How ESG Reporting is Transforming Corporate Financial Reporting: A Conceptual Framework

How ESG Reporting is Transforming Corporate Financial Reporting: A Conceptual Framework

Zulkiffly Baharom

Tunku Puteri Intan Safinaz School of Accountancy (TISSA-UUM), College of Business, Universiti Utara Malaysia, Malaysia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.914MG00148

Received: 31 August 2025; Accepted: 05 September 2025; Published: 06 October 2025

ABSTRACT

Environmental, social, and governance (ESG) reporting has become an essential part of corporate financial reporting and governance. This study develops a conceptual framework to explore how ESG factors influence the quality of corporate financial reports by examining ESG disclosure quality, ESG risk management integration, and engagement in corporate governance. The framework emphasizes stakeholder trust as a key mediator, with firm size and industry serving as moderators that impact these relationships. Based on recent literature and governance theories, the study clarifies how ESG promotes transparency, completeness, and investor confidence in financial disclosures. Practical implications underscore the need for proactive governance structures and robust ESG integration to enhance the quality of reporting and foster stakeholder trust. The framework also highlights challenges such as regulatory differences, data comparability issues, and evolving ESG standards, offering guidance for practitioners and policymakers seeking to support transparent and resilient reporting in a dynamic sustainability environment. Future research should focus on empirical validation through diverse multi-method studies across various institutional settings. This work bridges the gap between ESG and financial reporting research, advancing more accountable and sustainable corporate disclosure practices.

Keywords: ESG reporting, corporate financial reporting, stakeholder trust, risk management integration, corporate governance

INTRODUCTION

ESG reporting has rapidly evolved from a niche aspect of corporate responsibility into a crucial component of corporate financial reporting and governance. Today, incorporating ESG factors into traditional financial disclosures is crucial for companies aiming to meet stakeholder expectations, regulatory standards, and market demands for transparency and sustainability (Ding et al., 2024; Sabauri, 2024). This change reflects increasing awareness that ESG-related risks and opportunities have a direct impact on a company’s financial performance, reputation, and long-term success (Tamasiga et al., 2024; Wang, 2024).

The shift in corporate financial reporting to include ESG considerations presents a complex challenge for organizations. It demands new frameworks for measuring, managing, and disclosing non-financial information alongside financial data, emphasizing the interconnections between financial results and sustainability outcomes (Nicolo’ & Andrades‐Peña, 2024; Rakipi & D’Onza, 2023). Despite the growing importance of ESG disclosures, companies encounter challenges related to data quality, comparability, regulatory differences, and the changing nature of ESG standards (Solaimani, 2024; Yan et al., 2024).

This conceptual paper aims to address these challenges by examining how ESG reporting is transforming corporate financial reporting, identifying key trends, challenges, and opportunities. Building on established governance theories and recent literature, this study develops a theoretical framework that reflects the multidimensional nature of ESG integration and its implications for corporate disclosure practices. This approach offers both academic insights and practical guidance for companies seeking to enhance transparency, accountability, and stakeholder trust in the evolving reporting landscape (Gherai et al., 2024; Ahmad et al., 2023).

This study helps bridge the gap between ESG and financial reporting research, highlighting key mechanisms through which ESG influences the evolution of corporate reporting. It also emphasizes the strategic importance of internal auditing and governance functions in supporting adequate ESG disclosure, risk management, and sustainable value creation (Fernandez et al., 2025; Sabauri, 2024). Ultimately, this study lays a foundation for future empirical research and provides actionable insights for practitioners navigating the fast-changing landscape of corporate reporting.

LITERATURE REVIEW

ESG and Company Financial Reporting: Overview

ESG factors have become essential considerations not only for sustainability but also for corporate financial reporting. Increasingly, investors and regulators expect companies to include ESG information alongside traditional financial data to give a complete view of corporate value and risk (Tamasiga et al., 2024; Wang, 2024). ESG disclosures cover non-financial metrics related to environmental impact, social responsibility, and governance practices that significantly influence financial performance and long-term shareholder value (Nicolo’ & Andrades‐Peña, 2024; Solaimani, 2024). This shift represents a move from separate ESG reporting to integrated frameworks that combine financial and sustainability information, improving transparency and relevance for stakeholders.

Trends in ESG Financial Disclosure

Current trends indicate an increase in regulatory pressure and the adoption of standardized ESG reporting frameworks, such as those proposed by the International Sustainability Standards Board (ISSB) and the Task Force on Climate-related Financial Disclosures (TCFD) (Rakipi & D’Onza, 2023). Companies are also increasingly using key performance indicators (KPIs) and data analytics to measure ESG impacts and link them to financial results (Yan et al., 2024). However, the absence of universal ESG metrics and challenges in comparability still pose barriers to consistent financial reporting, highlighting the need for further refinement and harmonization of ESG standards (Miao, 2024).

