Abstract

Objectives: This study examines the dynamic relationship between environmental reporting and financial performance within the manufacturing sector, aligning with United Nations Sustainable Development Goal 12 (Responsible Consumption and Production). Specifically, it aims to identify latent performance patterns and transitions between environmental disclosure and corporate profitability over time. Methods: Panel data from sixty-three publicly listed manufacturing firms in Saudi Arabia, covering the years 2020 to 2023, are analyzed. Hidden Markov Models (HMMs) are utilized to identify latent performance states and monitor transitions in environmental disclosure and return on assets (ROA). Firms are classified by environmental impact level, and a customized environmental disclosure index is developed through content analysis of annual reports. Results: The analysis identifies four hidden states, ranging from high sustainability and high financial performance to low sustainability and low financial performance. Notably, the findings indicate strong persistence within states and gradual transitions between performance states. Larger, older firms and those in high-impact industries are more likely to attain and maintain superior sustainability and financial performance states. Conclusions: This study supports stakeholders, legitimacy, and signaling theories by showing that transparent environmental disclosure enhances corporate reputation, investor confidence, and financial resilience. It introduces a new framework that advances sustainability accounting and guides managers, regulators, and investors in integrating environmental factors into decisions.