This study aims to investigate the environmental, social and governance (ESG) reporting practices of the banks listed on the Colombo Stock Exchange (CSE).
A quantitative content analysis was conducted using three years of annual reports from all 12 banks listed on the CSE to measure and examine ESG reporting practices.
The study found that social disclosures by banks are lower compared to governance and environmental disclosures. Significant variations in ESG reporting practices among banks were observed, with firm size and leverage significantly impacting these practices.
The variations in ESG reporting among banks underscore the need for a standardized reporting approach to ensure credibility and transparency within the sector. Furthermore, the study emphasizes the significance of organizational capacity and resources in driving the sustainability initiatives of banks listed on the CSE. Moreover, the study recommends that all CSE-listed banks seek external assurance for their reported ESG information to enhance both the credibility and impact of their disclosures.
This study contributes to the sparse literature on ESG reporting in the banking sector within developing countries.
1. Introduction
Public confidence in capital markets declined due to the collapse of large firms, such as Enron and WorldCom, in the early 2000s (Horvat and Korošec, 2015; Maama, 2021; Vitolla et al., 2019). Investors and other stakeholders struggle to obtain an accurate picture of a company’s performance, which affects their investment decisions. Therefore, investors and other stakeholders seek reporting that goes beyond traditional financial disclosures (De Villiers et al., 2017). Accordingly, the demand for more comprehensive corporate reporting systems that include all the dimensions of value creation, such as environmental, social and governance (ESG) factors, has grown rapidly (Agnese and Giacomini, 2023). Thus, the practice of disclosing information about a company’s ESG performance to stakeholders has emerged, commonly referred to as ESG reporting.
Firms believe that sharing ESG information demonstrates their commitment to sustainability and builds stakeholder confidence. Therefore, many organizations use ESG reporting to enhance transparency and accountability, even though it remains non-mandatory in many countries worldwide (KPMG, 2022). However, the demand for ESG information from investors, customers, and other stakeholders is evolving and increasing, prompting companies to respond accordingly. Consequently, all companies face growing pressure to improve their ESG reporting practices, regardless of their industry or business type. Banks, in particular, are under similar pressure to integrate ESG considerations into their operations and reporting due to some specific reasons.
The banks play a pivotal role in the economy by allocating funds among investors, borrowers and across various sectors. Consequently, they possess the capacity to either promote or hinder in specific industries, thereby influencing the adaptation of sustainable practices throughout the broader economy. For instance, when banks choose to finance environment-friendly projects for their clients, they contribute to achieving the sustainable development goals of the nation. On the other hand, even though financial institutions do not directly pollute the environment, they play a big role in funding the companies that do. For example, a bank might extend credit to a company engaged in deforestation. Although the bank is not directly responsible for the environmental harm caused, it is still accountable for enabling such practices through its funding. This reason increases the importance of transparency in financial institutions’ ESG performance and disclosures. Providing this information allows stakeholders and policymakers to assess how institutions are managing ESG-related risks and opportunities. Therefore, the ESG reporting practices of banks can have a profound impact on the overall sustainability of the economy (Saif-Alyousfi et al., 2023).
Sri Lanka’s banking sector is still in the early stages of integrating ESG considerations into its operations and reporting. As the demand for sustainable banking continues to grow, Sri Lankan banks must take further steps to embed ESG principles into both strategic decision-making and disclosure practices. More importantly, Sri Lanka’s banking sector consists of banks with varying sizes and operational scopes, which introduces complexity in understanding the relationship between corporate characteristics and ESG reporting practices. This practical challenge motivated the researchers to investigate ESG reporting within the Sri Lankan banking context.
Moreover, the researchers identified that although a considerable number of studies have examined the relationship between ESG reporting and firm performance, there is a lack of research that simultaneously explores the relationships between corporate attributes such as firm size, profitability and leverage and ESG reporting, particularly within the Sri Lankan context. Furthermore, existing literature presents contradictory findings among the number of global studies on this topic (Saif-Alyousfi et al., 2023). For example, Branco and Lima Rodrigues (2008) found an insignificant impact of corporate attributes such as profitability and leverage on ESG reporting. In contrast, Hossain et al. (2018) reported a significant impact of profitability on ESG reporting. Further, some other studies have identified a significant influence of leverage on ESG reporting (Andrikopoulos et al., 2014; Maurya and Singh, 2022). In addition, the need for further research on ESG reporting in developing countries, including Sri Lanka, is also identified as these nations encounter challenges in integrating environmental sustainability management into their developmental strategies (Gunarathne et al., 2021).
Therefore, this study was conducted to address the research problem, “Do the ESG reporting practices of Colombo Stock Exchange (CSE-listed banks reflect the influence of corporate attributes?” Accordingly, the primary objective of the study was to examine the impact of firm size, profitability and leverage on the ESG reporting practices of listed banks in the CSE. In addition, the study aimed to evaluate the overall extent of ESG reporting practices among these banks and to investigate whether ESG reporting levels significantly vary across individual banks.
The significance of this study spans both theoretical and practical domains. This study could be considered pioneering in investigating the institutional factors influencing ESG accounting practices within Sri Lankan banks, thereby contributing to scholarly discourse and expanding the existing body of knowledge on ESG reporting in the banking industry. More importantly, this study offers insights into the underlying motives behind ESG reporting practices of Sri Lankan banks by exploring both the extent of their ESG reporting practices and the impact of corporate attributes together. Therefore, findings may benefit society at large by enabling individuals to make more informed decisions regarding investments, social activities or any banking-related activities. In an era where environmental concerns are paramount, the practice of greenwashing has raised serious questions about corporate responsibility (Gai et al., 2023). The whole society would benefit from this kind of research due to increasing public attention on the drivers of ESG reporting practices of the banks. Moreover, understanding the factors that enable or hinder ESG transformation can guide other banks in formulating effective sustainability strategies. In addition, the study also provides valuable insights for policymakers in Sri Lanka and other emerging markets about the effectiveness of existing regulations aimed at promoting ESG reporting.