Impact of ESG on Financial Reporting and Performance

Research indicates a strong correlation between solid ESG practices and improved financial outcomes, resulting from enhanced risk management, operational efficiency, and benefits to reputation (Tamasiga et al., 2024; Ahmad et al., 2023). Companies with well-integrated ESG reporting often gain increased investor confidence and easier access to capital (Wang, 2024). However, challenges remain, such as how ESG-related assets and liabilities are accounted for, the valuation of intangible ESG factors, and ensuring the accuracy of ESG information in financial statements (Nicolo’ & Andrades‐Peña, 2024; Solaimani, 2024).

Challenges in ESG and Financial Reporting Integration

Integrating ESG information into company financial reports is complicated due to differences in data quality, changing regulations, and diverse stakeholder expectations (Yan et al., 2024). Disclosures often lack consistency and comparability across industries and regions, making it harder for analysts and investors to make informed decisions (Rakipi & D’Onza, 2023). Additionally, coordinating ESG reporting schedules and methods with financial reporting cycles remains a continual operational challenge (Miao, 2024).

Opportunities for Enhanced Financial Reporting

Despite challenges, integrating ESG into financial reporting presents opportunities to enhance corporate accountability, risk transparency, and long-term value creation (Fernandez et al., 2025). Advances in data technology and reporting standards are enabling companies to enhance the accuracy of ESG data and integrate sustainability into their financial narratives (Solaimani, 2024). This development supports a more comprehensive understanding of corporate performance and resilience in the face of environmental and social risks.

UNDERPINNING THEORIES

The integration of ESG factors into corporate financial reporting is supported by several key governance theories that explain how organizations respond to stakeholder expectations, regulatory pressures, and sustainability demands. This study primarily draws on Agency Theory, Stakeholder Theory, and Institutional Theory to examine the role of ESG in financial reporting.

Agency Theory

Agency theory explains the relationship between principals (shareholders) and agents (managers), emphasizing the conflicts caused by differing objectives and information asymmetries (Moloi & Marwala, 2020). In the realm of ESG and financial reporting, agency conflicts become more pronounced as managers try to balance short-term financial gains with long-term environmental and social responsibilities valued by stakeholders (Yeh et al., 2023). ESG disclosures serve as tools to close information gaps and align managerial efforts with the interests of shareholders and society, thereby fostering transparency and accountability in financial reports (Sabauri, 2024).

Stakeholder Theory

Expanding beyond shareholder primacy, stakeholder theory asserts that organizations have responsibilities toward a broad range of stakeholders, including employees, customers, regulators, and communities (Bridoux & Stoelhorst, 2022). ESG governance aligns closely with this framework by requiring companies to incorporate ESG considerations into their reporting, thereby addressing the diverse interests of stakeholders (Wang, 2024). Integrating ESG into financial disclosures enables firms to demonstrate responsiveness to stakeholder expectations, enhance their legitimacy, and foster trust, ultimately improving their corporate reputation and financial performance (Yan et al., 2024).

Institutional Theory

Institutional theory explains how organizations respond to external pressures from regulatory agencies, industry standards, and societal expectations in order to gain legitimacy and stability (Ahmad et al., 2023). The increasing focus on ESG in financial reporting reflects these institutional pressures, prompting companies to adopt ESG disclosure practices in response to changing regulations and stakeholder demands (Solaimani, 2024). This theory helps explain how ESG-related financial reporting evolves through imitation, compliance, and adaptation, thereby preserving organizational legitimacy in a competitive market (Rakipi & D’Onza, 2023).

Together, these theories provide a strong conceptual foundation for analyzing how ESG factors influence corporate financial reporting practices. They emphasize the diverse motivations behind ESG integration, from resolving principal-agent conflicts and meeting stakeholder demands to responding to institutional pressures, thereby explaining the drivers, challenges, and strategic opportunities in ESG financial disclosures.

METHODOLOGY

This study employs a conceptual research design to develop a theoretical framework that explains how ESG factors are integrated into company financial reporting. Instead of empirical testing, it focuses on synthesizing existing knowledge through a thorough review and critical analysis of peer-reviewed academic literature and industry reports published mainly between 2018 and 2025. This method helps identify key themes, trends, challenges, and theoretical insights related to the integration of ESG and financial reporting.

