Environmental Accounting Disclosure and Financial Performance of Listed Manufacturing Companies in Nigeria

Environmental Accounting Disclosure and Financial Performance of Listed Manufacturing Companies in Nigeria

Samson Ojeme SAMUEL., Ayotunde Oladipupo AKINYOSOYE

Department of Accounting, Achievers University, Owo, Ondo State, Nigeria

DOI: https://dx.doi.org/10.47772/IJRISS.2025.906000381

Received: 09 June 2025; Accepted: 18 June 2025; Published: 18 July 2025

ABSTRACT

The study explored the effect of environmental accounting disclosure on the financial performance of listed manufacturing companies in Nigeria. Specifically, the study examined the effects of environmental sustainability, environmental management system, and environmental audit on return on assets and Tobin’s Q between 2014 and 2023. The study adopted ex-post facto research design. The study sample included 40 companies using purposive sampling technique. Secondary source of data was adopted by accessing information from the annual reports of selected companies. Descriptive statistics was employed to reveal the statistical properties of all parameters while panel regression analysis was utilized to test the formulated hypotheses. The study outcomes showed that environmental sustainability has a positive but statistically insignificant effect on return on assets (ROA) and Tobin’s Q; environmental management systems (EMS) had positive insignificant effect ROA, while having a negative but insignificant effect on Tobin’s Q. Environmental audit revealed a significant negative impact on the return on assets and Tobin’s Q. Firm size (control variable) demonstrated a negative significant impact on return on assets and Tobin’s Q of publicly listed manufacturing firms in Nigeria. The study concluded that while environmental reporting is vital for viable business operations, its financial advantages might not be immediately apparent in emerging market scenarios, especially Nigeria. Therefore, the study recommended among others that businesses must ensure that the adoption of EMS is not solely based on regulations but is also customized to enhance operational efficiency and reduce costs.

Keywords: Environmental sustainability, environmental management system, and environmental audit on return on assets and Tobin’s Q

INTRODUCTION

The global concern on environmental consciousness and the push for sustainable economic development are prompting firms to prioritize environmental responsibility. Environmental accounting disclosures emphasize the understanding that current actions influence future possibilities; if resources are depleted now and unavailable for future use, it presents significant risks to upcoming generations, particularly when these resources are finite (Etale & Otuya, 2021). To address environmental challenges linked to manufacturing firms in Nigeria, it is essential for managers to provide transparent information on the environmental impacts of their economic activities. They should disclose and implement eco-friendly policies while engaging host communities and stakeholders to guide future decision-making. Neglecting these responsibilities often results in adverse consequences for host communities and society at large (Solomon, 2020). Positive organizational responses to environmental and societal concerns through accounting and disclosure build trust among investors, host communities, and stakeholders, showcasing transparency and social responsibility. Environmental concerns have become a central focus in industrial and academic discussions, especially among firms engaged in manufacturing, exploration, and production. This area poses significant challenges to organizations, host communities, and society, given the environmental impact of business activities and the need to preserve resources for future generations (Uwalomwa et al., 2018; Umoren & Ukpong, 2022).

In preserving resources for the future generations, there is need for growing global awareness of environmental sustainability and the drives for sustainable economic development have compelled firms to prioritize environmental responsibility. This shift has led to the establishment of several global institutions, such as the National Environmental Standards and Regulations Enforcement Agency (NESREA) that provide guidelines for interactions with the environment. These standards urge businesses to acknowledge their influential role in society and recognize their impact on the physical, social, and economic environments (Ogunkan, 2022). In response, environmental accounting has emerged as a tool to integrate environmental costs and benefits into organizational financial decision-making (Angela & Handoyo, 2021).

Ibrahim and Kurfi (2021) explain that environmental accounting enables firms to identify, measure, and report the environmental effects of their operations, including costs related to pollution control, resource usage, waste management, and compliance with environmental regulations. Unlike traditional accounting, which focuses solely on financial transactions, environmental accounting incorporates both monetary and non-monetary elements related to environmental performance. Accounting standard setters, professional bodies, and government agencies have increasingly encouraged companies to take an active role in environmental preservation and to disclose their environmental activities comprehensively in annual reports or separate environmental disclosures (Etale & Otuya, 2021).

The worrying rate of environmental degradation, particularly in Nigeria, has heightened public concerns about sustainability. Recognizing that organizations operate within society and often generate negative externalities through their business activities has led to the growth of environmental accounting disclosures (Emmanuel & Ifeanyichukwu, 2021). Fasua and Osifo (2020) highlight the environmental consequences of business operations, such as ozone layer depletion, which disrupt ecosystems. These concerns about resource depletion, pollution, and environmental degradation, along with the pursuit of sustainable economic practices, have driven the development of environmental accounting and reporting. As organizations, both in Nigeria and globally, focus more on these issues, the importance of accountability in ensuring sustainability for future generations takes on greater significance.

