The effect of environmental, social and governance (ESG) disclosure and Shariah-compliance, on firm performance among listed firms in Malaysia

Public listed firms (PLFs) in Malaysia are increasingly expected to demonstrate responsible practices in response to environmental, social, and governance (ESG) challenges. These include environmental degradation, social inequality, and weak governance structures, all of which can significantly impact firm performance (FP). In the meantime, the growing emphasis on Shariah-compliance, which is guided by Islamic principles of ethical conduct, fairness, and social responsibility, raises questions on how Shariah-compliance status (SCS) interacts with ESG disclosure in influencing firm performance. This study examines the effect of ESG disclosure and Shariahcompliance status (SCS) on the firm performance of Malaysian PLFs from 2020 to 2023. This study also examines whether SCS moderates the ESG-performance relationship. Using pooled data analysis with industry and year effects, the study analyses 798 firm-year observations, with firm performance measured by Tobin’s Q, return on assets (ROA), return on equity (ROE), and cash holdings (CH). ESG scores and financial data were retrieved from Refinitiv DataStream, while SCS classification was sourced from the Securities Commission Malaysia. This study addresses the limited research examining the combined effect of ESG disclosure and Shariah-compliance status (SCS) on firm performance, particularly within the Malaysian context. The findings reveal that ESG disclosure positively influences firm performance, with social disclosure consistently showing the strongest impact, underscoring the operational and financial value of stakeholder-oriented initiatives. The study further finds that while SCS enhances market-based performance (Tobin’s Q), it is associated with lower accounting-based performance (ROA and CH), suggesting a trade-off rooted in conservative financial practices under Islamic principles. Importantly, the moderating role of SCS strengthens the positive relationship between social, governance, and ESG controversies disclosures and firm performance, but not environmental disclosure, highlighting that the ethical and reputational aspects of Shariah compliance align more closely with certain ESG dimensions. These results extend prior research by empirically demonstrating that Shariah compliance reinforces selected ESG components, addressing the research gap on how dual screening mechanisms (ESG and SCS) interact to influence firm performance. Grounded in stakeholder and legitimacy theories, this study contributes to understanding how ESG and Islamic principles jointly shape firm outcomes in a Muslim-majority capital market. It also offers insights for firms, investors, and policymakers aiming to integrate ethical, sustainable, and financial goals in support of Malaysia’s Thirteenth Plan.