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The impact of Sustainability performance on the Financial Performance of a Business: The context of selected Australian firms

Aims and background

The research aims to examine the widely studied but yet to be established relationship between sustainability and financial performance with a special focus on selected companies in Australian energy and financial services industries. Trust and corporate image are two known outcomes of Corporate Social Responsibility (CSR) or sustainability. However, different studies performed on the correlation between sustainability and financial performance record different levels of significance, hence giving mixed results. The objectives of this study is to establish whether sustainability performance of a firm affects its financial performance by examining selected firms in Australia’s energy and finance industries, whether there are sustainability activities (or types/activities) with greater financial impact than others, and if the size of the firm affects this relationship. For this research, the terms sustainability and CSR are used interchangeably. At the end of the study, recommendations will be given on the determinants of this relationship including the impact of the size of the organization, aspects of CSR that contribute to financial performance, the most appropriate methodology for measuring this relationship and implication for chief financial officers (CFOs) that have been tasked with determining whether it will pay (financially) to adopt sustainability initiatives.

Literature review

McPeak and Huizi (2012) examined the relationship between CSR and financial performance which comprised 56 US companies with Dow Jones Sustainability Index membership. The report showed that 66.7% of the companies examined went beyond market expectations in the five-year period between 2002 and 2007. In addition, they surpassed the S&P 500 in return on equity (ROE), indicating a connection between the efficient CSR efforts management and financial performance. The authors sought to explore existence of more evidence to ascertain whether the trend will persist after 2008 using ROE and Jensen’s Alpha to measure performance in the four-year period between 2007 and 2011, and compare results with the S&P 500. There was a positive relationship between sustainability efforts and financial performance given the outcome of percentage change in stock price, Jensen’s Alpha and proportional change of ROE to S&P 500 average. Vitezić et al. (2012) and Mikołajek-Gocejna (2016) reported similar findings where companies with larger investments and deep involvement in CSR activities are likely to record a steadier and rising stock price, realize excess returns and bring in a higher return on shareholder’s equity.

Kurapatskie and Darnall (2013) affirm that different sustainability activities affect financial performance differently. While some may have negative effects, others have positive or less significant impact. Islam (2016) states there are determinants of the relationship between these two variables. For the sake of clarity and deeper understanding, Kurapatskie and Darnall (2013) classify sustainability activities into four distinct categories; community, product stewardship, pollution prevention and clean technology. In figure (1), the study shows the percentage effect each activity is likely to impact financial performance. Pollution prevention tends to have strongest significant impact while community focus has the least effect. Therefore, the choice of sustainability category engaged by a firm will have a direct impact on financial performance.