The harmful environmental impacts of economic activities have gained global attention over the past few decades (Angela & Handoyo, 2021), as unchecked economic growth poses serious threats. Consequently, companies worldwide are exploring ways to minimize their environmental footprints by disclosing quality environmental information (Solanke et al., 2021). This trend has led to significant research into corporate environmental reporting (Rezaee et al., 2020). As a result, organizations are under greater pressure from stakeholders to demonstrate environmental responsibility by addressing environmental concerns in their annual reports and on corporate websites (Owolabi & Solarin, 2020; Ibrahim & Kurfi, 2021). Environmental accounting disclosure is influenced by factors such as environmental sustainability, environmental management systems, and environmental audits (Fan et al., 2020; Al-Shear et al., 2022). Scholars argue that these elements are critical in shaping environmental accounting disclosure (Stubbs & Higgins, 2018). Countries like the United States, Canada, and Australia have shown greater commitment to addressing these factors (Wang & Zhang, 2019).

Previous studies have investigated the impact of environmental accounting disclosures on the financial performance of firms across various countries and sectors in recent years, yielding mixed and inconclusive findings. These results have ranged from positive to negative effects, no significant relationship, and both statistically significant and insignificant influences. Such discrepancies can be attributed to differences in research methodologies, the periods studied, the nature and availability of data, the variables examined, jurisdictional and sectoral contexts, sample compositions, and the diverse metrics used to measure environmental accounting disclosures. These factors have contributed to the varied and often conflicting perspectives.

Owolabi and Solarin (2020), focused on environmental accounting and corporate reporting quality of Nigerian manufacturing companies, while Emmanuel and Ifeanyichukwu (2021) examined environmental accounting disclosure and the financial performance of Nigerian manufacturing firms. Fasua and Osifo (2020) explored environmental accounting and financial performance, and Igbekoyi et al. (2021) studied “the relationship between environmental accounting disclosure and the financial performance of listed multinational firms in Nigeria.  However, an evaluation of these studies reveals divergent findings. Notably, most research has concentrated on financial performance metrics like profitability, return on assets, return on equity, and return on capital employed, without sufficiently addressing the primary independent variable, environmental accounting disclosure. These indices primarily assess performance from an internal perspective, overlooking environmental accounting disclosure factors such as environmental sustainability, environmental management systems, and environmental audits.

To date, few studies have effectively captured the connection between these identified environmental disclosure indices and firm financial performance. This study aims to fill that gap by investigating issues on environmental accounting disclosure indicators, including environmental sustainability, environmental management systems, and environmental audits, and financial performance. Moreover, it distinguishes itself from previous Nigerian studies by focusing on these elements. Hence, this research will examine effect of environmental accounting disclosure (encompassing environmental sustainability, environmental management systems, and environmental audits) on financial performance of the listed manufacturing companies in Nigeria from 2014 to 2023. The choice of the period was to cover and examine long-term effect of environmental accounting disclosure on financial performance. The dependent variable, financial performance, was represented using return on assets (ROA). ROA is used as a proxy for financial performance because it effectively measures a company’s ability to generate profits from its assets, providing a comprehensive indicator of management’s efficiency in utilizing resources to drive profitability. The explanatory variables were environmental sustainability (ES), environmental management systems (EMS), and environmental audits (EA).

LITERATURE REVIEW

Environmental Management Systems and Financial Performance

The concept of an Environmental Management System (EMS) has been defined in various ways. Nyahuna and Doorsamy (2023) define EMS as the procedures and processes within an organization aimed at training personnel, monitoring, summarizing, and reporting environmental performance to stakeholders. They highlight that internal information from EMS is primarily used for pollution control, waste minimization, design, and training, while external information showcases sustainability efforts and enhances the company’s brand. Studies have suggested that a firm’s environmental responsibility is often driven by corporate benefits such as enhanced brand image, competitive advantage, lower production costs, and reduced external costs. Environmental management systems refer to eco-friendly operations designed to protect the environment and reduce damage caused by human and corporate activities. These systems include practices like recycling, eco-design, clean production, and reuse, all aimed at minimizing the costs associated with the manufacturing, distribution, use, and disposal of products (Neeveditah et al., 2017). Pollution control is a key component of EMS. Internationally, pollution control has gained attention, such as the integrated pollution prevention and control regime of 2000, which encourages European firms to invest in sustainable practices, waste treatment, and pollution prevention (Phan et al., 2018). Initiatives aimed at reducing pollution, according to Neeveditah et al. (2017), can improve revenue by appealing to environmentally conscious customers who prefer products with lower environmental impact.

Numerous research efforts have investigated the connection between Environmental Management Systems (EMS) and financial performance in corporations. Nyahuna and Doorsamy (2023) discovered a positive correlation between EMS and earnings per share (EPS) in South African companies, suggesting regulatory measures by the government to improve financial and environmental results. In a similar vein, Mehdijev and Kolli (2022) found that EMS, especially green innovation and ISO14001 certification, had a positive impact on the financial performance of Swedish energy SMEs. Kumar and Dua (2021) discovered a positive correlation between EMS and financial indicators such as ROE and ROA in Indian companies, employing dynamic panel regression. Petera et al. (2021) corroborated these results via managerial views, although the study’s subjectivity restricts its objectivity. Conversely, Fuzi et al. (2019) discovered no direct connection between EMS and financial performance in Malaysian manufacturing, noting the lack of short-term financial benefits. Similarly, Neeveditah et al. (2017) observed mostly trivial relationships in Mauritian companies, with the exception of energy-saving practices, which exhibited a noteworthy positive effect. In general, the findings mainly indicate a favorable relationship between EMS and financial success, although results can differ based on context and particular environmental strategies.

