0547 *	1.0000	1.15

Notes: The table presents the correlation coefficients among the primary variables included in the analysis. These coefficients indicate the strength and direction of the linear relationships between the variables. The definitions of the variables are provided in Table 3. Additionally, the variance inflation factor (VIF) is included to assess the presence of multicollinearity among the independent variables. *** p < 0.01; * p < 0.1.

indicates a moderately positive correlation between firm profitability (FPRO) and ESG disclosure (ESGD) (0.4139). Firm size (FSIZE) has weak negative correlations with FPRO (−0.1636) and ESGD (−0.1757), whereas firm age (AGE) has a small positive correlation with ESGD (0.1519) and a negligible correlation with FPRO (−0.0521). Liquidity (LIQ) had weak negative correlations with both FPRO (−0.0822) and ESGD (−0.0088), while leverage (LEV) showed minimal correlation with FPRO (0.1197) and ESGD (0.0046) but a moderate negative correlation with LIQ (−0.6185). The proportion of female board members (FEMALE) has weak positive correlations with ESGD (0.1589) and FPRO (0.1312). Institutional ownership (IO) shows a moderate positive correlation with ESGD (0.3458), and a weak positive correlation with FPRO (0.1744).

6.3. Diagnostic Tests

Owing to the nature of the data used in the present study, a potential causal relationship exists between the dependent and independent variables. Consequently, employing ordinary least squares (OLSs) may be unsuitable to resolve these challenges. The Hausman test was used to ascertain the appropriate regression model with either fixed or random effects. This modeling methodology was utilized in prior research by Wang et al. (2024) [64] and Chijoke et al. (2020) [92]. The Hausman test results suggest that a random-effects regression is suitable (see

Table 5. Regression results.

Variables	Coefficients	t-Sat
ESGD	0.2470	4.92 ***
FSIZE	−0.0089	−0.79
AGE	−0.0063	−1.60
LIQ	−0.0064	−1.89 **
LEV	0.0404	0.83
FEMALE	0.0006	2.04 ***
IO	0.1015	1.96 **
Constant	0.2709	1.89 *
R2	0.18
Number of obs	500
Prob > chi2	0.000
Hausman Test	Prob < chi2 < 0.05

*** p < 0.01; ** p < 0.05; * p < 0.1.

). Diagnostic tests were performed on the model to verify the accuracy of the results and assess linearity, multicollinearity, outlier presence, heteroscedasticity, and autocorrelation [7]. Scatter plot analysis indicated that the relationship between the independent and dependent variables in the study model was linear [31]. Table 4 indicates minimal multicollinearity among the study variables since none exhibited a correlation coefficient greater than 0.80 [93]. A variance inflation factor (VIF) test was conducted to assess multicollinearity. This value surpasses 10, indicating a significant degree of multicollinearity, as noted by Gujarati (2003) [94]. Consequently, the VIF values presented in Table 4 confirm the absence of multicollinearity. The Breusch–Pagan/Cook–Weisberg test for heteroscedasticity was performed, whereas the Wooldridge test was utilized for autocorrelation in the panel data [95]. Both assessments demonstrate the presence of these issues. Consequently, as per Rogers (1993) [96], appropriate standard errors clustered at the firm level are employed to rectify the predicted ESGD model.

6.4. Regression Results and Discussion

Table 5 presents the estimation of random effects for Model 1. The F-statistic for Model 1 was statistically significant at a p-value < 0.01, demonstrating the statistical validity of the model. The adjusted R-squared value for the model was 18%, indicating that the proportion of the variance in the dependent variable was explained by the independent variables. The regression results presented in Table 5 emphasize the positive and significant relationship between Environmental, Social, and Governance Disclosure (ESGD) and firm profitability (FPRO), with a coefficient of 0.2470 (t-statistic = 4.92, p < 0.01). This finding suggests that firms with greater disclosure of ESG tend to achieve higher profitability. Comprehensive ESG reporting is likely to build trust among stakeholders, enhance corporate reputation, and attract investors who value accountability and governance, thereby contributing to financial performance. This observation is consistent with prior studies that emphasize the importance of ESG disclosure. For instance, Chen and Xie (2022) [8] find that firms with high-quality ESG disclosures attract long-term institutional investors and achieve lower capital costs, both of which positively impact profitability. Similarly, Burki et al. (2024) [2], Tsang et al. (2023) [39] and Lopez et al. (2020) [97] highlight that comprehensive ESG disclosure improves stakeholder perceptions and aligns corporate practices with investor expectations, ultimately benefiting financial performance. In the Saudi context, ESG disclosure’s positive impact on profitability is particularly aligned with Saudi Vision 2030’s goals. Vision 2030 places significant emphasis on sustainability, governance, and transparency as the core elements of transforming the economy [13]. For example, the Kingdom’s initiatives to implement ESG reporting standards, such as those led by the Saudi Stock Exchange (Tadawul), reflect a broader strategy to align Saudi corporations with global best practices [12]. Enhanced ESG disclosure by Saudi firms not only supports the country’s ambitions to attract foreign investment, but also establishes these firms as leaders in transparency, a crucial factor for competitive advantage in an increasingly sustainability-focused global economy. Further, the incorporation of ESG into corporate strategies also aligns with stakeholder theory, which advocates balancing the interests of various stakeholders [70]. This theory posits that businesses thrive when they address all stakeholders’ needs, as doing so fosters trust, loyalty, and cooperation [69,71]. Thus, the positive effect of ESG disclosure on firm profitability observed in this study illustrates how firms that proactively engage in ESG disclosure create value for stakeholders, leading to improved financial performance.

