The Power of ESG Factors in Driving Financial Growth - Insights from Palestine

doi:10.21203/rs.3.rs-4276019/v1

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Research Article

The Power of ESG Factors in Driving Financial Growth - Insights from Palestine

https://doi.org/10.21203/rs.3.rs-4276019/v1

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published 03 Sep, 2024

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Purpose: This study examines the effects of environmental, social, and governance disclosure (ESG) components on the financial performance (FP) of firms listed on the Palestine Stock Exchange (PEX) from 2016 to 2022, focusing on the moderating role of corporate governance.

Design/methodology/approach: This study used primary data from 44 PEX-listed companies. A context analysis technique was used through company websites and disclosures, the entire population (308 observations) was used for this study, and the study used STATA utilizing the required statistical analysis for this research.

Findings: The study finds that environmental, social, and governance disclosures significantly influence the Return on Equity and Return on Assets. Testing for the moderating role of Corporate Governance, especially board diversity and size, shows that board diversity moderates the association between social and governance disclosure and firm performance. Board size moderates the relationship between social disclosure and firm performance. By contrast, Board Size and Diversity do not moderate the relationship between environmental disclosure and firm performance.

Originality: The study contributes to the literature as the first of its kind conducted in Palestine, examining the moderating effects of board size and diversity on the association between ESG disclosure and firm performance.

Environmental

Social

Governance

ESG

Moderating Variable

Governance Characteristics

Financial Performance

Companies use outdated business methods, such as product development, marketing, and investing, to improve firms’ financial performance (FP). After the 2008 financial crisis, firms should pay more attention to a wide range of stakeholders’ desires. Therefore, they are more inclined to modify their conduct as necessary and use their imaginations to develop novel solutions to meet these parties' needs. One of the main strategies that businesses need to employ to attract more stakeholders is engaging in non-financial activities[1]. It has been proposed that non-financial operations (such as sustainability and environmental projects) that aim to serve more stakeholders than shareholders can enhance financial success [2].

Organizations, authorities, and academics have provided integrated sustainability, which, since the announcement of the Environmental Agreement in 2020, has paid more attention to corporate governance, social responsibility, and environmental factors. This is because of the expectation that sustainability will be essential for enhancing a business's financial success and assisting its users in reaching and overseeing their objectives. Sustainability is the process of controlling how an organization affects social, economic, and environmental issues to identify possibilities and dangers that could eventually jeopardize a company's success [3]. Businesses now provide nonfinancial and financial data to satisfy stakeholders' information requirements. Concerns have been expressed regarding matters such as child labor, management of product liability, corporate governance, fair treatment of shareholders, emissions pollution, and misuse of natural resources, in addition to financial scandals. Stakeholders seeking data on companies' social and environmental impacts are putting pressure on the management. All these factors have contributed to the rise in management mistrust. To prevent management misappropriation, stakeholders are asking for non-financial assurance indicators in addition to those already available[4]. As a result, business stakeholders increasingly need information beyond financial statistics, and nonfinancial information on business activities is essential for stakeholders. As a result of these developments, market participants are paying more attention, and business Environment, Social and Governance disclosure (ESG) performance is becoming increasingly significant. Publicly traded companies have also become more circumspect when sharing their ESG performance, presumably to protect their moral tenets, preserve their reputation, and influence stakeholders' decisions[5].

To increase listed firms' understanding of the value of filing sustainability reports, the Palestine Securities Exchange published standards for sustainability reports. Additionally, integrated disclosure is emphasized in these recommendations to improve shareholder awareness of a firm's true worth and performance comparison, build the company's reputation, and encourage brand loyalty.The PEX Handbook on Sustainability addresses three main issues: social, governance, and environmental[6]. Palestine's emerging markets are considered poor because of social and political influences that make it difficult for their economy to thrive. This has harmed Palestine's financial markets, which has led to many worries about their social and economic stability, and the designation of their environment as one that discourages investment[7].

The unstable political conditions in Palestine have stifled transparency and exacerbated corruption, which requires taking into consideration conducting necessary studies to improve environmental, social, and administrative performance to support the financial situation of companies in Palestine [3].

To achieve this, understanding the underlying causal mechanisms through moderation analysis helps determine whether there is a mediating variable (e.g., corporate governance) that mediates the relationship between the independent variable (e.g., ESG) and the dependent variable (e.g., FP). This facilitates the study of how and why certain factors influence outcomes to gain a deeper understanding of the influencing dynamics [8]. Such mediating variables allow for a more accurate prediction of the relationship between ESG disclosure and FP, enabling researchers to improve their models and the accuracy of their predictions [9].

This study focuses on the exceptional challenges and opportunities in integrating the environmental, social, and governance factors that companies face in Palestine. This can help readers better understand the context and relevance of this study within the Palestinian business landscape. Therefore, this study specifically investigates the context of Palestine, an under-researched region in ESG research. By focusing on Palestine, this study contributes to academic discourse by providing insights into a conflicted area with socio-political challenges. Both the studies of [10, 11] used ESG disclosure and the moderating effect of board characteristics and recommended the need for future research to be conducted in different geographical areas where there is a notable gap in the literature concerning the contradicting results. Additionally, the lack of platforms providing ESG scores for Palestinian companies created another niche for this study, as it employed context analysis methods for listed companies’ primary data. Furthermore, the researcher eliminated the effect of Board Size and Board Diversity from the governance component of ESG by eliminating any unforeseen multi-collinearity between the moderating variables and Governance or other ESG components. Emphasizing practical and theoretical implications, the findings of this study can inform stakeholder decision-making and foster collaborative efforts towards sustainable development goals by providing concrete examples of how companies can leverage ESG disclosure to build trust, enhance brand reputation, and capitalize on new market opportunities.

This study employs a quantitative approach, utilizing primary data from 44 PEX-listed companies from 2016 to 2022. Context analysis techniques were used to gather data from the company websites and disclosures. The study relies on panel data models with fixed effects to analyze the relationship between environmental, social, and governance (ESG) disclosure factors and FP, taking into account the moderating effects of corporate governance characteristics. This helps answer the study question: How are environmental, social, and governance (ESG) disclosure of factors affecting the FP of companies listed on the Palestine Stock Exchange, and what is the moderating role of corporate governance?

This study presents findings with practical implications for Palestinian companies, policymakers, and investors. By understanding these relationships and impacts, companies can develop strategies to improve their environmental, social, and governance practices and governance structures, enabling them to achieve sustainability and enhance their competitiveness. In addition, these results can be used to develop strategies that ensure environmental, social, and governance transparency, and effective governance practices that support economic growth and stability in the Palestinian market. In addition, it provides investors with the opportunity to integrate these factors into decision-making processes as indicators of value creation and risk mitigation in the long term.