2. Literature review
2.1 Environmental, social and governance reporting and the banking sector
ESG disclosures of the organizations are covered by ESG reporting. This is a means for companies to communicate their commitments and performance in these areas to stakeholders (Raghavan, 2022). ESG reporting originated from a call for the accounting profession to broaden its scope and address its social and environmental responsibilities (Ismail and El-Shaib, 2012). Over time, stakeholders and experts recognized that traditional accounting disclosures were insufficient to meet their information needs (Ackers and Eccles, 2017). To address the limitations of conventional financial reporting frameworks, stakeholders began to demand greater access to ESG-related data. Stakeholders were concerned about how the businesses would affect the environment and society, as well as how their governance systems would assist them in dealing with these problems (Ackers and Eccles, 2017). Consequently, organizations have increasingly adopted ESG disclosures to inform stakeholders about their ESG-related initiatives.
Furthermore, since its introduction in the 1970s, the focus and objectives of ESG reporting have evolved due to increasing pressure on organizations to embrace greater sustainability and social responsibilities (De Klerk and De Villiers, 2012). Initially, accounting focused primarily on financial information, and the introduction of ESG reporting was considered a groundbreaking development in the field of accounting (Thomson, 2015). However, ESG reporting was not widely adopted by businesses, possibly as a result of the usage of non-monetary terms (Rupley et al., 2017). However, ESG reporting has become established and presents an opportunity to extend beyond traditional rules and norms. As a consequence, there has been a compelling demand for organizations to embrace ESG accounting and reporting, including ESG information presented through supplementary disclosures or standalone reports (Lai et al., 2018). This may result in more effective use of information by decision-makers.
The banking industry has been slower to adapt to sustainability issues than other industries. With the economic downturn in 2008, some banks succeeded in surviving and continued to operate and expand, whereas others failed. Banks that demonstrated sustainable practices and placed a strong emphasis on governance, social issues and environmental concerns were better positioned to withstand the crisis and continue growing.
Broadly, there are three perspectives from which a bank’s environmental responsibilities can be assessed: enhancing internal efficiency, funding environmentally conscious industrial initiatives and reducing the risk of financing illegal or unethical enterprises (Horvathova, 2010). Thus, the optimal approach is to adhere to the most stringent standards of corporate accountability while minimizing adverse environmental impacts and engaging in socially responsible initiatives (Gangi et al., 2019). On the opposing side, conflicting priorities between stakeholders and management may jeopardize the development of ESG policies and bank performance. For instance, banks may find it difficult to implement improved ESG practices due to a profit-driven inclination toward higher-risk investments. As a result of this defensive posture, the global banking industry is becoming more and more interested in analyzing the correlation among ESG performance, financial results and other corporate attributes (Azmi, et al., 2021; Buallay, 2020).
Sri Lanka has recently taken significant steps to strengthen ESG reporting regulations in line with global developments. In response to the growing demand for a comprehensive sustainability/ESG reporting framework, the International Sustainability Standards Board (ISSB) issued IFRS S1 and IFRS S2 on June 26, 2023. The Institute of Chartered Accountants of Sri Lanka, as the national standard setter, collaborated with the ISSB to localize these standards, resulting in SLFRS S1 and SLFRS S2, effective from January 1, 2025. Subsequently, the CSE amended Section 7 of its Listing Rules through a circular issued in March 2025, requiring listed banks to adopt these standards in accordance with the phased implementation schedule established by CA Sri Lanka. This schedule ranges from 01st of January 2025 to 1st of January 2030.
2.2 Theoretical background
Under the theoretical background of ESG reporting, various theories can be identified, including institutional theory (DiMaggio and Powell, 1983; Suchman, 1995), legitimacy theory (Deegan, 2002; Dowling and Pfeffer, 1975) and stakeholder theory (Freeman, 1984; Roberts, 1992).
The stakeholder theory emphasizes that organizations hold responsibilities toward a broad range of stakeholders beyond shareholders, including employees, customers, communities and regulators. From this perspective, ESG reporting functions to address the expectations and pressures of these diverse stakeholder groups, aiming to respond to their concerns and secure their ongoing support. According to the institutional theory, firms adapt to institutional pressures to achieve legitimacy and stability in their environments. The coercive (regulatory), normative (professional standards) and mimetic (industry best practices) pressures significantly influence ESG reporting decisions as companies strive to conform to industry norms and expectations.
However, this study is primarily anchored in legitimacy theory, which aids in understanding the motivation behind ESG reporting by CSE-listed banks. This theory explains that organizations continually seek to gain and maintain legitimacy from their stakeholders by conforming to societal norms and expectations. Adhering to transparent ESG reporting can be seen as a way to demonstrate responsible business practices, build trust and mitigate potential risks associated with non-compliance in the context of banks.
Because it uses public resources and employs people, an enterprise that is authorized to operate within a community is accountable to that society for its operations and outcomes (Deegan, 2004). The business’s survival will be at risk if stakeholders perceive that it has violated the social compact. Thus, legitimacy is a crucial strategic asset that a company depends on to survive (Dowling and Pfeffer, 1975). To ensure that they operate within the constraints set by society, businesses adopt voluntary corporate disclosure practices, including sustainability and integrated reporting (Cooray, 2021). Within this context, the concept of legitimacy is widely used to explain an entity’s commitment to upholding societal standards, such as through the disclosure of information related to social, environmental and governance issues (Camilleri, 2018). When a company fails to meet social norms, the community may impose sanctions by restricting the company’s operations and reducing consumer interest in its products. Consequently, the concept of legitimacy is frequently used in social and environmental studies to explain why management discloses social and environmental initiatives as part of its corporate strategy. Within this theoretical framework, analyzing the impact of corporate attributes on ESG reporting yields valuable insights into how CSE-listed banks strategically use ESG disclosures to align with societal expectations, manage stakeholder perceptions and enhance their legitimacy in the Sri Lankan banking sector.