The regression analysis includes six control variables to capture the additional factors influencing firm profitability. According to Table 5, the coefficient of FSIZE, representing firm size, is −0.0089, with an insignificant t-statistic of −0.79. This indicates that firm size does not significantly impact profitability within the sample, suggesting that the scale of operations does not confer distinct financial advantages or disadvantages. AGE, reflecting the number of years a firm has been in operation, has a coefficient of −0.00637 and a t-statistic of −1.60, which are also insignificant. This implies that the duration of a firm’s market presence does not significantly influence profitability. Further, the LIQ variable, which measures a firm’s liquidity, has a negative coefficient of −0.00649 with a statistically significant t-statistic of −1.89, indicating that higher liquidity is associated with lower profitability. This result suggests that maintaining high levels of liquid assets may occur at the expense of allocating resources to potentially more profitable investments. Meanwhile, LEV, which captures the firm’s leverage, has a coefficient of 0.04049 and an insignificant t-statistic of 0.83, showing that leverage does not have a notable effect on profitability. This may indicate the financial risks and rewards associated with the debt financing balance in the sample. The proportion of female members on the board, represented by FEMALE, has a positive coefficient of 0.0006 and a statistically significant t-statistic of 2.04. This finding suggests that greater female representation on the board positively contributes to firm profitability, highlighting the potential benefits of diversity in governance. Finally, IO, representing institutional ownership, has a positive coefficient of 0.10159, with a t-statistic of 1.96, which is statistically significant. This finding indicates that higher levels of institutional ownership are associated with greater profitability, reflecting the influence of informed and engaged investors on firm performance.

6.5. Sensitivity Analysis

Sensitivity analysis is vital in research, as it tests the robustness and reliability of findings by evaluating their consistency across alternative models, variables, or assumptions [19]. This process enhances credibility, identifies potential biases, and ensures that conclusions are not dependent on specific methodological choices, thereby strengthening the overall validity of the results [14,45]. This study’s main findings were based on return on assets (ROA) as the primary measure of firm profitability, revealing a positive and significant impact of ESGD on profitability. To validate these results further, an additional analysis was conducted using return on equity (ROE) as an alternative measure of profitability. The findings from this analysis are consistent with those derived from ROA, demonstrating that ESGD positively and significantly influences ROE. Therefore, by demonstrating similar findings across both measures, this study provides stronger evidence that the financial benefits of ESGD are not confined to a single aspect of profitability but extend to broader dimensions of financial performance.

Table 6. Regression results for the return on equity (ROE) model.

Variables	Coefficients	t-Sat
ESGD	0.1348	3.70 ***
FSIZE	0.0049	0.67
AGE	−0.0008	−0.97
LIQ	−0.0005	−0.17
LEV	0.0803	1.92 **
FEMALE	0.0003	1.01 **
IO	0.0803	1.90 **
Constant	0.0547	0.74 *
R2	0.11
Number of obs	500
Prob > chi2	0.000

*** p < 0.01; ** p < 0.05; * p < 0.1.

presents the regression results of the sensitivity analysis.

7. Conclusions, Implications, Limitations and Future Research

This study examines the impact of ESG disclosure on the profitability of Saudi firms. The analysis is based on a sample of 100 non-financial firms, encompassing 500 firm-year observations over a five-year period (2019–2023). To achieve the study’s objectives, a comprehensive ESG disclosure index was developed based on internationally recognized ESG frameworks, Saudi-specific regulations, and the established literature. The results confirm the predicted relationship that Saudi firms with higher ESG disclosure levels will achieve better profitability. This study demonstrates findings that support Saudi Vision the 2030s fundamental goals, which focus on sustainability, corporate transparency, and economic diversification, for long-term development.