Reviewing the relevant literature enables the identification of gaps and proposes research hypotheses. The methodology section describes the research design, sampling method, data collection, and analytical techniques employed. The results section presents the findings of the study, supported by the tables and figures. The discussion and limitations section interprets the results and acknowledges any study limitations. Finally, the conclusions summarize the key findings, discuss their implications, and suggest avenues for future research.

2.1. Theoretical framework

Numerous theoretical vantage points exist to inspect the relationship between ESG, its foundational elements, and FP, such as stakeholder, agency, legitimacy, signaling, and resource allocation theories, and a few theories were used for interpretation and analysis in this study.

Stakeholder theory places high priority on businesses protecting stakeholder interests, including shareholders, employees, customers, suppliers, and the broader community[12–14]. Research on the association between ESG and FP benefits from the foundation provided by stakeholder theory[15]. Where any group or individual that has the possibility to inspire or be affected by an organization's actions is deemed as a stakeholder [16]; conferring to [14], stakeholder theory mandates that a company determine its obligations to all parties involved, including associates, directors, clients, contractors, personnel, investors, and societies[17]. Therefore, the effective management of environmental and social issues, along with sound governance practices, is crucial for maintaining positive relationships with stakeholders. Stakeholder Theory suggests that firms that prioritize ESG considerations are better positioned to build trust, enhance their reputation, and foster long-term sustainability, ultimately leading to improved FP [18]. However, stakeholder theory argues that a business would only actively works to maximize shareholder value [19].

The real reason for the emergence of the agency theory revolves around the problem of information asymmetry. According to earlier studies, the audit committee must effectively observe the adaptability of the accounting system, the board of directors should effectively supervise managers, and financial analysts should be able to decrease the information asymmetry triggered by the agency problem using the financial and non-financial information reported by managers [20]. In the current environment, corporate governance practices, ESG, and business contracts significantly contribute to resolving agency problem[21]. Governments and organizations are under pressure from new economic, social, and environmental encounters to uphold laws, values, and norms and voluntarily disclose social and environmental data so that compliance can be investigated. Therefore, legitimacy theory partially justifies the disclosure of environmental information is partially justified by legitimacy theory[5]. The pressure to reassess their value systems and highlight the significance of legitimacy came from the global financial crisis and volatility of financial markets. A new organizational vision must consider the association between the material’s financial resources and the immaterial resources of legitimacy. Thus, the advancement of legitimacy theory has drawn criticism from numerous academics [22]. On the other hand, Agency Theory focuses on the relationship between principals (shareholders) and agents (management) within organizations[23].

Bukari, Agyemang [24] highlight the conflict of interest arising from agents making decisions without involving managers. Governance mechanisms represented by internal controls, board supervision, and executive compensation structures play an important role in reconciling the interests of management with the interests of shareholders. Effective governance practices also contribute to the effective allocation of resources and creation of long-term shareholder value, in addition to alleviating agency costs [25]. By integrating these perspectives, mechanisms that explain the impact of environmental initiatives, social responsibility efforts, and governance practices on a company's value and profitability can be found. This provides a deeper understanding of the relationship between ESG factors and FP, thus promoting sustainable business practices [26, 27].

According to the study [28], concrete actions implemented by environmental and social standards and values can support the disclosure of information, which helps companies maintain their legitimacy. Undoubtedly, companies need legitimacy to find stakeholders and continue their operations [29]. To maintain legitimacy, one can try to change stakeholders' perceptions and expectations and detect changes in a company's operations [30].

A company may use ESG not only to preserve or enhance public perceptions of its legitimacy but also to identify and counteract social pressure, enhance its reputation, and enhance its image. Companies that perform poorly financially may need ESG to remain legitimate [31]. The following section discusses the literature on paper variables.

2.2. Hypothesis Development

2.2.1. Environmental Disclosure and FP

One of the most significant challenges affecting humans is climate change, which has been debated since the early 21st century. This makes the topic important for businesses that deal with their financial markets because businesses will have to function in more challenging environments in the near future. Modifications to industry regulations in response to calls from activists to halt climate change affect how firms function [32]. The typical method for obtaining results on business environmental disclosure is to use publicly accessible data sources, including websites, annual reports, reports on environmental activities, and other documents[33]. Stakeholders' changing interests in social and environmental concerns and their inclination to highlight the environmental effects of their activities have resulted in a substantial growth in the importance of environmental disclosure. Reducing CO2 emissions has not been successful for greenhouse-gas companies [3]. Wasara and Ganda [34]discovered that environmental disclosures do not significantly impact the performance of firms listed on the Johannesburg Stock Exchange. According to Al-Dhaimesh [35], the FP of ASE firms was not significantly enhanced by the environmental component of sustainability.

Chen and Xie [33] state that to maximize shareholder expectations for environmental and social factors, research on the reasons underlying the weak influence of environmental factors on corporate governance disclosure and FP is crucial. Tien, Anh [36] argued that managers in Vietnam should effectively accept and understand non-financial elements pertaining to environmental reporting in a manner that supports their improved financial results. According to Li, Gong [37], businesses adhering to environmental disclosure regulations improve their FP by winning stakeholders. Nekhili, Nagati [38] state that environmental disclosure is a strategy to match stakeholders' expectations because environmental issues are a vital concern for all parties involved, especially consumers, investors, and the government. Accordingly, environmental disclosures are thought to affect all capital market categories [39]. A company's success in the financial market increases when it discloses more information about its environmental performance and respects its stakeholders[40]. Accordingly, by satisfying the demands of various parties in the financial markets, environmentally conscious businesses are more likely to have improved performance and higher profits[2]. Based on the preceding discussion, the following hypothesis was developed:

H1. There is a positive effect of the environmental on FP.

2.2.2. Social Disclosure and FP

The phrase "social score" describes an assessment method that considers social factors, including human rights advocacy, corporate ethics, charitable giving, consumer behavior, and product response [41]. Social performance is one of the most vital indicators of a business's success, both globally and within the ESG framework. Focusing on corporate social responsibility has become a standard practice, with a greater emphasis on social dimensions [42]. Furthermore, this dimension deals with a few workforce-related concerns such as diversity in human resources and worker health and safety [43]. The Socially Responsible Investment approach emphasizes the importance of this statistic in assessing the long-term accomplishment of a company in relation to risk assessment [32].

Sustainability reports that address various topics, including working conditions and human rights, must include social disclosure [44]. Businesses bind to explicit guidelines on social responsibility [45]. Banking declarations have been discovered in GCC nations. According to [46], financial results related to businesses listed on the PEX and their social responsibility declarations are positively correlated. This suggests that it successfully improved the banking sector’s FP [47],challenging earlier findings with fresh data from the Australian market. As businesses age, social disclosures may not impact their bottom-line. However, the expected benefit of sustainability disclosures is not as straightforward as predicted because there is evidence of an adverse correlation between the social features of sustainability and FP [43]. The social ideas included in the sustainability outline are crucial for helping people embrace businesses as contributing members of society. Therefore, by enhancing the quality of social components, stakeholders' social transparency and FP can be improved [3]. Based on the preceding discussion, the following hypothesis is proposed.