2.3 Corporate attributes
Existing literature on ESG reporting in the banking sector primarily focuses on the effects of ESG initiatives on banks’ stock value, stability, financial distress, efficiency, profitability, lending practices and risk-taking (Basu et al., 2022; Demir and Danisman, 2021; Ji et al., 2023). In addition, factors such as ownership structure, multiple exchange listings, international experience, media exposure, consumer proximity and environmental sensitivity have been examined as independent variables in some ESG-related studies (Branco and Lima Rodrigues, 2008; Kiliç, 2016). Further, firm-specific characteristics such as size, profitability, ownership structure, age and leverage are also commonly analyzed in related literature (Hossain et al., 2018; Dissanayake et al., 2019; Kiliç, 2016; Andrikopoulos et al., 2014; Maurya and Singh, 2022).
However, this study focuses on profitability, firm size and leverage as key corporate attributes. These three factors represent fundamental financial metrics that directly influence the stability and performance of banks. Accordingly, they are crucial factors in understanding the capacity of banks to adopt ESG reporting practices as they reflect financial health and operational efficiency. Moreover, since banks operate in highly regulated environments, capital adequacy ratios and risk management practices are closely monitored. Therefore, understanding how these financial attributes relate to ESG reporting can provide valuable insights into the unique challenges and opportunities faced by banks in integrating sustainability considerations into their operations. By focusing on these common metrics, researchers can compare banks of varying sizes and financial strengths. Furthermore, data availability was a key factor in selecting these three attributes in the Sri Lankan context. Maurya and Singh (2022) conducted a study using similar variables to examine the impact of corporate attributes on sustainability reporting in the context of India. They investigated the effect of age, size, leverage, profitability and international presence on the sustainability reporting of Indian listed banks. However, the current study excludes international presence due to contextual limitations. The variable “age” was initially included in the model. However, it was dropped during the regression analysis (fixed effect model) due to insufficient within-group variation across the panel data set, as the variable remained largely time-invariant over the three years.
Further, although ownership structure and corporate governance attributes have been considered in prior studies examining the determinants of ESG reporting, they were not included in the present analysis due to context-specific reasons. Ownership structure was excluded because it is relatively homogeneous among CSE-listed banks in Sri Lanka, where Most banks exhibit dispersed ownership with a significant presence of institutional investors. Similarly, the corporate governance structures of these banks are highly uniform due to stringent regulatory supervision by the Central Bank of Sri Lanka, resulting in limited differences across institutions.
2.3.1 Firm size.
Firm size is a key element in the fields of management, accounting and finance. Larger firms differ from smaller ones in that they tend to have hierarchical leadership structures, a greater variety of operational divisions, higher concentration of specialized skills and more administrative systems. In addition, big companies are more publicly visible, particularly through media coverage and typically possess greater capacity for diversification and social engagement (Fortanier et al., 2011). These characteristics may increase their exposure to stakeholder scrutiny and, consequently, their motivation to engage in transparent ESG reporting.
There is substantial evidence to suggest that large banks significantly influence their ESG reporting procedures. Empirical studies consistently indicate that larger banks tend to disclose more information about their ESG performance compared to smaller banks (Andrikopoulos et al., 2014; Branco and Lima Rodrigues, 2008; Dissanayake et al., 2019; Zakimi and Hamid, 2004). These findings are also consistent with the assumptions of legitimacy theory. The substantial resources available to large banks may enable them to produce more comprehensive ESG reports. Furthermore, increased transparency is often driven by stakeholder pressure, reputational concerns and stricter regulatory requirements, all of which are more pronounced for larger institutions. Comprehensive ESG disclosures are also encouraged by proactive risk management and the expanding market opportunities in sustainable finance, mostly used by large banks. However, to validate this theory and determine its actual significance in the particular context of Sri Lankan banks, this study hypothesizes a significant positive impact of bank size on the ESG reporting practices among banks listed on the CSE.
The size of the bank positively impacts the level of its ESG reporting.
2.3.2 Leverage.
Financial leverage in a firm’s capital structure refers to the proportion of debt relative to equity (Fodio, 2021). Leverage can provide potential benefits by increasing shareholder returns, provided that management effectively uses the tax advantages associated with borrowed funds. According to legitimacy theory, executives are more likely to disclose additional details to clarify the company’s financial state and present a positive image of the company to investors and society. However, such disclosures may depend on the availability of resources. From the perspective of agency theory, organizations with high levels of leverage are expected to voluntarily disclose more information to reduce lender pressure and mitigate information asymmetry (Orazalin and Mahmood, 2020). Practically, banks with a high level of leverage may exhibit lower levels of ESG reporting due to the pressure to maintain short-term profitability. As a result, these banks may prioritize financial stability over long-term sustainable goals. On the other hand, highly leveraged banks might also increase their ESG disclosures as a strategic response to mitigate environmental and social risks that could affect financial stability. Moreover, such disclosures can be used to enhance their credibility and transparency, thereby improving access to capital, attracting more favorable loan terms and reducing borrowing costs.
Accordingly, previous studies have found that there is a positive association between leverage and ESG reporting (Maurya and Singh, 2022), while others have found a negative relationship (Maama, 2021). Based on the theoretical reasoning and contextual considerations discussed earlier, this study hypothesizes a negative impact of financial leverage on ESG reporting.
The financial leverage of the bank negatively impacts the level of its ESG reporting.
2.3.3 Profitability.
A company’s profitability has an advantageous impact on how much information it reveals about sustainability (Andrikopoulos et al., 2014). According to legitimacy theory, more profitable firms are generally more willing to voluntarily disclose their sustainability performance to build trust within the broader community. In the banking sector, higher profits may enable firms to allocate more resources to ESG reporting-related activities, including data collection, good reporting systems. At the same time, profitability can also improve a bank’s legitimacy and reputation, which increases the value of good ESG reporting as a strategy for winning over stakeholders. However, some profitable banks may deprioritize ESG efforts, focusing instead on maximizing shareholder wealth rather than pursuing broader sustainability goals. In such cases, these banks may reduce their budgets for ESG-related investments and reporting initiatives, viewing them as non-essential or secondary to financial performance.
Reflecting on the above-mentioned points, prior studies have reported that more profitable companies tend to disclose more information (Hossain et al., 2018), while others have found no relationship (Dissanayake et al., 2019) or even a negative relationship (Bhatia and Tuli, 2014) between profitability and the ESG reporting of banks. Based on theoretical reasoning and the contextual relevance to the Sri Lankan banking sector, this study hypothesizes a positive impact of profitability on ESG reporting practices to determine the true influence of profitability on Sri Lankan banks’ ESG reporting.
