Authors
Abstract
Background: ESG disclosure quality has become a central determinant of corporate transparency, investor confidence, and market discipline in emerging economies. While firms increasingly publish sustainability and governance reports, the credibility and decision usefulness of ESG information remain contested due to greenwashing concerns, limited assurance practices, and heterogeneous institutional enforcement.
Aim: This study examined the effect of ESG disclosure quality on the cost of capital in emerging economies, while assessing the mediating role of financial reporting quality and the influence of institutional ownership in shaping disclosure credibility.
Methodology: The study employed an ex post facto design using panel data from 80 listed non financial firms across Nigeria, Ghana, South Africa, and Kenya covering 2013 to 2024. ESG disclosure quality was measured using a weighted index capturing specificity, completeness, comparability, and governance transparency. Cost of capital was operationalised using the weighted average cost of capital proxy. Financial reporting quality was measured using accrual quality and conservatism indicators, while institutional ownership was measured as institutional shareholding proportion. Data were analysed using fixed effects regression, mediation analysis, and robust regression for sensitivity checks.
Findings: ESG disclosure quality exhibited a negative and statistically significant relationship with the cost of capital, suggesting that higher quality disclosure reduces perceived risk and improves access to finance. Financial reporting quality partially mediated the relationship, indicating that ESG information becomes more decision useful when supported by credible financial reporting practices. Institutional ownership strengthened the ESG disclosure cost of capital link, implying that sophisticated investors
enhance monitoring and reduce symbolic reporting incentives.
Contributions: The study extends ESG reporting literature by demonstrating that the capital market benefits of ESG disclosure depend on complementary reporting credibility and investor oversight. It provides evidence from African and emerging market contexts where disclosure quality challenges remain significant.
Recommendations
Regulators: Promote ESG reporting standards with minimum assurance requirements and industry specific disclosure metrics.
Firms: Improve ESG disclosure quality through measurable indicators and integrate ESG governance into audit and risk oversight.
Researchers: Explore dynamic effects of ESG assurance, sector specific ESG materiality, and
macroeconomic risk channels in explaining financing outcomes.