A systematic literature review was conducted using major databases, including Scopus, Web of Science, and Google Scholar. The search focused on scholarly articles, conceptual papers, and relevant industry frameworks related to ESG reporting, sustainability disclosure, corporate financial reporting, and governance. Inclusion criteria prioritized sources that offered theoretical foundations, empirical results, or practical insights into the links between ESG and financial reporting. Special attention was given to studies addressing regulatory developments, harmonization of reporting standards, and the role of governance mechanisms.

The reviewed literature was critically assessed for its relevance to theory, empirical strength, and consistency with the study’s goal of developing a conceptual framework. This involved integrating different viewpoints to identify the factors that drive, hinder, or facilitate effective ESG integration into financial disclosures. Theoretical foundations were based on Agency Theory, Stakeholder Theory, and Institutional Theory, which help explain organizational behavior in the context of ESG reporting.

This methodological approach ensures that the resulting conceptual framework is both theoretically sound and practically applicable, providing a clear foundation for future empirical research and offering practical guidance for practitioners and regulators. By emphasizing recent and authoritative literature, the study reflects the evolving landscape of ESG and company financial reporting as of 2025.

CONCEPTUAL FRAMEWORK

This study develops a conceptual framework to clarify the mechanisms by which ESG reporting transforms the quality of corporate financial reporting. Drawing on current literature and governance theory, the framework identifies three key independent variables that drive this transformation: ESG Disclosure Quality, ESG Integration in Risk Management, and Corporate Governance Engagement.

ESG Disclosure Quality encompasses the comprehensiveness, accuracy, and reliability of ESG information disclosed by firms (Yan et al., 2024). This variable reflects how well organizations communicate their environmental, social, and governance practices to stakeholders through transparent and credible reporting mechanisms.

ESG Integration in Risk Management reflects the extent to which ESG risks are thoroughly embedded in enterprise risk management frameworks (Miao, 2024). This dimension captures the extent to which organizations identify, assess, and manage ESG-related risks as integral components of their overall risk management strategies.

Corporate Governance Engagement refers to the active oversight and involvement of boards and audit committees in the development and reporting of ESG strategies (Fernandez et al., 2025; Ding et al., 2024). This variable highlights the critical role of governance structures in ensuring the effective implementation and disclosure of ESG.

The dependent variable in this framework is the quality of corporate financial reporting, which encompasses multiple dimensions including transparency, completeness, timeliness, and investor confidence (Tamasiga et al., 2024; Nicolo & Andrades-Peña, 2024). These dimensions represent how financial reporting evolves to integrate ESG considerations, moving beyond mere compliance toward embracing long-term value creation and comprehensive risk disclosure.

Stakeholder trust and confidence are positioned as crucial mediating variables in the framework. When organizations demonstrate reliable ESG practices and effectively integrate them into governance and risk management processes, stakeholders, including investors, regulators, and the broader community, develop increased trust in the organization’s financial disclosures (Rakipi & D’Onza, 2023). This enhanced trust serves as the mechanism through which effective ESG practices translate into higher-quality financial reporting outcomes.

The framework also incorporates firm size and industry as moderating variables that influence the strength of these relationships. Larger organizations typically possess greater resources and face more intense public scrutiny, which can amplify the effects of ESG practices on financial reporting quality. Similarly, companies operating in environmentally sensitive industries are subject to heightened regulatory and stakeholder expectations, which may intensify the influence of ESG factors on their reporting practices (Nicoló & Andrades-Peña, 2024).

This comprehensive framework integrates multiple layers of influence, capturing both the direct pathways through which ESG reporting shapes financial disclosures and the contextual conditions under which these effects are most pronounced. By acknowledging the mediating role of stakeholder trust and the moderating effects of organizational characteristics, the framework provides a nuanced understanding of how ESG factors contribute to enhanced financial reporting quality in contemporary corporate environments.

Figure 1: Conceptual Framework: The Influence of ESG on Quality of Corporate Financial Reporting

Figure 1 illustrates the proposed conceptual framework, highlighting the direct and indirect relationships between the key constructs that influence the quality of corporate financial reporting. The framework illustrates how the three independent variables influence stakeholder trust, thereby improving reporting quality, while also demonstrating how firm size and industry characteristics moderate these relationships.

The framework’s design acknowledges that the transformation of corporate financial reporting through ESG integration is not a simple linear process but rather involves complex interactions among multiple factors. This comprehensive approach offers valuable guidance for both researchers seeking to empirically understand these relationships and practitioners aiming to optimize their ESG integration strategies to enhance financial reporting quality.