The profitability of a bank positively impacts the level of its ESG reporting.
2.4 Empirical review
Previous studies on ESG reporting present a diverse yet informative body of research. Scholars have used a variety of methodologies, including content analysis and econometric models as major methods. Further, these studies have explored a wide range of determinants of ESG reporting across different contexts.
Maurya and Singh (2022) found that firm size and leverage have a significant impact on ESG reporting, based on a study of 10 listed banks in India. Notably, they reported that age, profitability and international presence did not have a significant effect. Maama (2021) identified firm size, firm value and age as significant determinants of ESG disclosure, among the variables of size, value, age, net profit margin and leverage. In contrast, Fodio (2021) found no significant relationship between corporate attributes such as company size, financial leverage, profitability and ESG reporting, based on an analysis of 13 listed banks on the Nigerian Stock Exchange.
Furthermore, the literature demonstrates that firms’ nationality and leverage have an important effect on their ESG accounting strategy (Kühn et al., 2018). Sief (2014) and Almihoub et al. (2013) found no significant association between a company’s age and its engagement in ESG reporting. According to a related research effort by Baughn et al. (2007), economic, social and political factors have an impact on how much ESG accounting is practiced by businesses. The authors demonstrate that the pressures from and roles of different organizations and stakeholders of companies are significant elements that impact the ESG accounting practice of a firm. Similarly, Sikka (2011) emphasized that firms with greater asset size and market value tend to exhibit more comprehensive ESG disclosures, due to their enhanced capacity, expertise and resources. This is why bigger enterprises would have the means, knowledge and experience to apply ESG accounting. According to Dissanayake et al. (2019), in the context of listed companies in Sri Lanka, sustainability reporting is primarily influenced by company size and the extent to which GRI guidelines are adopted. In contrast, ownership structure and industry classification demonstrate a comparatively weaker association with the level of sustainability disclosures during the examined period.
3. Research methodology
This study was conducted from the standpoint of positivism. Since the research aims to explore the impact of corporate attributes on ESG reporting practices listed on the CSE, the quantitative approach is appropriate for measuring and analyzing these relationships. In particular, quantitative research allows for straightforward comparisons of various corporate attributes and their impact on ESG reporting practices. The population of the study comprised Sri Lankan banks that are publicly listed on the CSE up to the data collection date (October 24, 2023). Accordingly, 12 banks were listed on the CSE. The study collected data for each bank in the population over three years, covering the years 2020–2022, using annual reports. Therefore, this study used a census approach, which involves using the entire population to examine the subject matter. The researchers were able to collect complete data for all CSE-listed banks across the selected years, as these institutions are required to publicly disclose their audited financial statements in compliance with relevant regulatory requirements. Therefore, a balanced panel data set was used in this study, comprising 36 observations from 12 CSE-listed banks over three years, with no missing data.
Table 1 shows the summary of the operationalization of the variables.
Operationalization of the variables
| Variable | Indicator | Definition | Measure |
|---|---|---|---|
| ESG reporting practices (dependent variable) | ESG reporting disclosure index | ESGRDI is calculated by dividing the combined score on all ESG dimensions obtained by the total number of indicators | Five-point Likert scale |
| Firm size | Total asset | Amount of total assets | Natural logarithm in total assets |
| Profitability | Return on assets | Return on asset ratio | |
| Leverage | Debt-to-Equity | Debt-to-equity ratio |
An ESG reporting disclosure index was used to measure the ESG reporting practices of the listed banks, using the quantitative content analysis method. The ESG reporting disclosure index applied in the study was developed based on the evaluation matrix introduced by Maama (2021), with certain modifications to suit the Sri Lankan banking context. The index comprises a total of 34 indicators, comprising 09 environmental, 13 social and 12 governance dimensions. A five-point Likert scale (Table 3), ranging from 1 (no disclosure) to 5 (full disclosure) (Maama, 2021), was used to score the banks’ ESG accounting practices, as the Likert scale is widely regarded as an effective tool for assessing the differences between the various levels of ESG disclosures based on the quality and perceived usefulness of the information disclosed by the firm (Mensah et al., 2017). The ESG reporting disclosure index used in this study is shown in Table 2.
ESG Reporting disclosure index
| Environmental disclosures | 5 | 4 | 3 | 2 | 1 | |
| ED01 | Disclosure of waste generation and recycling | |||||
| ED02 | Disclosure of waste and pollution from operations | |||||
| ED03 | Environmental policy | |||||
| ED04 | Environmental protection expenditures and investments | |||||
| ED05 | Reduction in carbon emissions | |||||
| ED06 | Green banking practices | |||||
| ED07 | Reduction of renewable/non-renewable resources | |||||
| ED08 | Initiatives to provide renewable energy | |||||
| ED09 | Water use efficiency | |||||
| Social responsibility disclosures | 5 | 4 | 3 | 2 | 1 | |
| SD01 | Local economic development, e.g. infrastructure | |||||
| SD02 | Information on the empowerment of local people | |||||
| SD03 | Sponsoring of sporting or recreational projects | |||||
| SD04 | Support for education | |||||
| SD05 | Significant fines for non-compliance | |||||
| SD06 | Total number of employees | |||||
| SD07 | Gender of employees | |||||
| SD08 | Employee unionization | |||||
| SD09 | Employees turnover by age and gender | |||||
| SD10 | Employee training and education | |||||
| SD11 | Employment of disabled | |||||
| SD12 | Support for public health | |||||
| SD13 | Disclosures on occupational diseases | |||||
| Governance disclosures | 5 | 4 | 3 | 2 | 1 | |
| GD01 | Statement and policy on sustainability | |||||
| GD02 | The governance structure of the firm | |||||
| GD03 | Culture, ethics and values of the firms | |||||
| GD04 | Financial risk disclosure | |||||
| GD05 | Social and environmental risk disclosures | |||||
| GD06 | Provision of risk mitigation plans | |||||
| GD07 | Provision of measurable targets for the coming years | |||||
| GD08 | Assurance reports on environmental and social information | |||||
| GD09 | Information on primary brands, products or services | |||||
| GD10 | Information on markets served | |||||
| GD11 | Disclosure of engagement with stakeholders | |||||
| GD12 | Awards and recognitions | |||||
Five-point Likert scale used in the study
| Point | Label | Criteria |
|---|---|---|
| 1 | No disclosure | No information is shared |
| 2 | Limited disclosure | Share only certain aspects or details while keeping the majority undisclosed |
| 3 | Partial disclosure | Reveal more than just limited details but still holding back significant information |
| 4 | Substantial disclosure | More information is shared, approaching a comprehensive level, but some key details are still omitted |
| 5 | Full disclosure | All available information or details are openly shared without holding anything back |
The reliability of data was ensured through the use of published annual reports of the banks for data collection. Since the study relied on the banks’ annual reports, the degree of data unreliability and bias was minimized, as these documents are legally required to be accurate and fair. Further, the validity and reliability of variable measurements were ensured through a comprehensive review of the relevant literature. However, subjectivity is a major limitation of the content analysis method. Different coders may interpret the data in different ways, which can lead to inconsistent results.
