Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE IMPACT OF SUSTAINABILITY PRACTICES ON FINANCIAL PERFORMANCE: EMPIRICAL EVIDENCE FROM SWEDEN DO THI NGOC ANH ID No: 19046135 Intake 3 Supervisor: Assoc. Pham Duc Cuong September 2020 17014129079061000000 Executive summary Sustainability issues are one of the fields that managers and investors have taken detailed consideration when handling their operations and activities. Despite a number of empirical findings on the effects of sustainable development on financial efficiency, the results are still inconclusive due to numerous specific factors and conditions of each research scope. In our globalized world, every business is connected with one another in the complex web of cross-cultural interaction and influences the lives of people in different ways.
Therefore, sustainability is never a solo mission. This study aims at empirically exploring the influence of green initiatives on the financial results of 116 listed Sweden companies in the year 2019. Furthermore, the thesis contributes by identifying opportunities and providing recommendations for companies, organizations, and authorities regarding the implementation of sustainability strategies. With the support of theories and previous research studies, a positive relationship is supposed between sustainability performance and financial success.
The findings indicate a positive relationship between corporate sustainability and financial performance that is measured by earnings yield, return on asset, return on equity and return on capital employed. When it comes to Tobin’s Q, which is a market- based financial measure, the result is inconclusive. Finally, it is recommendable for firms to be engaged in Dow Jones Sustainability Index, prepare their sustainability report in accordance with GRI Standards, improve their sustainable growth rate, as well as keep a high position in the corporate social responsibility ranking. There are some limitations and room for further study.
Reasonably, the matter needs to be handled in a mutual effort of different countries and to be approach from an i international perspective. There is also a concern about newer data when addressing environmental problems since sustainability concept is considered as a hot topic in recent research forums. Besides, further studies should take into account the factor of business nature of each company, represented by such variables as sales, number of employees, size of the company, etc. Each business has its own ability and approach to placing an emphasis on sustainability, as well as different extents of pressure to taking sustainable responsibility.
ii Acknowledgements First and foremost, I would like to express my deepest gratitude to my respectful supervisor, Assoc. Pham Duc Cuong, for his supportive advice and constructive comments during the conduction process of the dissertation. Thanks to his practical expertise and hands-on experience in multiple research aspects, I was able to explore the highlights of the problem mentioned in the thesis and reach new heights in my academic pursuits. He was always willing to lend an ear to any problems or issues I may have had.
I have learned so much under his mentorship and I could not be more grateful to have him as my supervisor. Furthermore, I have also benefitted from discussions with Mr. Dang Tien Dat and Ms. Tran Thao Linh.
I must express my sincere appreciation and gratitude to these people who have given so much of their time and boundless enthusiasm to helping me in my research. Indeed they are a source of continued support throughout the process. Last but not least, I want to thank all my family members and friends who stood by my side during my journey. As always, they have been an unfailing source of support – both emotional and practical – throughout this process.
Without them, I could not have accomplished all the things I have done for the last few months. iii Table of contents Executive summary. iii Table of contents. iv List of tables.
1 List of figures. Research aims and objectives. Introduction to research methodology. Literature review and theoretical framework.
Defining sustainability and sustainable development. The relationship between sustainability and financial performance. The necessity and importance of sustainability practices. Current challenges and opportunities for firms regarding sustainability practices.
Financial performance measurement. Sample and data collection. Formulation of hypotheses. Empirical results and analysis.
Correlation between variables. Conclusions and recommendations. Limitations of research. Recommendations for further research.
94 v List of tables Table 1.1: Structure of the dissertation .1: Descriptive statistics for the sample .2: Test for autocorrelation.3: Correlation between social responsibility and financial performance.4: Test for heteroskedasticity .5: Regression Coefficients after Correcting Heteroskedasticity for models 1, 2, 3, and 4.6: Verification of models’ hypotheses. 72 1 List of figures Figure 2.1: Interplay of the environmental, economic, and social aspects of sustainability.2: Corporate Sustainability Priorities in 2025, 2017 (Percentage of all respondents) .3: Types of organizations involved in making the greatest impact on advancing sustainability over the next 10 years, 2017 (Percentage of all respondents) .4: Interest in sustainable products is growing over time (% of global internet users who say they would pay more for sustainable/eco-friendly products).5: Global biofuels growth outlook. Research background The world has been entering into the Fourth Industrial Revolution and Industry 4.0, which is a new production revolution associated closely with the fusion of the digital, biological and physical worlds, as well as the growing utilization of such unprecedented technological breakthroughs as cloud computing, 3D printing, sensor technology, artificial intelligence, block chain, advanced wireless technologies, etc. Much of what would be considered to be in a scientific fiction few decades ago is now driving the globe toward the new era.