H2. There is a positive effect of social on FP.

2.2.3. Governance Disclosure and FP

Governance in the setting of the ESG framework is defined as a system of integrated processes, systems, and structures that allows businesses to grow profitably [42]. Corporate governance primarily pertains to managerial responsibilities, management, and control of firms. As a result, it is an essential component that helps with both the requirement to strengthen shareholder trust and the efficiency of economic development difficulties [48]. Furthermore, governance reflects interactions between the board of directors, managerial roles, shareholders, and other pertinent stakeholders inside the company or organization [49]. Recently, much attention has been paid to this specific element because of the division of managerial and ownership control responsibilities in an organization's business activities. There are often conflicts between the interests of stockholders and managers [32]. Principal-agent issues arise when the management direction diverges from stakeholders' interests. We might conclude that in reality, there are still a variety of interpretations of what corporate governance genuinely is. According to [50], governance can be defined as capital structure, ownership distribution, incentives for managerial roles, product rivalry in the market, and even the organization's structure.

Adequate levels of governance disclosure can communicate to stakeholders that a company is doing well in terms of optimizing shareholder wealth. A "corporate governance" structure controls and monitors the board of directors' decisions and actions regarding financial and non-financial operations [51]. Rajesh [52]discovered that the inclusion of more sustainability disclosure pillars, specifically in the field of governance, dramatically enhances the performance of Indian businesses. It also highlights the benefits of disclosure for governance regarding how well organizations reflect on their actual performance. Hussain, Rigoni [53] found little evidence that corporate governance disclosures contribute to improved FP rates. Uwuigbe, Teddy [54] demonstrated an adverse association between financial success in Nigerian enterprises and governance disclosure, thus supporting their conclusions. The earlier inconsistent outcomes of the features of the financial market and the level of sustainability disclosure awareness are two possible explanations for this discrepancy in the results. FP is likely to increase with the disclosure of governance. Shaheen and Jaradat [46]investigated the insurance sector in Palestine. There is a statistically significant correlation between the adoption of corporate governance pillars and the FP of insurance firms. Based on the previous discussion, the following hypothesis is proposed.

H3. Governance has a positive effect on FP.

2.2.4. Governance Characteristics and FP

Governance has increased in popularity over the past few years. This is because, particularly in light of the numerous international companies collapses and bankruptcies that have occurred, governance is crucial to maintaining economic stability, enhancing the caliber of work produced by a variety of companies and institutions, and ending crises in both financial and non-financial firms[55]. Consequently, applying governance rules has become a basic principle adopted by different sectors to ensure confidence in the state’s economy and the application of fair and transparent laws and regulations to preserve the rights of investors and economists alike [56]. Governance is an integrated system of financial and non-financial control implemented through the institution's management and control is called governance[57]. Additionally, it can be characterized as a system of guidelines, procedures, and controls that drives institutions towards the proper course of operation and investment in compliance with national laws and regulations that belong to the owner [58].

The agency issue that arose from the institution's founders and management being separated gave rise to governance, which was created to bridge the potential gap between owners and managers if some managers took advantage of their positions, potentially worsening the institution's financial standing [59]. A framework that defines the duties and relationships between owners and management is another way to demonstrate the significance of governance. By helping to define the organization's goals, improve performance, and give the board of directors the right incentives, governance helps the organization make the best use of its resources [60]. This study focuses on two governance characteristics, board diversity and size.

In both the developing and developed financial markets, board size significantly influences shareholder value. A firm's management may be disciplined by the board, which lowers the agency costs of the market. Board size is a significant governance factor that influences FP is board size [61]. The board of directors can be reflected as the best tool for following up on management’s behavior, supervising it, and limiting manipulation resulting from its wrong behavior, as it supports protecting the investor’s capital in the institution from misuse committed by management through its legal powers to appoint and reward senior management [62]. In addition, an active board of directors contributes strongly to building the institution’s plan, developing appropriate incentives for management, and monitoring its behavior, which positively reflects the institution’s position and FP [63].

Board diversity has come under scrutiny because of the increased emphasis on board performance, especially regarding how well membership is represented by the general public [64]. Tyson [65]found that there should be greater diversity in directors' backgrounds, especially in the percentage of women and members of minorities. In addition, diversity guarantees high-quality decision making [66].

Audit quality has recently become a topic that has received significant attention in auditing [67]. This is because of the significant influence of audit quality on the transparency and accuracy of financial reports, and its significant role in improving users’ confidence in the financial disclosure prepared by directors [68]. The necessity of audit quality also arises because it is a crucial requirement for management and stakeholders. Management’s main objective is to increase stakeholder confidence in its financial statements, while stakeholders' main objectives are to lower agency costs and enhance management's oversight and accountability procedures [69].

Based on the preceding debate, the following hypothesis is proposed:

H4. ESG positively affects FP, with governance characteristics as a moderating variable.

Since governance, environmental, and social factors represent dimensions of corporate behavior, including governance as a separate variable, it is important for the accuracy of the analysis, which enables researchers to better understand the impact of this individual factor on FP without confusing it with environmental or social considerations (Hasnan et al., 2023). In addition, some investors may give greater consideration to governance factors than to other factors when making investment decisions. Thus, separating the governance factor in the analysis helps provide insights into how it affects investor behavior and company evaluation, and thus helps companies enhance their internal operations (Patterson et al., 2017).

3.1. Population and sample

All companies listed on the PEX between 2016 and 2022 were included in the study sample because this period provided enough time for companies to present their environmental, social, and governance policies. A total of 44 firms listed on PEX comprised nine services, ten investments, eleven industry, six banks, seven insurance companies, and one financial service company. After counting the number of observations over time and removing missing data, the final number of observations for the seven years of the study was 308. Data for the current study, which thoroughly evaluated the annual reports of listed businesses for seven years from 2016 to 2022, were gathered and analyzed using content analysis. Content analysis helps collect information on disclosure via company disclosures[70]. Furthermore, messages are more accurately understood, and the necessary information may be extracted without being tainted [71]. It has also been extensively used in pertinent literature [72].

3.2. Measurement of FP

The dependent variable FP is measured using return on equity (ROE)and return on assets (ROA). ROA is calculated by dividing the annual net profit after taxes by average total assets. ROE is calculated by dividing the annual net profit after taxes by the average total equity. However, the annual net profit after taxes is divided by the total shareholder equity to obtain the return on equity (ROE). This is the dominant approach in the literature[73–75].

