Sustainability Performance and Corporate Financial Stability of Shariah-Compliant Companies in Malaysia: The Moderating Effects of Ownership Concentration

To date, sustainability performance (SUSP) has become a pivotal component that influences the corporate sectors viability, resilience and financial success in the long term. The SUSP, which portrays the corporate sectors’ engagement with the environment and community, has increasingly gained attention among the market regulators and business stakeholders especially since the launching of the UN’s SDGs Agenda in 2015. Strong SUSP contributes towards achievement of triple bottom lines (planet, people and profit) that ultimately leads to the realization of the UN’s 17 SDGs. However, there are conflicting conclusions on the relationship between SUSP and corporate financial stability (CFS) as evidenced by the previous studies. Therefore, this study attempts to examine the association between the SUSP (ESG scores) and the CFS (Altman’s z-score) using the samples of 77 Shariah-compliant public listed companies at Bursa Malaysia. In addition, this study looks into the moderating effects of ownership structure (ownership concentration) on the SUSP-CFS association. The study uses annual unbalanced panel data from 2018 to 2023 and uses the static panel analysis (fixed and random effects) to account for differences within and between companies. Although the results were not statistically significant, the finding reveals that the SUSP (ESG) is positively associated with the CFS. However, the positive association between the SUSP and CFS has weakened when there are ownership concentrations in the companies. The results imply that the corporate sectors’ commitment towards the issues related to the environment, society and governance pay off in terms of enhanced legitimacy and improved reputation, which consequently brings about the CFS. Nevertheless, the SUSP-CFS connection is deteriorated if the substantial shareholders do not approve or support the commitment towards the SUSP. The rational might be that the concentered ownerships have the belief the SUSP comes at the expense of decreased financial performance. This study has policy and managerial implications. The policy makers and regulators need to improve the ESG framework, which is still unclear and not standardized to be implemented by the corporate sectors. In addition, the government has to come up with robust ESG-related incentives to encourage the corporate sectors to undertake the SUSP. Meanwhile, the corporate sectors have to ensure clear sustainability plan and strategy besides convincing the shareholders to render strong support in committing towards SUSP.