IMPLICATIONS AND CONTRIBUTIONS

The proposed conceptual framework offers valuable theoretical and practical insights into how ESG reporting can enhance corporate financial reporting. By incorporating ESG disclosure quality, risk management integration, and corporate governance involvement as key factors, the framework highlights the primary ways that financial reporting quality can be enhanced in a world increasingly focused on sustainability.

Theoretically, this study contributes by closing gaps in the literature connecting ESG practices with financial reporting outcomes. It highlights the mediating role of stakeholder trust and confidence, demonstrating how credible ESG disclosures lead to more favorable perceptions of corporate transparency and reliability (Rakipi & D’Onza, 2023). Additionally, by including firm size and industry as moderators, the framework acknowledges contextual differences that influence ESG-financial reporting relationships, thereby encouraging detailed empirical research (Nicolo’ & Andrades-Peña, 2024). This enhanced theoretical perspective supports broader investigations of ESG integration in various corporate contexts.

Practically, the framework provides corporate boards, audit committees, and finance professionals with actionable insights to leverage ESG initiatives and improve the quality of financial disclosures. Engaging governance structures more actively in ESG oversight helps align reporting practices with stakeholder expectations and regulatory requirements, thereby reducing information gaps and boosting investor confidence (Fernandez et al., 2025; Ding et al., 2024). Furthermore, understanding the moderating effects of firm size and industry enables organizations to customize their ESG strategies, thereby increasing reporting effectiveness within their specific contexts.

The framework also emphasizes the importance of integrating ESG risk considerations into enterprise risk management systems, ultimately supporting more comprehensive and future-oriented reporting practices (Miao, 2024). Together, these contributions lay a foundation for practitioners to develop robust ESG disclosure and governance strategies that significantly enhance the quality and relevance of corporate financial reporting in a rapidly changing global environment.

FUTURE RESEARCH DIRECTIONS AND CONCLUSION

This conceptual study provides a foundational framework that demonstrates how ESG reporting impacts the quality of corporate financial reporting through its influence on disclosure practices, risk management, and governance. While the framework offers valuable insights, several directions for future research emerge.

First, validating the proposed relationships empirically is crucial. Quantitative studies using surveys, archival data, or mixed methods could assess the strength and significance of ESG disclosure quality, risk management integration, and governance engagement on financial reporting quality, including the mediating role of stakeholder trust and the moderating effects of firm size and industry contexts. Longitudinal research designs would be beneficial to track ESG reporting changes over time and their impact on financial transparency and investor confidence.

Second, comparative studies across various geographic regions and regulatory environments could improve understanding of how institutional factors influence the relationship between ESG and financial reporting. Emerging markets and developed economies might present different challenges and opportunities, affecting the relevance and broader application of the framework.

Third, qualitative research exploring organizational practices, managerial perceptions, and stakeholder responses would deepen our understanding of the mechanisms driving ESG integration within financial reporting. Case studies or interviews can reveal contextual nuances, barriers, and success factors that are not easily captured through quantitative methods.

In conclusion, this study advances theoretical understanding by incorporating key ESG-related drivers and contextual factors that influence the quality of corporate financial reporting. It provides practitioners with a comprehensive view to develop and apply ESG strategies that improve transparency and stakeholder trust. As corporate reporting continues to evolve in response to sustainability demands, future empirical and qualitative research is essential for refining conceptual frameworks and promoting more accountable, transparent, and resilient financial reporting systems.

CONCLUSION

This study has developed a comprehensive conceptual framework that demonstrates how ESG reporting is transforming corporate financial reporting by incorporating ESG disclosure quality, risk management practices, and corporate governance involvement. The framework highlights the crucial role of stakeholder trust as a mediator, emphasizing the moderating effects of firm size and industry settings. These connected factors clarify how ESG factors influence the quality, transparency, and trustworthiness of financial reporting in modern organizations.

As companies face growing expectations from investors, regulators, and broader societal groups to show sustainability accountability, integrating ESG into financial disclosures is no longer optional but crucial for long-term value creation. The framework offers practical insights for practitioners to enhance reporting methods, mitigate risks, and foster stakeholder trust through proactive governance and reliable ESG disclosures.

While establishing a solid theoretical foundation, this study also encourages future empirical research to validate and refine the framework across various sectors and institutional contexts. The evolving nature of ESG standards and regulatory requirements necessitates ongoing scholarly attention to understand how the integration of ESG and financial reporting develops and impacts corporate performance.

Ultimately, this research helps bridge the gap between sustainability and financial reporting, promoting more socially responsible, transparent, and resilient business practices that meet the needs of a rapidly changing global environment.

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