Many people foresee that it will be serving more meaningful purposes: extending lifespans, ameliorating healthcare practice, alleviating poverty, and more. Notwithstanding, some see darker sides as it can usher in a period of economic disruption with uncertain socio-economic and environmental consequences for countries. Along with climate change, which dictates the need for global transformations in the economy, financial and energy crises have also necessitated the search for new models of economic growth oriented towards sustainable development. The development of mankind requires a transition to new principles and types of economic activity related to the production, distribution and consumption of goods and services that would enhance human well-being in the long run, without exposing future generations to significant environmental risks in an unfavorable condition.
To deal with the consequences, human beings have been trying to find new ways of revolutionizing the economy. In the decades following World War II, development was defined primarily in economic terms and measured by growth in countries’ gross domestic product (GDP) and per capita incomes (Harrison, 1996). Nevertheless, several authors in the late 1980s and early 1990s proposed a different theory 3 about what constituted development, conceptualized as “human development” (Desai, 1991; Streeten, 1994; ul Haq, 1995). Accordingly, development needs to be about human well-being, expanding people’s choices and freedom.
Though important, economic growth is not sufficient for full development. Over the past three decades, in parallel with human development, another powerful concept - sustainable development - also attracts a great deal of attention from scholars and authors on the discussion of new economic models (Khasanov, 2016). These two mutually enrich each other and gradually confirms the idea that if not being sustainable, the development path cannot claim the title of human development. There may exists some difference in theoretical approaches, however, human being is at the center of these concepts.
For years, responding to environmental issues has always been a no-win proposition for businesses (Walley and Whitehead, 1994). In this new world, both the business and the environment can be winning. Put it another way, going green is no longer an expense of doing business, as it is a catalyst for renovation and innovation, new market opportunities and the wealth maximization. As stated by UN Secretary- General António Guterres at opening ceremony of UN Climate Change Conference COP25 on 2 December 2019, “a green economy is not one to be feared but an opportunity to be embraced, one that can advance our efforts to achieve all the Sustainable Development Goals.” Needless to say, sustainability is an emerging and rapidly growing interdisciplinary field of research, closely related to the economic implications of environmental issues for different industries and firms, and the need of transition to a sustainable economy.
And yet there is no denying that the practices of sustainable development have triggered transformation in a wide range of industries. Keeping this in regard, 4 many companies are already aware of the significance of latest trends and are making use of go-green business models with integrated corporate social responsibilities, while larger, more established corporations are moving towards the production of more environmentally friendly and safe goods to meet social demands. As a young person, I demonstrate a strongly growing interest in sustainable growth, as I believe that a sustainable society would make the world a better place for us human beings. At the present, government officials and leaders are aware of several factors that have influence on sustainable economy efficiency, to name a few, globalization, urbanization, per capita GDP, foreign direct investment (FDI), science and technology, research and development (R&D) expenditure, pollution control investment, poverty rate, and more.
However, it is not an easy task determining the weight of these factors since it greatly depends on specific conditions and contexts of each organization, country and region. For instance, Chinese sustainable economy may rely on the amount of investment in fintech (financial technology) solutions (Daxueconsulting.com, 2018), while sustainability in African countries is greatly dependent on the level of poverty reduction (Adeleke and Josue, 2019). Therefore, a research on a broader scale should be conducted, which can apply to a scope consisting of numerous firms from a nation. Apart from some problems that require solutions customized for each country, there are, by all means, issues of common concern that governments and authorities might discuss and work together to resolve.
So exploring the global sustainability management could have vital practice significance. My research is inspired by the idea of Mercedes Rodriguez-Fernandez in the article “Social responsibility and financial performance: The role of good corporate governance” published in 2015. This theoretical empirical study is to explore the 5 bidirectional connection between corporate social responsibility (CSR) and financial performance (FP) in Spanish listed companies. The models proposed have been verified with the data on 121 Spanish companies listed on the Madrid Stock Exchange in the year 2009.
Hereby, the author has concluded the significance of corporate social responsibility on company financial performance, proving the positive relationship between CSR and FP in both directions. To specify, the increase of Social Behavior Index would amount to the improvement of business financial strength, and withal, firms enjoying a greater financial position usually implement green initiatives and extensive sustainable practices in their business. The conclusion is feasible in many senses since it encourages firms to allocate their financial resources for CSR policies, as well as to evaluate how their CSR investments can call forth satisfactory financial performance. While some findings and insights have been obtained from this exploratory analysis, there exist some limitations and room for further study.
In this case, the author only utilizes empirical data from Spanish enterprises. It leads to the fact that the research results - policy and implications - may not be generalized enough for other countries or regions. As long as there is agreement that sustainability is a global issue, everyone on the planet is affected by the decision of individual countries. This suggests that the matter needs to be tackled in a combining effort of countries in the world and to be approach from an international perspective.
There are also questions about more updated data when addressing environmental problems since sustainability term has also its secured position as a hot topic in recent research works, especially when the awareness on environmental management and sustainable development has been increasingly raising day by day all-round the globe.