3.3. Measurement of environmental, social, and governance

This study uses ESG performance disclosure requirements from the Thomson Reuters Eikon database. It is attached in Appendix I, and consists of three environmental, four social, and three governance performance indicators. The ESG performance disclosure score was calculated using a dummy variable; a score of 1 was assigned if the item was found; otherwise, a score of zero was assigned. Many relevant studies have also adopted Thomson Reuters Eikon indicators[1, 76, 77].

Additionally, very few previous studies have used ESG disclosure and the moderating role of Board Characteristics on performance, especially board size and board diversity [10, 11] for the purpose of this study. For the unstandardized method of measuring board diversity and size between the ESG framework and moderating variable, the effect of board size and board diversity have been excluded from the ESG framework.

3.4. Measurement of a moderating variable

To explore the interaction between ESG disclosure and FP, Governance Characteristics are used as moderating variables, as shown in Table 1.

Table 1

Description of moderating variables
Variable	Description	Symbol
Board size	The total number of directors on the board.	BordSize
Board diversity	Percentage of female or foreign directors on the board.	Bdivers

3.5. Measurement of control variables

The firm parameters (firm size, firm age, industry type, and audit quality) were selected as control factors to limit the impact of the independent variables, and are listed in Table 2.

Table 2

Description of control variables
Variable	Description	Symbol
Firm size	Log of firm's total assets.	LogAsset
Firm age	The number of years that have elapsed since the firm was founded.	FirmAge
Industry type	Type of sector to which the firm belongs.	Indtype (Service, Industry, Banks, Insurance, FinancialService)
Audit quality	Binary form is used to measure it. There were two types of audit firms: Big Four and Non-Big Four. The Big Four are denoted by the code "1" for KPMG, Price Waterhouse Coopers (PWC), Ernst & Young (EY), and Deloitte, and "0" for other audit companies.	AuditQ

Source(s)

Authors’ creation.

3.6. Research Equations And Model

To confirm the effect of ESG disclosure on Palestinian firms’ financial success, the following regression equations are created:

First Hypothesis:

Model 1:ROE_it = β0 + β1ENVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Model 2: ROA_it = β0 + β1ENVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Second Hypothesis:

Model 3: ROEit = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Model 4: ROA_it = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Third Hypothesis:

Model 5 :ROE_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Model 6: ROA_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7Bdivers_it

Fourth Hypothesis:
ROA Models:

Model 7:ROA_it = β0 + β1ENVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversE_it + β7Bdivers_it

Model 8:ROA_it = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversS_it + β7Bdivers_it

Model 9:ROA_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversG_it + β7Bdivers_it

Model 10:ROA_it = β0 + β1ENVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeE_it

Model 11:ROA_it = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeS _it

Model 12:ROA_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeG _it

ROE Models:

Model 13: ROE_it = β0 + β1ENVD_t + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversE_it + β7Bdivers_it

Model 14: ROE_it = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversS_it + β7Bdivers_it

Model 15: ROE_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6EfSBdiversG_it + β7Bdivers_it

Model 16: ROE_it = β0 + β1ENVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeE_it

Model 17: ROE_it = β0 + β1SOCD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeS _it

Model 18: ROE_it = β0 + β1GOVD_it + β2LogAsset_it + β3FirmAge_it + β4AuditQ_it + β5Indtype_it + β6BordSize_it + β7EfSBordSizeG _it

Where:

FP = financial performance includes two measurements (ROA; ROE).

β0 = Regression equation constant.

ENVD = Environmental disclosure.

SOCD = Social disclosure.

GOVD = Governance disclosure.

EfSBordSizeG = Interaction of Board Size and Governance Disclosure

EfSBordSizeS = Interaction of Board Size and Social Disclosure

EfSBordSizeE = Interaction of Board Size and Environmental Disclosure

EfSBdiversG = Interaction of Board Diversity and Governance Disclosure

EfSBdiversS = Interaction of Board Diversity and Social Disclosure

EfSBdiversE = Interaction of Board Diversity and Environment Disclosure

Controls = includes (firm size, age, audit firm, and industry type).

Moderating Variable = includes (Board size, Board diversity).

The research model is presented in Fig. 1:

4.1. Descriptive Statistics

Table 3 provides the standard descriptive statistics characterizing the data, as well as the mean value, standard deviation for numerical variables, and minimum and maximum values.

Table 3

Descriptive Statistics
Variable	Obs	Mean	Std. Dev.	Min	Max
Environmental	308	.247	.184	0	.722
Social	308	.283	.201	0	.75
Governance	308	.637	.254	0	1
LogAsset	308	7.791	.786	5.881	9.916
FirmAge	308	30.773	14.985	7	78
Service	308	.205	.404	0	1
Investment	308	.227	.42	0	1
Industry	308	.25	.434	0	1
Banks	308	.136	.344	0	1
Insurance	308	.159	.366	0	1
FinancialService	308	.023	.149	0	1
ROA	308	.21	.066	0	.515
ROE	308	.441	.123	0	.863
AuditQ	308	.711	.454	0	1
BordSize	308	0	1	-2.188	3.012
Bdivers	308	0	1	− .297	9.225

Table 3 shows the findings of the descriptive analysis of this study's dependent, independent, control, and moderating variables. Based on the above table, all variables consist of 308 observations. The mean values for the environmental, social, and governance variables indicate the average level of disclosure or performance related to these ESG factors among the sample of Palestinian companies. The wide range of values, with minima of 0 and maxima close to 1, suggests considerable variability in ESG practices among the companies studied. This variability could reflect differences in organizational priorities, stakeholder engagement, regulatory compliance, and industry norms. This variation may be relevant to the extent to which companies prioritize environmental sustainability, social responsibility, and effective governance practices. The relatively high standard deviations for both ROE and ROA indicate a significant variability in FP across the sample. The variable (FirmAge) exhibits higher standard deviations than the other variables, indicating diversity among the sample companies in terms of age and possibly experience in the market. The relationship between environmental, social, and governance factors and FP is affected by the outliers, trends, and patterns represented by this dispersion.

4.2. Diagnostic tests

This study attributes an exogenous assessment and authentically does not vouch for endogeneity issues of the variables. Based on these factors, the assumption of exogeneity is that independent variables are orthogonal to the error term this helps to minimize endogeneity concerns. Often, the assumption of being absent is considered in most regression analyses, especially when the independent variable is believed to not be the cause of the error terms and is not affected by them [78]. In Table 4 are the results of endogeneity testing for 6 models.

Table 4

Tests of endogeneity
	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
Durbin (score) chi2(1) Wu-Hausman F(1,303)	0.4296 0.4833	0.2477 0.2514	0.4896 0.4933	0.3320 0.3359	0.2293 0.2329	0.6969 0.6995

Table 4 suggest that there is no endogeneity in the models based on the given p-values so the null hypothesis of H0: Variables are exogenous is rejected. Therefore, they are not correlated with the error term and do not suffer from endogeneity issues in this context.