Environmental Audit and Financial Performance

Many studies have investigated the influence of environmental audits and CSR on financial performance in various sectors and nations. Nugrahanti and Lysandra (2024) discovered that environmental audits and CSR initiatives greatly improve the financial results of small and medium manufacturing companies in Indonesia, highlighting the need to incorporate sustainability into financial frameworks. In a similar vein, Erinoso and Oyedokun (2022) studied Nigerian oil and gas companies and found that environmental disclosure notably enhances financial indicators like ROA, PAT, and ROE, while environmental audits primarily impact ROE. Ozoani (2021) found that social and environmental audits are positively linked to the financial performance of Nigerian banks, recommending enhanced audit practices and regulatory norms. Marwa et al. (2020), in their research on French non-financial companies, found that environmental audits and factors like firm size, industry, and the engagement of Big 4 auditors positively influence the quality of voluntary environmental disclosures, whereas the existence of a CSR committee did not demonstrate a notable impact.

Arising from the literature review, the following hypotheses were formulated

H₀₁:  There is no significant effect of environmental sustainability on financial performance of the listed manufacturing companies in Nigeria.

H_O2: There is no significant effect of environmental management system on financial performance of the listed manufacturing companies in Nigeria.

H_O3: There is no significant effect of environmental management system on financial performance of the listed manufacturing companies in Nigeria.

Theoretical Review

The Stakeholders’ Theory

The Stakeholders’ Theory, as propounded by Freeman (1984), is a conceptual framework that emphasizes the importance of managing relationships with stakeholders in order to achieve organizational success. This theory is particularly relevant to the study of environmental accounting disclosure and financial performance of listed manufacturing companies in Nigeria. According to Freeman (1984), stakeholders comprise any group or individual who can affect or be affected by the achievement of an organization’s objectives. These stakeholders include employees, local communities, customers, suppliers, competitors, banks, investors, governments, and non-governmental organizations (NGOs).  The Stakeholders’ Theory posits that all stakeholders have the right to be treated reasonably by the organization, and that the success of the organization is dependent on the support of relevant stakeholders (Ezeokafor & Amahulu, 2019).

In the context of environmental accounting disclosure and financial performance, the Stakeholders’ Theory is particularly relevant. The theory promotes increased environmental awareness, leading companies to extend corporate planning to include non-traditional stakeholders. This, in turn, creates the need for companies to provide environmental accounting information to stakeholders, including those concerned about environmental issues (Feng et al., 2015; Friedman & Miles, 2002). The Stakeholders’ Theory also suggests that companies manage stakeholder relationships by providing voluntary disclosures, such as environmental accounting information. This is because stakeholders have the power to influence companies’ actions, decisions, and policies.  Companies can demonstrate their social and environmental responsibility by providing environmental accounting information which can lead to improved financial performance. Furthermore, the stakeholders’ theory implies that improved environmental performance can lead to a market premium, boosting shareholders’ value. This is because stakeholders, including those concerned about environmental issues, are willing to pay a premium for companies that demonstrate social and environmental responsibility.

The Agency Theory

The Agency Theory, as propounded by Jensen and Meckling (1976), provides a useful framework for understanding the relationship between environmental accounting disclosure and financial performance of listed manufacturing companies in Nigeria. This theory posits that a principal-agent relationship exists between shareholders (principals) and management (agents), whereby management is appointed to run the operations of the company. However, this relationship is often characterized by conflicts of interest, as management may pursue their personal goals rather than those of the shareholders (Garcia & Noguera-Gamez, 2017).

In the context of environmental accounting disclosure, management has discretion over the level of information they disclose, and may use this information to demonstrate to shareholders and stakeholders that they are acting optimally. According to the Agency Theory, companies may voluntarily publish sustainability reports, including environmental accounting information, to reduce agency costs, mitigate information asymmetries, and avoid pressure from regulatory bodies. This is particularly relevant in the context of listed manufacturing companies in Nigeria, where stakeholders, including investors and regulatory bodies, may demand more transparency and accountability in environmental reporting.

