The effect of board gender diversity, firm size and leverage on financial performance: A mediating effect of ESG decoupling

Abstract

This study develops a Malaysia-focused framework on firm size, leverage and board independence shape the ESG decoupling and focus on examples decoupling mediate the financial performance among Malaysian public listed companies. ESG decoupling refers to the gap between symbolic ESG disclosure and substantive ESG performance. The issue is timely because Malaysia's sustainability reporting environment is moving toward more structured and comparable disclosure under the National Sustainability Reporting Framework, which adopts IFRS S1 and IFRS S2 as baseline standards for sustainability reporting. At the same time, the Malaysian corporate governance environment continues to emphasize board composition, including board gender diversity and independent board oversight. Within this setting, the paper proposes firm size, leverage and board independence as the independent variables, ESG decoupling as the mediating variable, and financial performance as the dependent variable measured exclusively by Tobin's Q. Drawing on legitimacy theory, agency theory, stakeholder theory and signalling theory, the study argues that firm visibility, financial pressure and board monitoring affect the extent to which ESG disclosures correspond with actual ESG performance. ESG decoupling is expected to reduce Tobin's Q because symbolic sustainability disclosure weakens investor trust, increases information risk and exposes firms to reputational and regulatory costs. The study also explains how ESG decoupling can be operationalized using company annual reports by comparing an ESG disclosure score with an ESG performance score. The proposed framework contributes to corporate governance and sustainable finance literature by positioning ESG decoupling as the mechanism through which firm and board and company characteristics influence market-based firm value in Malaysia's emerging market.