This study used skewness and kurtosis; the models indicate a p-value of 0.000, which is below 0.05, indicating that the normality hypothesis was not satisfied. Gujarati [79] showed that if the number of observations exceeds 30, the normal distribution is not considered a problem with the regression equation and can be ignored; this study has 308 observations.

The study used variable correlation matrix; the Spearman’s correlation test was used to assess the multiple regression model to ensure no strong correlations between the independent variables. A high correlation had a correlation rate of more than 80% between two or more variables. This can distort the link between one of two independent variables [79]. A cross-correlation matrix between the research variables was created to confirm that there were no correlations of this type, as shown in Tables 5 and 6.

The results in Tables 5 and 6 indicate that the highest correlation coefficient was (0.637) between the (social) and (environmental) variables, indicating that there was no interference between these variables in the regression models. The rho values of -0.131 in both tables suggest a lack of substantial correlation between the variables, reinforcing the absence of multi-collinearity concerns.

In addition to the correlation matrix, multi-collinearity (VIF) was performed for the models. A VIF coefficient exceeding 10 suggests multi-collinearity [80]. After conducting this analysis, it was found that the VIF values for the (investment) variable were greater than 10; therefore, they were deleted. Tables addressing VIF and normality were omitted for simplicity.

Table 5

Multi-collinearity Test for Model (ROE)
Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)
(1) ROE	1.000
(2)Environmental	0.243	1.000
(3) Social	0.233	0.637	1.000
(4) Governance	0.347	0.525	0.613	1.000
(5) LogAsset	0.095	0.389	0.513	0.480	1.000
(6) FirmAge	0.156	0.046	0.040	-0.021	-0.058	1.000
(7) Service	-0.124	-0.210	-0.188	-0.308	-0.140	-0.232	1.000
(8) Industry	0.190	0.104	0.158	0.070	-0.323	0.428	-0.293	1.000
(9) Banks	-0.114	0.186	0.507	0.292	0.556	-0.089	-0.201	-0.229	1.000
(10) Insurance	0.260	0.055	0.136	0.167	0.142	-0.025	-0.221	-0.251	-0.173	1.000
(11) Financial Serves	-0.036	-0.086	0.012	-0.017	-0.156	-0.030	-0.077	-0.088	-0.061	-0.066	1.000
(12) AuditQ	-0.055	0.017	0.218	0.171	0.359	-0.207	0.075	0.021	0.253	-0.212	0.097	1.000
(13) Investment	-0.199	-0.075	-0.520	-0.154	-0.055	-0.114	-0.275	-0.313	-0.215	-0.236	-0.083	-0.150	1.000
(14) BordSize	0.051	0.289	0.367	0.344	0.533	0.045	-0.071	-0.111	0.377	-0.059	-0.136	0.232	-0.026	1.000
(15) Bdivers	-0.101	0.092	0.092	0.045	-0.030	0.115	-0.011	-0.006	0.170	-0.103	-0.118	-0.168	0.009	-0.131	1.000
Spearman rho = -0.131

Table 6

Multi-collinearity Test for Model (ROA)
Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)
(1) ROA	1.000
(2)Environmental	0.180	1.000
(3) Social	0.058	0.637	1.000
(4) Governance	0.201	0.525	0.613	1.000
(5) LogAsset	-0.121	0.389	0.513	0.480	1.000
(6) FirmAge	0.210	0.046	0.040	-0.021	-0.058	1.000
(7) Service	-0.007	-0.210	-0.188	-0.308	-0.140	-0.232	1.000
(8) Industry	0.302	0.104	0.158	0.070	-0.323	0.428	-0.293	1.000
(9) Banks	-0.364	0.186	0.507	0.292	0.556	-0.089	-0.201	-0.229	1.000
(10) Insurance	0.079	0.055	0.136	0.167	0.142	-0.025	-0.221	-0.251	-0.173	1.000
(11) Financial Serves	0.065	-0.086	0.012	-0.017	-0.156	-0.030	-0.077	-0.088	-0.061	-0.066	1.000
(12) AuditQ	-0.070	0.017	0.218	0.171	0.359	-0.207	0.075	0.021	0.253	-0.212	0.097	1.000
(13) Investment	-0.099	-0.075	-0.520	-0.154	-0.055	-0.114	-0.275	-0.313	-0.215	-0.236	-0.083	-0.150	1.000
(14) BordSize	-0.049	0.289	0.367	0.344	0.533	0.045	-0.071	-0.111	0.377	-0.059	-0.136	0.232	-0.026	1.000
(15) Bdivers	-0.115	0.092	0.092	0.045	-0.030	0.115	-0.011	-0.006	0.170	-0.103	-0.118	-0.168	0.009	-0.131	1.000
Spearman rho = -0.131

4.3. Linear regression

As indicated in the tables below, a linear regression model was employed to conduct the regression analysis, demonstrate the impact of the independent factors on the dependent variable, and confer or reject the hypotheses developed earlier.

Table 7

ESG Pillars's Influence on ROE
Model	1			3			5
ROE	Coef.	t-value	p-value	Coef.	t-value	p-value	Coef.	t-value	p-value
Environmental	.125	3.15	.002***
Social				.164	3.09	.002***
Governance							.135	4.29	0***
LogAsset	.024	1.68	.095*	.02	1.38	.167	.019	1.42	.155
FirmAge	0	0.50	.615	0	0.73	.468	.001	1.13	.258
Service	.023	1.21	.226	− .006	-0.28	.783	.017	0.90	.367
Industry	.085	3.76	0***	.042	1.38	.169	.06	2.51	.013**
Banks	.003	0.11	.914	− .049	-1.74	.083*	− .014	-0.56	.576
Insurance	.076	3.80	0***	.029	1.18	.238	.052	2.56	.011**
FinancialServie	.052	1.19	.236	.008	0.17	.868	.018	0.42	.676
AuditQ	− .04	-2.41	.017**	− .043	-2.61	.01***	− .046	-2.86	.005***
BordSize	− .005	-0.68	.5	− .006	-0.79	.431	− .01	-1.37	.173
Bdivers	− .05	-7.11	0***	− .053	-7.29	0***	− .049	-7.13	0***
Constant	.207	2.08	.039**	.248	2.37	.019**	.191	2.00	.047**
Mean dependent var		0.441				0.441			0.441
R-squared		0.302				0.301			0.320
F-test		11.616				11.570			12.688
Akaike crit. (AIC)		-503.044				-502.678			-511.498
Prob > F		0.000				0.000			0.000
* p < .01, p < .05, * p < .1

Table 7 shows the linear regression results for the study sample of (44) diversified Palestine companies listed on the PEX for the models associated with ROE.