The Agency Theory suggests that the provision of environmental accounting information can help to reduce information asymmetries between management and stakeholders, and can also help to mitigate the conflict of interest between management and shareholders. By providing more transparency and accountability in environmental reporting, companies can demonstrate their commitment to social and environmental responsibility, and can also enhance their reputation and financial performance. Furthermore, the Agency Theory implies that the lack of adequate public disclosure by companies can lead to increased risk perception by investors, which can result in undervaluation of shares or demands for higher returns. In the context of listed manufacturing companies in Nigeria, this highlights the importance of environmental accounting disclosure in reducing information asymmetries and enhancing financial performance (Tiamiyu et. al. 2023)

Legitimacy Theory

The Legitimacy Theory, as propounded by Suchman (1995), emphasizes the importance of organizations operating within the bounds of societal norms, values, and expectations to maintain their legitimacy. According to this theory, companies disclose environmental information to legitimize their operations and maintain a positive reputation in the eyes of stakeholders. In the context of environmental accounting disclosure and financial performance, Legitimacy Theory is particularly relevant, as companies seek to demonstrate their commitment to environmental responsibility. Legitimacy Theory posits that companies disclose environmental information to conform to societal expectations and norms. Stakeholders, including investors, customers, and regulatory bodies, expect companies to operate in an environmentally responsible manner. By disclosing environmental information, companies can demonstrate their commitment to environmental responsibility and maintain their legitimacy. This is particularly important for listed manufacturing companies in Nigeria, where environmental concerns are increasingly prominent (Gelb, 2017; Hill, 2020).

The Legitimacy Theory also suggests that companies that demonstrate environmental responsibility are likely to benefit from improved financial performance. By maintaining legitimacy, companies can reduce the risk of regulatory sanctions, improve their reputation, and increase stakeholder trust. This, in turn, can lead to improved financial performance. As Suchman (1995) notes, legitimacy is a crucial resource for organizations, and companies that fail to maintain legitimacy may face significant consequences. This theory provides a valuable perspective on the importance of environmental accounting disclosure in maintaining organizational legitimacy and achieving financial performance (Oyedokun et. al. 2019, Osaloni & Oso 2023).

Figure 2.4: Conceptual model

Source: Researchers’ Model (2025).

Research Gap

Many studies have explored the link between environmental accounting disclosures and financial performance, although the findings have mostly been inconsistent and failed to provide an in-depth analysis of the elements of environmental disclosure. Previous studies, particularly in the Nigerian setting have mainly concentrated on financial performance indicators, without breaking down important aspects of environmental accounting like environmental sustainability, management systems, and audits. Even research that incorporated environmental audits frequently omitted sustainability and management systems from their frameworks. This limited perspective restricts the comprehension of how extensive environmental disclosure affects financial results. To fill this gap, the present study utilizes a combined framework that concurrently analyzes the impacts of environmental sustainability, management systems, and audits on the financial performance of publicly traded manufacturing firms in Nigeria.

METHODS

The paper used an ex-post facto research design because it leverages existing, objective data from annual reports, eliminating manipulation and researcher bias while enabling causal inferences, generalizability, and efficiency in investigating relationships between variables. The population was classified into six sectors in line with the Nigerian Exchange Group consists sectoral classification of firms’ vis-à-vis: Conglomerate, Agriculture, Consumer goods, industrial goods, Natural Resources and oil and gas. The study used 40 manufacturing firms from the entire population of 57 manufacturing firms listed on the Nigeria Exchange Group using purposive sampling technique. Purposive sampling technique was employed to select 40 manufacturing firms based on specific criteria, ensuring that the sample is representative and relevant to the research objectives, thereby enhancing the validity and applicability of the findings. This study employed secondary data from the annual reports of the sampled companies from 2014 to 2023.

Empirical Model Specification

The research developed panel data model by building on existing models to investigate the relationship between different elements within environmental accounting disclosure (EAD) variables and financial performance (FFP) and so to examine the effect of environmental accounting disclosure on financial performance and firm financial performance (FP). The models for this study modify the one used by Erinoso and Oyedokun (2022) in their study on “Environmental Disclosure, Audit and Financial Performance of Listed Oil and Gas Companies in Nigeria”. Whereas their model captures independent variables as: Environmental Disclosure and Environmental Audit while financial performance as dependent variable. This study will modify their model by dropping Environmental Disclosure but adding environmental sustainability, and environmental management systems.  Erinoso and Oyedokun (2022) model is hereby stated:

𝑅𝑂𝐴𝑖=𝛽𝑜 + 𝛽1Env.dis+ 𝛽2audit +μ ——– (5)

𝑅𝑂𝐸𝑖=𝛽𝑜 + 𝛽1Env.dis+ 𝛽2audit +μ ——– (6)

𝑃𝐴𝑇𝑖=𝛽𝑜 + 𝛽1Env.dis+ 𝛽2audit +μ ——– (7)

Where:

ROA = Returns on Asset (Proxy for Financial performance)

ROE= Returns on Equity (Proxy for Financial performance)

PAT= Profit after Tax (Proxy for Financial performance)

Env.dis= Environmental Disclosure

Audit = Environmental Audit

е= еrrоr term

β =Constant

The model was modified in this study because it does not cover environmental sustainability, and environmental management systems. Erinoso and Oyedokun (2022) focused on environmental audit. Therefore, this study represents environmental accounting disclosure with environmental sustainability, environmental management systems and environmental audit. The dependent variable, financial performance, is calculated using return on asset as proxy and Tobin’s Q for each firm under this study. The independent variables were environmental sustainability (ES), environmental management systems (EMS) and environmental audit (EA).  This study modified the model to include Environmental Sustainability (ES), Environmental Management Systems (EMS) and is expressed functionally as:

The model is re-stated as follows:

ROA = f (EAD) …………………………………………. (3.3)

Where ROA = Return on Assets

EAD = Environmental Accounting Disclosure

Decomposing EAD = ES, EMS, EA ……………………….. (3.4)

ROA_it = f (ES_it, EMS_it, EA_it, FSIZE_it )……. …………………… (3.5)

ROA_it = 𝛽₀ + 𝛽₁ES_it + 𝛽₂EMS_it + 𝛽₃EA_it + 𝛽₄FSIZE_it + 𝜇 ……. ….. (3.6)

QT_it = f (ES_it, EMS_it, EA_it, FSIZE_it )……. …………………… (3.5)

QT_it = 𝛽₀ + 𝛽₁ES_it + 𝛽₂EMS_it + 𝛽₃EA_it + 𝛽₄FSIZE_it + 𝜇 ……. ….. (3.6)

it= i’ stands for company while ‘t’ for time ranging from 2014 to 2023.

𝜇 = Stochastic Error Term

β0 = Intercept of the regression line, regarded as constant

β₁,,, β₈ = Coefficients or shape of the independent variables

Apriori Expectation: β1>0,,, β8>0

Table 1 Measurement of Variables

Source: Researcher’s Compilations (2025)

Data Analysis Techniques

The study carried out pre-estimate tests which include descriptive statistics that reveals the statistical properties of all variables to be examined in this study. Secondly, the Pearson’s correlation technique was conducted to ascertain the degree of co-movement among the study variables and test of unit root (stationarity). The study uses multivariate regression model and prepare a pooled/panel data that will cover a relatively short period (10 years). The data for this study will be a pooled data comprising longitudinal hence the need to use a panel data analytical technique. A pooled/panel data consists of the form  where i is the individual dimension and t is the time dimension. A typical panel data linear regression model can be expressed as;

……………………………………………. (3.1)

which assumes a linear relationship between the dependent and independent variables. The study   uses the panel regression (least squares) technique to examine effect of environmental accounting disclosure on financial performance of listed manufacturing firms in Nigeria. The choice of panel regression will be premised on nature of the data that will be involved which is a combination of both Time series and cross-sectional data.

RESULTS

Data were utilized from the annual reports of the quoted manufacturing companies on environmental sustainability, environmental management systems, environmental audit, firm size, return on assets and Tobin’s Q between 2014 and 2023 (10 years). The data generated for the study from the annual reports were analyzed using panel regression estimates.

Descriptive Analysis

Table 2   Results from Descriptive Statistics

Note: ENVS= Environmental Sustainability, ENVA= Environmental Management Systems, ENVA= Environmental Audit, FSZ= Firm Size, ROA= Return on Assets, QT=Tobin’s Q

Source: Author’s Computation, 2025

The descriptive statistics offer perceptions into the dataset’s features, highlighting the distribution, central tendency, and variability of the variables. Regarding the mean values, environmental management systems (EMS) showed an average of 0.1665, indicating that manufacturing firms in Nigeria exhibit a fairly low application of environmental management systems. The average value of 0.1328 for environmental audit (ENVA) suggests that the adoption of environmental auditing practices is not prevalent among companies. Environmental Sustainability revealed an average value of 0.0827, indicating that the companies surveyed typically demonstrate minimal involvement in sustainability efforts. The average size of firms is 7.75, indicating that the listed manufacturing firms are of medium to large scale. The average Tobin’s Q stands at 1.2489, indicating that, on average, companies possess a market value marginally above their book value. The average ROA is 5.16%, indicating that, typically, companies yield a modest return on their assets.

In terms of range (maximum to minimum) analysis, EMS (0.00 to 3.19) indicated that certain companies lack environmental management systems, whereas others exhibit significantly higher levels. ENVA (0.00 to 1.00), as a binary scale (0 or 1), indicates that certain companies perform environmental audits, whereas others do not. ENVS (0.00 to 1.00) likewise suggests that environmental sustainability disclosures are either included or not included. Regarding firm size (6.27 to 10.18), there is significant variation in firm size, suggesting that the sample encompasses both medium-sized and large firms. For QT (-0.43 to 12.69), the negative minimum indicates that certain firms are facing financial difficulties, whereas ROA (-18.04 to 53.96) reveals that the severe negative figure signifies that some firms are enduring considerable losses, while others report very high profits.

