Does ESG Disclosure Reduce Firm Risk in Saudi Arabia? Dynamic System GMM Evidence from Tadawul-Listed Companies

Abstract

This study examines whether environmental, social, and governance (ESG) disclosure reduces firm risk among 73 non-financial Tadawul-listed companies in Saudi Arabia over 2015–2024, with particular attention to the moderating role of board independence. Firm risk is measured as the annualized standard deviation of daily stock returns, and ESG disclosure is captured by the LSEG (Refinitiv) ESG score. A two-way (firm and year) fixed-effects model with Windmeijer-consistent inference is used as the primary specification to identify the within-firm association between ESG disclosure and firm risk, while a two-step dynamic System Generalized Method of Moments (System GMM) estimator is reported as a robustness approach to address dynamic persistence, reverse causality, and unobserved heterogeneity. The findings indicate that the effect of ESG disclosure on firm risk is conditional rather than uniform. In the fixed-effects baseline, ESG disclosure is associated with lower firm risk, and this conditional pattern is confirmed under System GMM: once the interaction with board independence is introduced, the direct effect is no longer risk-reducing; instead, the negative and highly significant interaction term shows that ESG disclosure lowers firm risk mainly when board independence is high. Leverage consistently raises firm risk, while profitability reduces it in the moderation model. The study recommends that regulators pair ESG reporting requirements with stricter board-independence enforcement, that firms treat governance reform as a complement to sustainability reporting rather than a substitute, and that investors interpret ESG disclosure jointly with board structure when assessing firm risk. The study contributes to stakeholder, signaling, and agency theory by showing that ESG disclosure operates as a governance-dependent risk-management mechanism rather than an unconditional one.