It also shows that Model 1is positive and statistically significant at the (1%) level (F = 11.616), and the variables included in this multiple linear regression model explain 30% of the differences in the FP of firms listed on PEX for environmental disclosure. The regression analysis's findings show that the variables (Environmental, LogAsset, Sectors of Industry, Insurance) have a statistically significant positive influence on FP of firms listed on PEX but are negatively associated with (AuditQ and Bdivers) variables. The coefficient for the environmental pillar variable was 0.125, with a t-value of 3.15, and a statistically significant p-value of 0.002. This indicates that, for every one-unit increase in the environmental score, the ROE is expected to increase by 0.125 units, holding other variables constant. The significant coefficient suggests that environmental performance positively influences ROE, thus supporting the hypothesis that companies with strong environmental practices tend to have higher returns. In contrast, the remaining variables have no statistically significant influence on FP.

Model 3 is statistically significant at the (1%) level (F = 11.570). The variables included in this multiple linear regression model explain 30% of the differences in FP of companies listed on the PEX for social disclosure. The regression analysis findings show that the social disclosure variable statistically positively impacts the FP of companies listed on PEX, as indicated by the coefficient of 0.164, t-value of 3.09, and p-value of 0.002. This implies that companies that focus on social responsibility have a higher ROE. This aligns with expectations and suggests that firms with strong social initiatives may enjoy enhanced FP. By contrast, the variables (sector banks, AuditQ, and divers) had a significant negative influence. The remaining variables have no statistically significant influence on FP.

Model 5 is statistically significant at the (1%) level (F = 12.688), and the variables included in this multiple linear regression model explain 32% of the differences in the FP of companies listed on PEX. The Governance pillar variable demonstrates the strongest influence on ROE among the ESG factors, with a coefficient of 0.135, a t-value of 4.29, and a highly significant p-value of 0.000. This indicates that improvements in governance practices led to substantial increases in ROE. The regression analysis results show that the variables (Governance, Sectors of Industry, Insurance) positively impact the FP of firms listed on PEX, suggesting that firms operating in certain sectors tend to achieve higher returns.

In contrast, the variables (AuditQ and Bdivers) have an adverse statistical influence on FP, implying that factors such as higher audit quality and larger board sizes may exert downward pressure on returns. The remaining variables showed no statistically significant association with FP.

The overall model fit statistics show that the ROE remained constant across all three models at 0.441. This consistency suggests stability in the sample and indicates that on average, companies in the sample exhibit similar ROE values. R-squared values range from 0.301 to 0.320, indicating that approximately 30.1–32.0% of the variance in ROE is explained by the independent variables included in each model. While these percentages are not exceptionally high, they still imply a moderate level of explanatory power for the independent variables over the dependent variable. The F-test statistics were 11.616, 11.570, and 12.688 for Models 1, 3, and 5, respectively. The associated p-values were all below 0.001 (Prob > F = 0.000), indicating that the regression models were statistically significant at a high level of confidence. This suggests that the independent variables collectively have a significant impact on explaining the variance in ROE. The lower values of AIC ranging from − 503.044 to -511.498 indicate better-fitting models and suggest that the models have a good relative fit, with Model 5 having the lowest AIC value, indicating the best fit among the three models.

Table 8

ESG pillar's influence on ROA
Model	2			4			6
ROA	Coef.	t-value	p-value	Coef.	t-value	p-value	Coef.	t-value	p-value
Environmental	.078	3.83	0***
Social				.093	3.39	.001***
Governance							.071	4.32	0***
LogAsset	.006	0.80	.424	.005	0.66	.51	.006	0.79	.431
FirmAge	0	1.02	.31	0	1.14	.257	0	1.45	.15
Service	.016	1.59	.114	− .001	-0.08	.934	.012	1.26	.208
Industry	.046	3.93	0***	.022	1.44	.151	.035	2.83	.005***
Banks	0	.	.	− .056	-3.85	0***	− .036	-2.78	.006***
Insurance	.01	0.95	.344	− .017	-1.36	.175	− .003	-0.30	.761
FinancialServie	.037	1.67	.096*	.013	0.53	.595	.021	0.91	.365
AuditQ	− .015	-1.72	.087*	− .017	-2.00	.047**	− .019	-2.28	.024**
BordSize	− .002	-0.58	.561	− .003	-0.66	.511	− .005	-1.19	.235
Bdivers	− .026	-7.21	0***	− .028	-7.33	0***	− .025	-7.06	0***
Constant	.133	2.61	.01***	.151	2.80	.005***	.115	2.34	.02**
Mean dependent var		0.210				0.210			0.210
R-squared		0.352				0.345			0.360
F-test		14.611				14.189			15.148
Akaike crit. (AIC)		-914.214				-911.066			-918.174
Prob > F		0.000				0.000			0.000
* p < .01, p < .05, * p < .1

Table 8 shows the linear regression results when Model 2 used is statistically significant at the (1%) level (F = 14.611). This reflects a significant positive impact on the FP (FP) of companies listed on the PEX, as indicated by the coefficient of 0.078, t-value of 3.83, and p-value of 0.000. The variables included in the multiple linear regression model explain 35% of the differences in the FP of companies listed on the PEX. The regression analysis findings show that the variables (environmental and sectors: Industry, Financial Service) statistically positively impact the FP of companies listed on PEX. Similarly, (AuditQ and Bdiver) has adverse statistical effects on the association between Environmental Disclosure and firm performance. This suggests that while environmental transparency can enhance FP, factors such as poor audit quality and excessive business diversification may hinder positive effects. The remaining variables have no statistically significant influence on FP.

Model 4 is statistically significant at the (1%) level (F = 14.189), and the variables included in the multiple linear regression model explain 35% of the differences in the FP of companies listed on the PEX. The regression analysis results show that the social disclosure variables have a statistically positive impact on the FP of companies listed on PEX. Simultaneously (banks, audit quality, and divers) have a statistically negative impact. This indicates that, while social responsibility initiatives contribute positively to FP, factors such as reliance on bank financing, lower audit quality, and excessive business diversification may undermine these benefits. The remaining variables have no statistically significant influence on FP.

Model 6 is statistically significant at the (1%) level (F = 15.148), and the variables included in the multiple linear regression model explain 36% of the differences in the FP of companies listed on PEX. The regression analysis findings also show that the variables (governance disclosure, Sector: Industry) have a statistically positive impact on the FP of companies listed on PEX. However, (Sector: Banks, Audit Q, and Bdivers) negatively influence firm performance. This underscores the importance of effective governance practices in enhancing FP while also highlighting the detrimental effects of certain industry sectors and governance-related issues. The remaining variables have no statistically significant influence on FP.

The overall model fit statistics show that ROA remains consistent across all models, at 0.210, indicating sample stability. The R-squared values range from 0.352 to 0.360, indicating that approximately 35.2–36.0% of ROA variance is explained by the independent variables in each model, implying good model fit. The F-tests yield statistically significant results with p-values below 0.001, indicating the collective significance of the independent variables in explaining ROA variance. Furthermore, the Akaike Information Criterion (AIC) values, ranging from − 914.214 to -918.174, suggest a good relative fit, with Model 4 exhibiting the lowest AIC value, indicating the best fit among the models.