Concerning skewness, EMS (3.96), ENVA (2.16), ENVS (3.03), QT (4.09), and ROA (1.67) show positive skewness, suggesting a distribution featuring a longer right tail. This indicates that the majority of companies possess low values for these variables, while a select few exhibit very high values. The only variable of firm size (0.49) showed nearly zero skewness, indicating that it is roughly symmetric. Regarding kurtosis, EMS (26.08), QT (22.72), and ROA (10.31) exhibit notably high kurtosis, suggesting a leptokurtic distribution (sharply peaked with significant outliers). The values of ENVA (5.68) and ENVS (10.18) also indicate distributions that contain some extreme values. Firm size (2.57) exhibited a kurtosis close to 3, suggesting a distribution that is relatively normal. In total, each variable contains 400 observations, providing a sufficiently large sample for statistical evaluation.

Correlation Analysis

Table 3 Correlation Matrix of Independent Variables

Source: Author’s Computation, 2025

The correlation matrix investigates the linear connections between four important variables: EMS (Environmental Management Systems), ENVA (Environmental Audit), ENVS (Environmental Sustainability), and Firm Size. EMS and ENVA (r = 0.0736) indicate a very weak positive correlation exists between the adoption of environmental management systems and the conduct of environmental audits. This indicates that having a formal management system does not always align with the performance of audits. EMS and ENVS (r = 0.3304) indicates a moderate positive correlation between EMS and disclosures related to environmental sustainability. Companies that have improved environmental management systems are slightly more inclined to adopt sustainability practices.

EMS and Firm Size (r = 0.3347) suggests a moderate positive correlation between EMS and the size of the firm. This suggests that bigger companies are more likely to adopt formal environmental management systems, likely because of greater resources or elevated stakeholder expectations. ENVA and ENVS (r = 0.3114) indicated that the moderate positive correlation suggests that companies performing environmental audits are likely to reveal information on environmental sustainability. This might indicate a unified strategy for managing the environment. ENVA and Firm Size (r = 0.3699) indicates a moderate positive correlation between environmental audits and firm size, implying that larger firms tend to have more environmental audits. The correlation between ENVS and Firm Size (r = 0.4753) was the highest in the matrix, suggesting that bigger companies are significantly more inclined to participate in environmental sustainability reporting. It indicates that the size of a company plays a crucial role in promoting environmental sustainability initiatives.

Unit Root Diagnostic

Table 4 Summary of Unit Root Test Results

**5% level of significance

Source: Author’s Computation, 2025

To examine the integration order between the variables, the research employed the Levin, Lin & Chu test. The unit root test was applied to all the variables, considering the null hypothesis as ‘existence of a unit root (i.e., existence of non-stationarity) versus the alternative hypothesis that ‘the series is stationary’. If the absolute probability value is greater than the benchmark probability value (0.05), then the null hypothesis is accepted, indicating that the series is stationary, and vice versa. From the above tables 4.3 and 4.4, it is evident that the unit root test results demonstrate that all variables are stationary in their level form, represented as I (0). This indicates that no type of co-integration exists between the variables. Consequently, regression analysis was adequate for the research.

Hausman Specification Test

The Hausman test aids in selecting between a fixed effects model and a random effects model in panel data analysis, which is the study of data across time. The alternative hypothesis is that the model has fixed effects, whereas the null hypothesis is that random effect is the preferred model. In essence, the tests tend to verify if the unique errors and the model’s regressors are correlated. There is no association between the two, according to the null hypothesis. Therefore, the null hypothesis should be rejected if the p-value is insignificant (less than 0.05).

Table 5   Results of Hausman Specification Test (Panel A)

Source: Researcher’s Computation, (2025)

The result of statistical analysis showed a probability value of 0.4388 which is higher than the benchmark 0.05 level of significance, meaning that the result was not significant and the null hypothesis was accepted. Thus, the result meant that, random effect model was appropriate for the model and it was adopted for the analysis of the study data.

Table 6   Results of Hausman Specification Test (Panel B)

Source: Researcher’s Computation, (2025)

The result of statistical analysis showed a probability value of 0.0015 which is lower than the benchmark 0.05 level of significance, meaning that the result was significant and the null hypothesis was rejected. Thus, the result meant that, fixed effect model was appropriate for the model and it was adopted for the analysis of the study data.

Regression Analysis

Table 7   Regression Result (ROA Model)

Source: Researcher’s Computation, (2025)

Results from table 7 showed that the R-squared (coefficient of determination) for the model based on return on assets was 0.103. The R-squared served as an indicator of the model’s overall fitness, revealing that it could explain 10 per cent of the variation in the dependent variable (ROA) attributable to the exogenous variables, while the additional 90 per cent of the variations in the predicted variable were due to other factors not included in the model. This indicates that the model possesses weak explanatory strength. This outcome was supported by the adjusted R² (coefficient of multiple determination) of 9.4 per cent, representing the total variance that the model could account for.

Table 8   Regression Result (Tobin’s Q Model)

Source: Researcher’s Computation, (2025)

Results from table 8 showed that the R-squared (coefficient of determination) for the model based on return on assets was 0.676. The R-squared served as an indicator of the model’s overall fitness, revealing that it could explain 67.6 per cent of the variation in the dependent variable (Tobin’s Q) attributable to the exogenous variables, while the additional 32.8 per cent of the variations in the predicted variable were due to other factors not included in the model. This indicates that the model possesses significant explanatory strength. This outcome was supported by the adjusted R² (coefficient of multiple determination) of 63.7 per cent, representing the total variance that the model could account for.