Therefore, the study used a team of three independent evaluators to reduce the subjectivity associated with the content analysis method and ensure inter-coder reliability. Each evaluator independently reviewed and assessed all annual reports of the selected banks using the predefined ESG disclosure indicators. A five-point Likert scale (Table 3) was used to evaluate the level of disclosure for each indicator. The scale ranged from 1 (No information is shared), meaning no information was provided, to 5 (All available information or details are openly shared without holding anything back). The criteria for each level were discussed among evaluators prior to the scoring process. After the initial coding, the results were compared and any discrepancies were discussed among the evaluators to reach a consensus. The final score for each item was assigned based on this consensus-based evaluation, thereby enhancing the consistency and reliability of the coding process.
As explained earlier, this study used the quantitative content analysis method to measure the ESG reporting practices of the banks (Andrikopoulos et al., 2014; Hossain et al., 2018; Dissanayake et al., 2019; Maama, 2021; Maurya and Singh, 2022; Maurya and Singh, 2023). Descriptive statistics, one-way ANOVA and panel data regression analysis were used as the primary analytical techniques.
4. Findings and discussion
Table 4 shows the descriptive statistics of the main variables of the study.
Descriptive statistics of main variables
| Variable | N | Mean | SD | Minimum | Maximum |
|---|---|---|---|---|---|
| ESG | 36 | 3.483 | 0.521 | 2.206 | 4.324 |
| Size (natural logarithm of total assets) | 36 | 26.647 | 1.094 | 24.835 | 28.517 |
| Profitability (ROA (%)) | 36 | 0.825 | 0.379 | 0.038 | 1.687 |
| Leverage (total debt/equity) | 36 | 9.324 | 1.692 | 5.606 | 12.998 |
The mean value of ESG reporting practices among CSE-listed banks is 3.483 with a standard deviation of 0.521. The “size” variable, representing the natural logarithm of total assets, has a mean value of 26.647. More importantly, the relatively low standard deviation of 1.094 suggests limited dispersion in bank sizes across the sample. The minimum and maximum values also indicate the absence of significant outliers in this variable. The return on asset (ROA) variable has a low mean value of 0.825, with a relatively high standard deviation, indicating considerable variability in profitability across the banks. In addition, the wide range – from 0.038–1.687 – further reflects this variability. The debt-to-equity ratio shows a relatively high mean value of 9.324 with a standard deviation of 1.692. Further, all the values of the DE variable fall within the range of 5.606 and 12.998, indicating consistency without extreme outliers.
4.1 Extent of environmental, social and governance reporting practices of Colombo Stock Exchange-listed banks in Sri Lanka
Table 5 shows the results of the descriptive analysis performed on each disclosure used to measure the ESG reporting practices of listed banks in CSE.
Summary of descriptive statistics of ESG reporting practices
| Code | Disclosure | Mean | SD | |
|---|---|---|---|---|
| ED01 | Disclosure of waste generation and recycling | 3.83 | 1.108 | |
| ED02 | Disclosure of waste and pollution from operations | 2.19 | 0.525 | |
| ED03 | Environmental policy | 3.81 | 1.390 | |
| ED04 | Environmental protection expenditures and investments | 3.17 | 0.811 | |
| ED05 | Reduction in carbon emissions | 3.64 | 1.175 | |
| ED06 | Green banking practices | 4.08 | 1.180 | |
| ED07 | Reduction of renewable/non-renewable resources | 3.50 | 1.183 | |
| ED08 | Initiatives to provide renewable energy | 3.92 | 1.079 | |
| ED09 | Water use efficiency | 3.67 | 1.171 | |
| ED | Environmental disclosures | 3.5340 | 0.68997 | |
| SD01 | Local economic development, e.g. infrastructure | 3.17 | 1.207 | |
| SD02 | Information on the empowerment of local people | 3.08 | 1.360 | |
| SD03 | Sponsoring of sporting or recreational projects | 1.81 | 1.283 | |
| SD04 | Support for education | 3.83 | 1.056 | |
| SD05 | Significant fines for non-compliance | 3.50 | 1.134 | |
| SD06 | Total number of employees | 4.53 | 1.082 | |
| SD07 | Gender of employees | 4.00 | 1.531 | |
| SD08 | Employee unionization | 2.67 | 1.707 | |
| SD09 | Employees turnover by age and gender | 3.08 | 1.730 | |
| SD10 | Employee training and education | 4.61 | 0.645 | |
| SD11 | Employment of disabled | 1.72 | 1.210 | |
| SD12 | Support for public health | 2.81 | 1.411 | |
| SD13 | Disclosures on occupational diseases | 1.92 | 1.402 | |
| SD | Social disclosures | 3.1325 | 0.65880 | |
| GD01 | Statement and policy on sustainability | 4.25 | 0.996 | |
| GD02 | The governance structure of the firm | 4.61 | 0.599 | |
| GD03 | Culture, ethics and values of the firms | 3.94 | 0.860 | |
| GD04 | Financial risk disclosure | 4.17 | 0.737 | |
| GD05 | Social and environmental risk disclosures | 2.83 | 1.159 | |
| GD06 | Provision of risk mitigation plans | 4.42 | 0.770 | |
| GD07 | Provision of measurable targets for the coming years | 3.81 | 1.091 | |
| GD08 | Assurance reports on environmental and social information | 2.33 | 1.171 | |
| GD09 | Information on primary brands, products or services | 3.72 | 1.365 | |
| GD10 | Information on markets served | 3.61 | 0.728 | |
| GD11 | Disclosure of engagement with stakeholders | 3.28 | 0.659 | |
| GD12 | Awards and recognitions | 4.92 | 0.280 | |
| GD | Governance disclosures | 3.8241 | 0.44221 | |
| ESG | ESG reporting practices | 3.4828 | 0.52153 | |