In conclusion, the above statistics offer a high level of confidence in the accuracy and sufficiency of regression models as tools for demystifying the nature of the connection between different ESG viability aspects that become evident with regard to Palestine companies listed PEX. The results from this overall pattern of tests indicate that ESG exposures are significantly bankable for Palestine companies listed on the PEX. Although all ESG measurements showed a significant relationship with ROA, their power and effectuality varied. Fiscally profitable ESG performance critically depends on the transparency of ESG exposures, but these gains can be attenuated by extortionate bidding and poor audit quality; thus, cautious forceful governance frameworks and enhanced ESG disclosure can increase a company’s endurance by elevating financial stability.

Policymakers and stakeholders can use these findings to advocate for greater ESG transparency and accountability within the Palestine market, thereby promoting long-term value creation and economic stability.

4.4. Moderating effect of governance characteristics between ESG and FP

The primary hypothesis of this research pertains to the moderating role of governance features, specifically board diversity and size, between FP and ESG factors. There are multiple approaches to testing this moderating impact. The first is hierarchical regression, which is primarily utilized in the SPSS environment and is based on r-square changes. However, a more straightforward way to assess the moderating influence of factors is to use structural equation modeling such as STATA. The moderators in this study multiplied the independent factors to produce a moderator effect, which was examined for its moderating effect on FP. Tables 9 and 10 summarize the testing of the moderating effect, in which the code column is used to link the test to the literature.

Table 9

The Moderating Effect of governance characteristics between ESG and FP in (ROA)
	Board Diversity			Board Size
	Model 7	Model 8	Model 9	Model 10	Model 11	Model 12
ROA	p- value	p- value	p- value	p- value	p- value	p- value
Environmental	0			.01
Social		.002			.133
Governance			0			.001
LogAsset	.438	.395	.313	.852	.811	.761
FirmAge	.314	.205	.083	.256	.262	.232
Service	.108	.972	.178	.138	.357	.074
Industry	0	.095	.002	0	.006	0
Banks	.047	0	.004	0	.002	0
Insurance	.272	.276	.888	.382	.924	.689
FinancialService	.072	.417	.2	.078	.297	.147
AuditQ	.086	.079	.022	.182	.139	.015
Bdivers	.185	.801	.12
BordSize				.07	.012	.38
EfSBdiversE	.377
EfSBdiversS		.043
EfSBdiversG			.004
EfSBordSizeE				.093
EfSBordSizeS					.01
EfSBordSizeG						.308
Constant	.004	. .007	.016	.001	.001	.002
R-squared	0.353	0.353	0.375	0.245	0.244	0.255
* p < .01, p < .05, * p < .1

Table 10

The Moderating Effect of Governance Characteristics between ESG and FP in Model (ROE)

	Board Diversity			Board Size
	Model 13	Model 14	Model 15	Model 16	Model 17	Model 18
ROE	p- value	p- value	p- value	p- value	p- value	p- value
Environmental	.004			.057
Social		.005			.207
Governance			0			.001
LogAsset	.096	.11	.105	.273	.412	.375
FirmAge	.627	.389	.163	.082	.15	.125
Service	.217	.888	.321	.208	.481	.141
Industry	0	.1	.005	0	.01	0
Banks	.963	.073	.491	.128	.249	.077
Insurance	0	.122	.005	0	.025	.002
FinancialService	.18	.63	.418	.169	.512	.311
AuditQ	.016	.019	.004	.036	.05	.003
BordSize				.179	.009	.313
Bdivers	.235	.998	.114
EfSBdiversE	.321
EfSBdiversS		.023
EfSBdiversG			.004
EfSBordSizeE				.244
EfSBordSizeS					.005
EfSBordSizeG						.271
Constant	.021	.024	.046	.005	.003	.006
R-squared	0.303	0.311	0.335	0.186	0.197	0.207
* p < .01, p < .05, * p < .1

Tables 9 and 10 show the moderating effect of Bdivers between the ESG component environmental disclosure and firm performance (ROE and ROA ). It is not a statistically significant model at prob > chi2 = (.377) for ROE and (.321) for ROA. Thus, drivers do not moderate the association between the ESG component of environmental disclosure and FP. Additionally, the moderating effect of Board Size on environmental and firm performance is not statistically significant at prob > chi2 = (.093) ROE and (.244) ROA. Thus, Board Size does not moderate the relationship between the ESG component Environment and FP.

From Tables 9 and 10, the moderating effect of Bdivers between the ESG component social disclosure and firm performance (ROE and ROA) is inspected. It is a statistically significant model at prob > chi2 equal (.043) for ROE, clarifying (0.353%) the variation in the FP and (.023) for ROA, and can clarify (0.311%) the variation in the FP. Thus, divers moderate the relationship between the ESG components of social disclosures and FP.

The moderating effect of board size on social effects and firm performance was also examined. It is a statistically significant model at prob > chi2 = (.01) for ROE, and can clarify (0.244%) of the variation in FP and. at prob > chi2 equals (.005) for ROA, highlighting its role in shaping this relationship. This can clarify the variation in FP (0.197%). Thus, board size moderates the influence of social disclosures and FP.

From Tables 9 and 10, the moderating effect of Bdivers on ESG component governance disclosure and firm performance is inspected. It is a statistically significant model at prob > chi2 equal (.004) and can clarify (0.335%) of the variation in ROE, and a statistically significant model at prob > chi2 equals (.004) and can clarify (0.375%) of the variation in ROA. Thus, Bdivers moderate the association between the disclosure of governance and FP. Additionally, the moderating effect of board size on governance disclosure and firm performance was examined. It is not a statistically significant model at prob > chi2 equal (.271) for ROE, and at prob > chi2 equals (.308) in Model ROA. Thus, BoardSize does not moderate the association between ESG component governance and FP.

This study investigates the link between Environmental, Social, and Governance (ESG) factors and FP among Palestinian companies listed on the Palestine Exchange (PEX). These findings contribute to the ongoing debate on ESG's impact and offer valuable insights for both companies and policymakers.

This study aligns with prior research by [81], [82], and others, demonstrating a positive influence of ESG factors on ROE and ROA. This is further supported by [32] who find a statistically positive association between ROA and a firm's ESG disclosure.

These findings demonstrate that companies that integrate ESG best practices may have a positive impact on FP through such practices. Therefore, our findings are consistent with [83] who emphasize that there is a high level of ESG variation across companies and industries. Consequently, our results suggest a need for industry- and company-specific objectives and action plans to bridge the gap between the best and worst in terms of ESG integration. Finally, the findings also indicate that board diversity has a moderate impact on the association between social and governance disclosures and FP, which concurs with Carter, Simkins [84] who argue that several studies have yet to reach consensus on the influence of board characteristics on FP.