Hypothesis One

H₀₁:  There is no significant effect of environmental sustainability on financial performance of the listed manufacturing companies in Nigeria.

From the Table 4.7, environmental sustainability showed positive (0.1561) and insignificant (p=0.8023>0.05) influence on return on assets, suggesting that an increase in environmental sustainability led to an insignificant increase in the return on assets of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental sustainability on financial performance of the listed manufacturing companies in Nigeria” is accepted.  In this light, the study proceeded to examine the panel model two specified with Tobin’s Q

In the Table 4.8, environmental sustainability also indicated positive (0.0119) and insignificant (p=0.7786>0.05) influence on firm value, suggesting that an increase in environmental sustainability led to an insignificant increase in the value of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental sustainability on financial performance of the listed manufacturing companies in Nigeria” is accepted.

Hypothesis Two

H_O2: There is no significant effect of environmental management system on financial performance of the listed manufacturing companies in Nigeria.

From the Table 4.7, environmental management system showed positive (0.1807) and insignificant (p=0.9974>0.05) influence on return on assets, suggesting that an increase in environmental management system led to an insignificant increase in the return on assets of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental management systems on financial performance of the listed manufacturing companies in Nigeria” is accepted.  In this light, the study proceeded to examine the panel model two specified with Tobin’s Q

In the Table 4.8, environmental management system indicated negative (-0.005857) and insignificant (p=0.9086>0.05) influence on firm value, suggesting that an increase in environmental sustainability led to an insignificant decrease in the value of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental management system on financial performance of the listed manufacturing companies in Nigeria” is accepted.

Hypothesis Three

H_O3: There is no significant effect of environment audit on financial performance of the listed manufacturing companies in Nigeria

From the Table 4.7, environmental audit showed negative (-1.066) and significant (p=0.0273<0.05) influence on return on assets, suggesting that an increase in environmental audit led to a significant decrease in the return on assets of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental audit on financial performance of the listed manufacturing companies in Nigeria” is rejected.  In this light, the study proceeded to examine the panel model two specified with Tobin’s Q

In the Table 4.8, environmental audit also indicated negative (-0.2066) and significant (p=0.0000<0.05) influence on firm value, suggesting that an increase in environmental audit led to a significant decrease in the value of listed companies in Nigeria. As a result, the null hypothesis which states “there is no significant effect of environmental audit on financial performance of the listed manufacturing companies in Nigeria” is rejected.

DISCUSSION OF FINDINGS

Objective one shows that environmental sustainability has a positive yet statistically insignificant effect on return on assets (ROA) and Tobin’s Q for publicly traded manufacturing firms in Nigeria. The positive coefficients on ROA indicate that firms implementing environmental sustainability measures generally see improved asset performance and marginally elevated market valuation. This corresponds with the theoretical expectation that sustainable practices can result in improved operational efficiencies, a better reputation, and minimized risk. An increased Tobin’s Q, though not significant, suggests that there could be some acknowledgment in the market of the possible long-term advantages of environmental sustainability, even when the short-term financial gains are weak. The insignificance of the result could mean that in Nigeria’s manufacturing industry, efforts towards environmental sustainability may still be at an early stage. Numerous companies could just be starting to adopt these practices, and the monetary advantages may not be completely apparent during the sample timeframe. Nigerian companies, in particular, frequently encounter limitations in resources and conflicting priorities. This could result in a careful or restricted application of sustainability programs, consequently weakening their influence on financial performance indicators such as ROA and Tobin’s Q. The regulatory framework and investor expectations in Nigeria might vary from those in advanced economies, which have more consistently incentivized sustainability practices. This variation may additionally lead to the negligible results noted in the current study.

Objective two shows that environmental management systems (EMS) positively affect Return on Assets (ROA) without statistical significance, while having a negative but statistically insignificant effect on Tobin’s Q for the manufacturing companies listed in Nigeria. The favorable coefficient on ROA indicates that companies with more advanced EMS may encounter internal operational advantages, like enhanced efficiency or savings in costs. Yet, the absence of statistical significance suggests that this possible advantage is too minor, variable, or influenced by other factors to be consistently observed in the present sample. The negative coefficient suggests that, contrary to what was anticipated, improved EMS may be linked to a decreased market valuation in comparison to book value. Nonetheless, the lack of statistical significance implies that within the Nigerian context, investors may perceive EMS investments more as an expense than a value-adding effort, particularly if these systems are regarded as compliance-oriented instead of strategic. The market might not entirely compensate for environmental efforts because of insufficient awareness or underestimation of the long-term advantages of strong environmental management strategies. The comparatively lenient enforcement of environmental regulations in Nigeria could lead to EMS implementations that are more symbolic than revolutionary, thereby restricting their effect on financial performance. Numerous Nigerian manufacturing companies may be at the beginning phase of incorporating EMS into their fundamental strategies, resulting in ambiguous impacts on both internal performance (ROA) and external valuation (Tobin’s Q). The expense of adopting EMS can be heavy for companies, particularly if the market lacks adequate incentives or if there are wider economic and operational difficulties.