According to Table 5, the level of reporting environmental practices among the CSE-listed banks was high. Among all environmental disclosures included in the index, the highest priority was given to the disclosures regarding green banking practices by the CSE-listed banks in Sri Lanka. In addition to disclosures on green banking practices, disclosures related to initiatives to provide renewable energy, water generation and recycling, environmental policy, reduction in carbon emissions and water use efficiency were also at high levels. While the level of disclosure on the reduction of renewable resources was moderate, the level of disclosure on waste and pollution from operations, as well as on environmental protection expenditures and investments, was low. This finding regarding environmental disclosures reinforces the argument that banks consider environmental disclosures important, even when their operations do not have a direct impact. The rationale behind this argument is that, although their operations do not directly impact on the environment, banks’ lending activities do affect the state of the natural environment (Thompson and Cowton, 2004). Moreover, the positive relationship between environmental disclosures and financial performance also provides a valid explanation for the high level of environmental disclosure practices among banks (Stanwick and Stanwick, 2000). From the perspective of legitimacy theory, this high level of environmental disclosure can be interpreted as a strategic effort to secure and maintain a social license to operate. Accordingly, the results indicate that the listed banks in Sri Lanka aim to gain legitimacy in the eyes of stakeholders by aligning their practices with societal expectations for environmental responsibility.
Although the environmental disclosures reported by the CSE-listed banks are relatively high, the overall level of social disclosures remains moderate. However, disclosures relating to the employees’ training and education, the total number of employees and the gender of employees are reported at high levels. Disclosures regarding support for public education are also prominently featured in the annual reports of the CSE-listed banks in Sri Lanka. While disclosures regarding local economic development e.g. infrastructure, information on the empowerment of local people, significant fines for non-compliance, employee unionization, employee turnover by age and gender and support for public health are reported at a moderate level, disclosure regarding sponsoring of sporting or recreational projects, employment of persons with disabilities and occupational diseases are reported at lower levels. This finding introduces new dimensions for discussion. In many other countries, banks tend to prioritize social aspects over environmental ones (Maurya and Singh, 2023). Although employee training, workforce demographics and support for public education are prominently disclosed, disclosures related to local economic development, employee well-being and responsible business practices remain comparatively limited. This suggests that banks make efforts to build legitimacy; however, it also raises concerns regarding their broader social impact and commitment to stakeholders beyond shareholders.
Among all three categories of ESG reporting, governance disclosures exhibit the highest level of reporting. In addition, the level of disclosures relating to the awards and recognitions records the highest mean value, indicating the level of priority banks place on publishing information about such achievements. This serves as strong evidence to support the claims of many researchers that awards and recognitions are a key driver of non-financial reporting among organizations (Werner et al., 2022). Disclosures concerning the governance structure of the firm, provision of risk mitigation plans, sustainability statements and policies, financial risks, organizational culture, ethics and values, measurable future targets, primary brands, products or services and information on markets served are also reported at high levels. Even though the disclosures on stakeholder engagement and social and environmental risk are at moderate levels, the reporting of assurance statements on environmental and social information remains low.
Accordingly, the overall level of ESG reporting practices among CSE-listed banks in Sri Lanka is relatively high, with governance-related disclosures being more comprehensive and prevalent compared to environmental and social disclosures. This finding supports the results of Aloy Niresh and Silva (2017), who highlighted a high level of governance disclosures. This may be attributed to the highly regulated nature of the banking industry. Furthermore, it suggests that CSE-listed banks have adopted more rigid governance mechanisms in response to past financial institution failures, such as the collapses of ETI Finance Ltd and Golden Key Credit Company. In addition, these banks appear to recognize the public’s demand for greater transparency in governance structures as essential to building trust. From a theoretical perspective, institutional theory suggests that organizations are influenced by the institutional environment in which they operate. Primarily through regulatory, normative and mimetic pressures. In the case of CSE-listed banks in Sri Lanka, regulatory pressures are exerted by the Central Bank of Sri Lanka and the CSE, promoting institutionalized governance practices. As a result, governance disclosure functions both as a compliance requirement and an industry norm, leading to greater consistency and emphasis in governance-related reporting, as observed in this study. On the other hand, social disclosures are not subject to equally strong institutional pressures. In the absence of mandatory requirements or strong stakeholder demand, banks may not prioritize social reporting to the same extent.
4.2 Extent of statistical significance of variation of environmental, social and governance reporting practices among banks
The One-way ANOVA test was used to assess the statistical significance of variation in ESG reporting practices among the banks.
The results of the One-way ANOVA tests are presented in Table 6.
Summary of the results of one-way ANOVA test
| Dependent variable | p-value | The p-value of Bartlett’s test for equal variances |
|---|---|---|
| ESG | 0.0001 | 0.975 |
| ED | 0.0002 | 0.990 |
| SD | 0.0000 | 0.815 |
| GD | 0.0006 | 0.569 |
Since all the p-values of Bartlett’s test for equal variances are greater than 0.05, there was insufficient evidence to reject the null hypothesis of equal variances. Therefore, ANOVA was performed without major concerns regarding a violation of the homogeneity of variance assumption. Further, results of the Shapiro–Wilk W test for normality (Table 7) indicate that data of all variables were approximately normally distributed, thereby satisfying the normality assumption required for ANOVA.