However, this study did not confirm the significance of the moderating effect of board size. Accordingly, it is relevant to further investigate the optimal composition that ensures substantial ESG oversight. On the one hand, discloses associated with governance and social responsibility are positively related to FP; the current findings are consistent with [3]. This finding reinforces the arguments that is presented by [38, 85]. that high involves a high public attitude towards businesses that address social issues. However, discloses related to the environment have zero significance, which also requires further investigation, considering the adverse relationship that has also been reported by [86] in comparison to the positive association reported by (Iatridis [87].

More studies on these social and environmental elements that support FP are needed because they will contribute significantly to the understanding of the economic impact of the Palestinian context.

The results further drive home to the salience of ESG disclosure and proper governance as conditions for Economic Triumph. Palestinian Companies must be serious about ESG, and they should be an integral part of their business strategies. They also need to disclose their efforts to ESG achievements to the public. Moreover, the results point to the significance of regulatory frameworks that improve investments in ESG areas. (Lagasio & Cucari, 2019) also stated that regulation assists the ESG disclosure level to a higher level.

5.1. Conclusion

According to the research findings several practical implications can be highlighted, companies should be aware of ESG factors because they significantly impact FP, especially in terms of metrics such as ROE and ROA. This suggests that integrating ESG factors into corporate plans may improve financial results. Additionally, the findings can be used by legislators and other government representatives to support legislation or draft rules that incentivize companies to incorporate ESG concepts into their daily operations. This can entail requiring or offering incentives to report ESG measures to ensure that businesses take social and environmental issues seriously and to minimize the gap between implementation and commitment to ESG.

Furthermore, this study targets sector-specific ESG reporting. Understanding how different sectors interact with ESG factors can help companies develop targeted initiatives to improve their performance and competitiveness.

Additionally, this study provided theoretical implication, for instance: the findings related to board diversity and size as moderating variables provide insights into how corporate governance mechanisms affect the association between ESG factors and FP. This aligns with agency theory, with some limitations of governance features on which the pillars of the ESG governance structure are considered significant. It is crucial to anticipate that the interests of all stakeholders may not be applicable in all situations, as evidenced by the fact that corporate governance-related independent variables, in addition to moderating variable effects, do not statistically significantly affect FP, which challenges stakeholder and agency theories. Furthermore, the findings indicate that firms may perceive adopting ESG practices as a means of maintaining or enhancing their legitimacy in the marketplace. The influence of ESG factors on FP suggests that companies recognize the importance of aligning with societal expectations regarding sustainability and responsible governance to secure long-term legitimacy and stakeholder support. Moreover, the lack of a statistically significant influence of certain variables on FP may reflect the complexities in balancing the competing legitimacy demands of various stakeholders.

Based on these results, we consider strategies for uncovering Palestinian companies to investors, regulatory bodies, and other stakeholders. Enhanced disclosure practices could lead to higher market transparency, which will in turn present investors’ confidence and access to capital. There should also be a focus on upgrading governance structures, ensuring internal controls, and accountability mechanisms that are essential to reduce risks and ensure efficiency. For some emerging or developing organizations, robust governance metrics establish trust among various stakeholders, which, in turn, contributes to the long-term financial sustainability of the organization. Increasing engagement with numerous stakeholders, including investors, employees, local communities, and regulatory bodies, is key to understanding stakeholder expectations and concerns regarding ESG issues. Pro-active, purposeful stakeholder engagement can provide a better contribution to a company's horizon scanning, detecting early risks, and taking control of decision-making, which in turn is linked to sustainable business development. Furthermore, organizations must ensure continuous monitoring and evaluation of ESG performance metrics using these as benchmarking tools against industry peers, best modern practices, and others. Continuous monitoring helps companies follow up on progress, pinpoint areas of bondage, and generally convey the company’s desire to achieve the goals of sustainable development. In contrast, it requires policymakers, regulatory authorities, and industry associations to collaborate with companies on development ideas, supportive frameworks, incentives, and guidelines on the integration and promotion of ESG and sustainable business practices. Joint public-private efforts (P3s) will be the new drivers of knowledge sharing and capacity building, also known as collective actions for achieving specifically set sustainability targets.

While this study has provided valuable insights into the relationship between firm performance and environmental, social, and governance disclosures, there are several limitations that should be acknowledged:

1.The study focuses on ESG reported by Palestinian firms, which may limit the generalizability of the findings to other countries. 2.The study uses a cross-sectional design, which limits the ability to establish causality and may not capture the dynamic nature of the relationship over time 3. The study does not consider potential third variables or moderators that may influence the relationship between firm performance and environmental, social, and governance disclosures.

There are various reasons for conducting additional studies included in the current work. First, considering the political and economic challenges faced by Palestinian enterprises, recent research has provided a complete understanding of their reality. This study may open the door to future empirical studies that compare comparable nations, which would yield a variety of viewpoints and more thorough and convincing data. Second, other variables, such as working capital and gross profit margin, may be the subject of future research. It is also possible to assess other features of corporate governance such as CEO duality and board member independence. Third, we should consider the opinions of several investors and consumers on how sustainability affects a company's non-financial performance. Fourth, there is a need to explore the reasons for ESG investments in Palestine, whether ESG affects market share rather than investors, and how organizational culture affects reporting. This finding supports the theoretical underpinnings of further studies on this subject.

Data Access Statement: Research data supporting this publication are available upon request.

Conflict of Interest declaration: The authors declare that they have NO affiliations with or involvement in any organization or entity with any financial or non-financial interest in the subject matter or materials discussed in this manuscript.

Author Contributions: Mr. Naji contributed to the design and implementation and analysis of the research, Dr. Naser conceived the original and supervised the project.

Funding: No funding was received to assist with the preparation of this manuscript.

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No competing interests reported.

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The Power of ESG Factors in Driving Financial Growth - Insights from Palestine

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Journal Publication

Version 1

Abstract

Figures

1. Introduction

2. Literature review

2.1. Theoretical framework

2.2. Hypothesis Development

2.2.1. Environmental Disclosure and FP

2.2.2. Social Disclosure and FP

2.2.3. Governance Disclosure and FP

2.2.4. Governance Characteristics and FP

3. Methods

3.1. Population and sample

3.2. Measurement of FP

3.3. Measurement of environmental, social, and governance

3.4. Measurement of a moderating variable

3.5. Measurement of control variables

3.6. Research Equations And Model

4. Results

4.1. Descriptive Statistics

4.2. Diagnostic tests

4.3. Linear regression

4.4. Moderating effect of governance characteristics between ESG and FP

5. Discussion of the results

5.1. Conclusion

Declarations

References

Additional Declarations

Supplementary Files

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