The results contrast in objective three, as the environmental audit revealed a significant negative impact on the return on assets and Tobin’s Q of publicly traded manufacturing firms in Nigeria. The adverse correlation with ROA indicates that firms conducting environmental audits might face significant expenses. These consist of direct costs associated with audit activities, compliance, remediation actions, and possible expenditures for corrective measures. These expenses can decrease net income in comparison to assets. Environmental audits may be started in reaction to current environmental or operational problems. In these situations, the audit itself serves as an indicator that the company is experiencing difficulties that may affect its operational effectiveness and profitability. The immediate financial strain of performing an audit and rectifying its results may not be balanced by short-term operational enhancements, leading to a detrimental effect on ROA. Tobin’s Q, representing the market’s assessment of a company’s worth in relation to its book value, is adversely affected, indicating that investors might perceive the expenses and outcomes of environmental audits as harmful to the firm’s enduring value. The commencement of audits might be perceived by the market as a sign of possible risks, regulatory challenges, or inefficiencies. Companies performing audits may be seen as encountering notable environmental or compliance obstacles. This viewpoint can diminish investor trust, resulting in a decrease in market valuation. Investors may worry that the resources allocated to environmental audits could have been used in other areas to yield greater returns, thus negatively impacting the company’s market valuation.

Concerning the control variable, firm size demonstrated a negative significant impact on return on assets and Tobin’s Q of publicly listed manufacturing firms in Nigeria. This could imply that larger entities may face bureaucratic inefficiencies and managerial laxity, leading to decreased operational efficiency. This may lead to a reduced return on assets since the advantages of scale are surpassed by greater complexity. The assessment of company size, commonly represented by total assets or its logarithm, might indicate a significant asset base that is not being used effectively. Significant asset bases may result in reduced asset turnover and, as a result, a diminished ROA. Larger corporations might possess varied operations that can weaken emphasis on key strengths. The resulting inefficiencies could result in less than ideal returns on the utilized assets. The inverse correlation with Tobin’s Q indicates that investors may view bigger companies as having reduced growth potential or suffering from inefficiencies. Investors might consider larger firms as less nimble when reacting to market shifts, particularly in a fast-changing setting like Nigeria’s manufacturing industry. This might result in a reduced premium on larger companies, which could adversely impact Tobin’s Q. The increased fixed costs and possible operational inefficiencies in big firms may indicate to the market that more assets aren’t leading to equivalent rises in value, thus diminishing market valuation compared to book value.

CONCLUSION

This research highlights the interaction between environmental accounting disclosures and financial performance in publicly traded manufacturing firms in Nigeria. Although environmental sustainability and management systems showed positive but statistically insignificant effects on both ROA and Tobin’s Q, the significant negative effect of environmental audits highlights possible short-term financial expenses linked to rigorous environmental assessments. Additionally, the result indicating that greater firm size negatively impacts financial indicators implies that inefficiencies related to scale and increased compliance demands could obstruct performance. Together, these results indicate that while environmental reporting is vital for viable business operations, its financial advantages might not be immediately apparent in emerging market scenarios, especially Nigeria.

Based on the findings of this study, the following recommendations are proposed:

• Manufacturing companies need to go beyond simple compliance and incorporate environmental sustainability practices into their fundamental business strategies. This involves implementing energy-saving production methods, waste handling systems, and sustainable resource use to enhance long-term financial results.
• Considering the varied impacts of EMS on financial results, businesses must ensure that the adoption of EMS is not solely based on regulations but is also customized to enhance operational efficiency and reduce costs. Investing in green technologies and improving processes can maximize the advantages of EMS.
• Given that environmental audits revealed a notable adverse effect on financial performance, companies ought to adopt cost-efficient auditing methods. Government bodies and industry regulators ought to explore providing incentives like tax reductions or subsidies to alleviate the financial pressures of compliance for companies conducting regular environmental audits.
• The adverse effect of company size on ROA and Tobin’s Q indicates that bigger firms might experience inefficiencies and elevated operational expenses. Businesses ought to embrace lean management techniques, increase operational adaptability, and allocate resources toward technology to boost efficiency and profit.
• Regulatory authorities and policymakers ought to impose clear and uniform environmental disclosure standards while offering incentives to firms that choose to participate in detailed environmental reporting voluntarily. This can aid in fostering transparency, boosting investor trust, and ensuring long-term financial viability.

Suggestion for Further Studies

Future studies should broaden the scope to include businesses other than manufacturing, including finance, telecommunications, and construction, in order to see if comparable trends hold true across various sectors. Subsequent studies should examine variables like corporate governance procedures, legislative modifications, or CSR programs that might modify or mediate the association between environmental disclosures and profits. Wider insights into how various market structures and regulatory frameworks affect the financial effect of environmental accounting disclosures might be obtained by comparing Nigeria to other emerging or established nations.

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