Results of Shapiro–Wilk W test for normality
| Variable | Observations | W | V | z | Prob>z |
|---|---|---|---|---|---|
| Size | 36 | 0.94430 | 2.031 | 1.481 | 0.06924 |
| DE | 36 | 0.97091 | 1.061 | 0.123 | 0.45101 |
| ROA | 36 | 0.96491 | 1.280 | 0.516 | 0.30307 |
| ESG | 36 | 0.96379 | 1.320 | 0.581 | 0.28065 |
According to the results of the ANOVA test, all p-values were less than 0.05, indicating that the mean values of the ESG reporting practices, as well as the overall ESG reporting practices among the banks, differed significantly.
These findings align with Senaratne’s (2010) observations of significant variations in CSR practices among Sri Lankan companies. Senaratne highlighted that the lack of standardization in non-financial reporting, along with the absence of guidance from external sources, were key contributors to these inconsistencies. This argument remains relevant in the Sri Lankan context, as ESG reporting is neither mandatory for all entities nor fully standardized. However, the issuance of SLFRS S1 and SLFRS S2 by the Institute of Chartered Accountants of Sri Lanka, effective from 1 January 2025, is a notable step toward standardization and may help reduce these variations. According to the legitimacy theory, organizations strive to align their practices with stakeholders' expectations to obtain public trust and approval. However, this study presents evidence of significant variation in ESG reporting among CSE-listed banks in Sri Lanka. This raises questions about the depth of some banks’ commitment to environmental and social responsibility. Further, while banks with more comprehensive reporting practices may enhance their ability to attract more investors, those with lower levels of disclosure are at risk of losing legitimacy and reputation standing.
4.3 Impact of firm size, profitability, and leverage on the environmental, social and governance reporting practices of listed banks on the Colombo Stock Exchange
Panel regression analysis was used to assess the impact of firm size, profitability and leverage on the ESG reporting practices of CSE-listed banks. The assumption of normality was tested using the Shapiro-Wilk W test for normality.
According to the results of the Shapiro–Wilk W test for normality, all the p-values were greater than 0.05. Accordingly, there was insufficient evidence to suggest that firm Size, debt-to-equity ratio, ROAs and ESG reporting scores deviate from a normal distribution.
According to Table 8, all variance inflation factors (VIF) values are well below 5, with a mean VIF of just 1.20. These results indicate no evidence of multicollinearity among independent variables.
Multicollinearity diagnostics using VIF
| Variable | VIF | 1/VIF |
|---|---|---|
| Size | 1.31 | 0.765153 |
| DE | 1.23 | 0.810212 |
| ROA | 1.07 | 0.938481 |
| Mean VIF | 1.20 | |
Accordingly, the Hausman test was conducted to determine whether the random effects or fixed effects model was more appropriate. The Prob> chi2 value was 0.0000, indicating a statistically significant preference for the fixed effect model. As a result, the fixed effect model was selected for this study. The regression analysis was performed using 36 observations across 12 strongly balanced groups, based on 3 years of data from CSE-listed banks. The Wooldridge test for autocorrelation revealed evidence of first-order autocorrelation, with a p-value of 0.0005. Similarly, the Modified Wald test for groupwise heteroscedasticity produced a p-value of 0.0000, indicating the presence of significant heteroscedasticity across groups. Therefore, all fixed-effects estimations were conducted using robust Standard Errors that correct both heteroscedasticity and autocorrelation, clustered at the bank level. The regression results with robust standard errors are presented in Table 9.
Fixed-effects regression results with robust standard errors
| Variable | Coefficient | Robust standard errors | t-value | p-value |
|---|---|---|---|---|
| Size | 2.413719 | 0.3466406 | 6.96 | 0.000** |
| ROA | 0.2105251 | 0.186777 | 1.13 | 0.284 |
| DE | −0.1027202 | 0.0422253 | −2.43 | 0.033* |
Prob > F; 0.0002; R-Sq; within = 0.6878; between = 0.3768; overall = 0.3167; **p < 0.01; *p < 0.05
The results show a 0.0002 Prob > F value, indicating that the model is statistically significant and demonstrates a good overall fit. Further, the model explains 68.78% of the within-group variation, 37.68% of the between-group variation and 31.67% of the overall variation. Accordingly, 31.67% of the variation in ESG reporting practices is explained by the independent variables included in the model.
More importantly, results indicate that while firm size and profitability (ROA) are positively associated with ESG reporting among CSE-listed banks, leverage (Debt-to-equity ratio) is negatively associated with ESG reporting. Although both size and profitability have positive effects on ESG disclosure, firm size is the only variable that shows a statistically significant positive impact. Moreover, while the relationship between leverage and ESG reporting is negative, this association is also statistically significant.
Hence, this study suggests that larger banks are more likely to engage in higher levels of ESG reporting practices, whereas banks with higher leverage tend to report ESG practices less extensively.
The findings of a positive and significant impact of the size of the bank on ESG reporting practices support the results of previous studies conducted in other countries (Andrikopoulos et al., 2014; Maurya and Singh, 2022; Zakimi and Hamid, 2004). This result aligns closely with the core arguments of legitimacy theory. Accordingly, the rationale behind this relationship may be the high resources, expertise and capabilities to invest in ESG reporting initiatives compared to smaller banks. Furthermore, as suggested by the legitimacy theory, larger banks may use ESG reporting to signal their organizational competence and commitment to meet societal expectations.
The finding of an insignificant impact of profitability on ESG reporting is consistent with the results of Branco and Lima Rodrigues (2008). However, some studies have reported a significant association between profitability and ESG disclosure (Hossain et al., 2018). This finding indicates that achieving legitimacy extends beyond immediate financial benefits for the CSE-listed banks. Further, the ESG reporting of CSE-listed banks is more closely tied to visibility and external pressures, which are more prominent in larger firms. Accordingly, responding to stakeholder expectations, external pressures and proactive risk management through ESG practices may be the reasons for the ESG reporting practices of CSE-listed banks in Sri Lanka. Nevertheless, while stakeholder engagement offers reputational benefits, maintaining the long-term ESG reporting efforts in the absence of direct financial incentives could present a sustainability challenge.