This study fills a gap in the literature on the effect of ESG disclosure on the profitability of listed Saudi firms. Accordingly, by providing empirical evidence that firms with higher levels of ESG disclosure achieve significantly greater profitability, this study highlights the pivotal role of corporate transparency and sustainability practices in enhancing financial performance. This contribution is particularly relevant in the context of Saudi Arabia, where the government’s push for stronger ESG reporting standards and sustainable business practices under Vision 2030 has gained momentum. Furthermore, these findings may also be valuable for other Gulf Cooperation Council (GCC) countries, as they share similar economic structures, regulatory frameworks, and sustainability goals. Given the increasing emphasis on ESG integration across the GCC region, this study’s insights can help policymakers and businesses in countries such as the UAE, Qatar, and Kuwait enhance their ESG disclosure practices to drive financial performance and long-term sustainability. Moreover, this study provides practical utilization for various stakeholders because it demonstrates that ESG disclosure acts as a vital driver of business profitability. For example, the Saudi Capital Market Authority (CMA) can use these findings to enhance its ESG disclosure requirements. For investors and financial institutions, the study highlights that firms with strong ESG commitments tend to achieve higher profitability. This evidence supports the growing trend of sustainable investing, where institutional investors prioritize firms with ethical business practices, governance integrity, and environmental responsibility. By integrating ESG factors into investment decision-making, investors can enhance portfolio resilience and long-term financial returns. Further, for customers and the broader community, the reported findings emphasize that ESG disclosures provide greater transparency and accountability, enabling consumers to make informed purchasing decisions that align with their values. As consumer awareness of sustainability grows, firms that actively disclose ESG initiatives such as ethical labor practices, carbon reduction strategies, and corporate social responsibility (CSR) programs can build stronger brand loyalty and competitive advantage. This is particularly relevant in industries where environmental and social impact plays a critical role in consumer choices. Additionally, the comprehensive ESG disclosure index developed in this study provides a robust and nuanced framework for evaluating the quality and extent of ESG-related disclosures among Saudi-listed firms. This index was meticulously designed by integrating key Environmental, Social, and Governance indicators derived from globally recognized ESG standards, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) while ensuring alignment with Saudi Arabia’s regulatory landscape and cultural context. Therefore, by aggregating these indicators into a holistic measure, the ESGD index enables a detailed and systematic assessment of firms’ transparency, sustainability commitments, and corporate accountability, reinforcing the strategic objectives of Saudi Vision 2030 in promoting responsible business practices and economic resilience.

This study identifies a number of limitations that generate academic avenues for future research. First, the dataset is limited to non-financial firms listed in Saudi Arabia, which restricts the generalizability of the findings to financial institutions and other industry sectors. While this exclusion was necessary due to the distinct regulatory frameworks governing financial firms, future studies could explore how ESG disclosure influences profitability within financial institutions or other heavily regulated industries and countries. Second, while firm size was incorporated as a control variable, this study does not fully capture the differential impact of ESG disclosure across various business types and industries. The sample represents a mix of non-financial firms, but a more extensive dataset covering multiple sectors (e.g., financial firms and technology) would provide deeper insights into industry-specific ESG challenges and opportunities. Third, the study is restricted to Saudi Arabia-listed non-financial firms; therefore, its generalizability to other international settings is restricted. Subsequent studies should extend this breadth to firms in other GCC countries or emerging economies to understand the impact of ESG disclosure on profitability in a variety of regional environments. Fourth, the use of a comprehensive ESG disclosure index in the current study raises the overall quality of the investigation; nevertheless, it fails to respond to qualitative concerns regarding corporation-related sustainability and its objectives, and reporting acceptance by its constituencies. Future studies should use qualitative approaches, including case studies and interviews, to reveal ESG corporate motives and their long-term financial consequences. Fifth, this study considers only direct ESG disclosure and profitability relations, ignoring any moderating and/or mediator factors that could possibly shape such a relationship. Future studies should explore how parts of an organization’s culture, in addition to board independence, regulative requirements, and industry conditions, contribute to this relationship in a composite manner. An investigation of the mechanism involved will enrich academic knowledge regarding ESG disclosure and financial performance, and consequently, both sustainability and corporate profitability studies will gain in terms of overall research quality. Finally, while this study provides valuable insights into the relationship between ESG disclosure and firm profitability, it primarily adopts a linear analytical approach. However, it is possible that ESG disclosure and other independent variables may exhibit non-linear effects, where the impact on profitability could vary at different levels of ESG engagement. Given these possibilities, future research should consider applying non-linear regression models or interaction effects to explore whether ESG disclosure follows a curvilinear or threshold-based pattern in influencing financial performance.