The finding of the significant impact of leverage on ESG reporting is confirmed by the findings of the significant impact of leverage on ESG reporting by Andrikopoulos et al. (2014), and Maurya and Singh (2022). However, while Andrikopoulos et al. found a negative association, Maurya and Singh (2022) reported a significant positive effect. In contrast, the findings of Maama (2021) align more closely with the present study, highlighting a negative relationship between leverage on ESG reporting. This result suggests that highly leveraged firms may have fewer resources or reduced incentives to invest in ESG reporting. From the perspective of legitimacy theory, this implies that financially constrained firms may prioritize financial survival over legitimacy-seeking behaviors like ESG reporting.
5. Summary and implications
“Do the ESG reporting practices of CSE-listed banks reflect the influence of corporate attributes?” This inquiry is particularly relevant given the limited number of studies in the Sri Lankan context and the inconsistent findings reported in international literature.
A key finding of the study is the relatively high level of ESG reporting practices among CSE-listed banks in Sri Lanka. More specifically, high levels of disclosure were observed for environmental and governance aspects, whereas social disclosures were reported at moderate levels. Governance emerged as the aspect that has the highest level of reporting practices. This suggests that CSE-listed banks in Sri Lanka have a clear understanding that the public needs more information on their governance structures to trust their banks. In addition, the study revealed significant variations in the level of ESG reporting practices among CSE-listed banks in Sri Lanka. Accordingly, concerns arise regarding the commitment of some banks to environmental and social responsibility. More importantly, the study found that firm size has a significant positive impact on ESG reporting practices, whereas leverage exerts a significant negative influence. This suggests that CSE-listed banks in Sri Lanka use ESG reporting as a means to demonstrate their organizational capacity and commitment to fulfilling societal expectations. Furthermore, the finding of an insignificant impact of profitability on ESG reporting practices implies that banks prioritize legitimacy over immediate financial gains.
This study theoretically highlights areas of both high and low disclosure levels that warrant particular attention from stakeholders. In addition, the study contributes novel insights to the literature on ESG reporting practices of CSE-listed banks in Sri Lanka, serving as a pioneering investigation focused specifically on the impact of corporate attributes on ESG reporting practices.
More importantly, the study provides valuable insight into the practice of ESG reporting of CSE-listed banks in Sri Lanka. Even though governance and environmental reporting practices are reported at high levels, the moderate level of social disclosure practices suggests that these CSE-listed banks should place greater emphasis on social impact and stakeholder engagement. Specifically, enhanced reporting on employee well-being, community development and responsible business practice is warranted. Failure to address social expectations may result in reputational damage and erosion of public trust in CSE-listed banks. Moreover, an exclusive focus on governance and environmental factors presents an incomplete picture of the banks’ overall sustainability performance, potentially limiting their ability to attract stakeholders who prioritize sustainability.
Furthermore, the public should be encouraged to demand transparency regarding banks’ socially related activities since this study provides evidence of relatively low levels of social disclosures compared to governance and environmental disclosures. Government bodies and other relevant institutions can play a vital role in promoting stakeholders’ awareness and encouraging more balanced decision-making that considers all dimensions of ESG practices.
The finding of significant variations in ESG reporting practices among the banks underscores the need for greater consistency and standardization in reporting frameworks within the Sri Lankan context. Banks that report lower levels of ESG information may face concerns about their commitment to sustainable practices, particularly when peers demonstrate stronger reporting performance. Therefore, it is crucial to address the variations in ESG reporting in maintaining the overall credibility and reputation of the banking sector in Sri Lanka. Given that the Sustainable Banking Initiative, launched by the Sri Lanka Banks’ Association (SLBA) in July 2015, remains active, promoting responsible banking and sustainable economic development, it would be advisable to broaden its scope to more explicitly support ESG reporting practices. Specifically, the SLBA, in collaboration with the Institute of Chartered Accountants of Sri Lanka, should consider developing standardized and cost-effective ESG reporting templates to guide and streamline disclosure practices across the banking sector. Such an initiative would help reduce the reporting burden, particularly for highly leveraged banks with limited financial flexibility. Further, it will support greater consistency, transparency and compliance in ESG disclosures across the sector.
In addition, the findings indicate a low emphasis on the credibility of the provided ESG information since most of the banks do not obtain external assurance for their reported ESG information. This may reduce the impact of reporting ESG information and achieving intended legitimacy over the practice. Therefore, CSE-listed banks should focus on obtaining external assurance over their reported ESG information.
The significant impact of firm size on ESG reporting practices highlights the importance of organizational capacity and resources in driving sustainability initiatives. Accordingly, banks that have more resources and capabilities can show their commitment to stakeholder expectations and legitimacy than banks with fewer resources and capabilities. Therefore, banks with limited resources and capabilities should consider making strategic investments in ESG reporting to remain competitive and uphold their legitimacy within the banking industry in Sri Lanka. Further, to mitigate the negative impact of high leverage on ESG reporting, banks could integrate fundamental ESG metrics into their existing risk management frameworks. This approach would enhance ESG reporting without incurring substantial additional costs.
More importantly, the finding of an insignificant impact of profitability on ESG reporting suggests that financial success does not automatically translate into responsible business conduct. Therefore, stakeholders should avoid relying solely on financial indicators when evaluating a bank’s commitment to sustainability. While ESG and sustainability reporting enhance transparency, it is crucial that CSE-listed banks move beyond disclosure and actively embed sustainable practices into their core business strategies. Genuine integration is essential for maintaining long-term legitimacy and reputation.
6. Limitations of the study and direction of future research
This study focused exclusively on CSE-listed banks in Sri Lanka. Future research can broaden the scope to include all Sri Lankan banks to identify the impact of corporate attributes on ESG reporting practices. Further, this study examined only three corporate attributes, firm size, profitability and leverage, to assess the impact on ESG reporting practices of banks. Future research can extend the scope of this study by incorporating a wide range of corporate attributes and undertaking comparative cross-country analyses to improve the generalizability of findings. Beyond the limitations highlighted in this study, future investigations could also explore the reasons why banks choose not to obtain external assurance for their ESG disclosures. In addition, in-depth case studies of individual banks may offer valuable insights into the internal drivers and challenges that shape ESG reporting practices.
