Journal of Business Ethics

, Volume 108, Issue 1, pp 61–79

Sustainability Practices and Corporate Financial Performance: A Study Based on the Top Global Corporations

Authors

    • Accounting Research Institute, Faculty of AccountancyUniversiti Teknologi Mara
  • Radiah Othman
    • School of Accountancy, College of BusinessMassey University New Zealand
Article

DOI: 10.1007/s10551-011-1063-y

Cite this article as:
Ameer, R. & Othman, R. J Bus Ethics (2012) 108: 61. doi:10.1007/s10551-011-1063-y

Abstract

Sustainability is concerned with the impact of present actions on the ecosystems, societies, and environments of the future. Such concerns should be reflected in the strategic planning of sustainable corporations. Strategic intentions of this nature are operationalized through the adoption of a long-term focus and a more inclusive set of responsibilities focusing on ethical practices, employees, environment, and customers. A central hypothesis, that we test in this paper is that companies which attend to this set of responsibilities under the term superior sustainable practices, have higher financial performance compared to those that do not engage in such practices. The target population of this study consists of the top 100 sustainable global companies in 2008 which have been selected from a universe of 3,000 firms from the developed countries and emerging markets. We find significant higher mean sales growth, return on assets, profit before taxation, and cash flows from operations in some activity sectors of the sample companies compared to the control companies over the period of 2006–2010. Furthermore, our findings show that the higher financial performance of sustainable companies has increased and been sustained over the sample. Notwithstanding sample limitation, causal evidence reported in this paper suggests that, there is bi-directional relationship between corporate social responsibilities practices and corporate financial performance.

Keywords

EnvironmentEthicsDiversityPerformanceSustainability

Introduction

The concept of sustainable development first became the focus of international policy- making with the publication of the Brundtland Report (WCED 1987), which presented the outcome of the World Commission on Environment and Development and served as an important foundation for the UN Earth Summit in 1992. That report defines sustainable development as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The report provided what is arguably the most frequently quoted definition of sustainable development, though of late, sustainability has been interpreted in different ways. Robinson (2004) argues that apparent difficulties in defining the concept of sustainability have led sustainability practices to be indistinguishable from green-washing, and branded as delusional, mis-representational, and hypocritical.

At the broadest level, Gray (2010) defines sustainability as a systems based concept and, environmentally at least, it is probably difficult to conceptualize it as anything below planetary and species level. A simple assessment of the relationship between a single organization and planetary sustainability is virtually impossible. Aras and Crowther (2008) argue that sustainability is actually based upon efficiency in the transformation process and equity in the distributive effects. The management of sustainability performance requires a sound management framework which firstly links environmental and social management with the business, competitive strategy and management and, secondly, that integrates environmental and social information with economic business information and sustainability reporting (Schaltegger and Wagner 2006). Managing corporate sustainability requires the examination of the impacts of social and environmental initiatives on overall corporate profitability (Epstein and Roy 2001).

In this paper, we approach the concept of ‘sustainability practices’ and ‘sustainable reporting’ synonymously, as a corporation’s account of its legitimate existence in society amid growing concern about the lack of harmony between organization, environment, and societies. Tenuta (2010) suggests that the sustainability report is the most operative instrument to relate the organization with its stakeholders, and the absence of a single referential form and of common comparison parameters, limits its communication of [sustainability] considerably. In this paper, we use reporting of corporate sustainability practices, as a manifestation of the integration of environmental and social management within business processes, and examine its impact on financial performance using a sample of top global corporations. Information was drawn from a content analysis of companies’ sustainability reports and from secondary sources on the corporate financial performance. The review of corporate sustainability reports was not meant to be exhaustive but it was comprehensive enough to uncover information about sustainability practices. Thus, our evaluation of sample companies’ under consideration in based on a combination of observation, subjective judgment, and objective calculations.

There are number of theoretical works conceptualizing the link between environmental performance, social performance, and financial performance. Much earlier, Carroll (1979) argued that, the social responsibility of a business includes economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time. Brown (1990, p. 25) suggested that ‘to speak of an organization as ‘moral community’ allows us to acknowledge the moral significance of the human interactions and relationship within organizations’. Wood (1991) categorized principles of social responsibility and process of social responsiveness as throughputs, and firm’s financial performance was as one dimension of overall social performance. Research seeking to link social responsibility with financial performance exploded during 1980s with two opposing views (Fredrick 2006). One view is that the firm faces a trade-off between social responsibility and financial performance. Those holding this view propose that firms incur costs from socially responsible actions. A second, contrasting viewpoint is that the explicit costs of corporate social responsibility are minimal and that firms may actually benefit from socially responsible actions (McGuire et al. 1988). While acceptance of the latter argument for the business case for social responsibility has been growing; it remains to be seen, whether relationship between social responsibility and financial performance is perpetual.

The impact of environmental management and environmental protection activities on corporate economic performance has also been debated strongly for many years. Schaltegger and Synnestvedt (2002) argued that there is no natural or mechanical law automatically linking environmental performance with economic performance. The relationship holds true only in specific cases, where the environmental and health regulations provide strong economic incentives to companies, to make continuous improvements in the business operations. Environmental issues must be of certain, [maybe] major importance, to have some impact on the company’s economic performance. A review of theoretical framework which thrives on precision and power to explain this alluded relationship is as follows.

According to Schaltegger and Synnestvedt (2002) dynamic theoretical framework, for environmental protection to be rewarding, company management would have to identify the specific set of restrictions, opportunities, threats, and incentives. As a next step, objectives and goals would have to be defined, plans developed and concrete action taken. This new rethinking will then result in a new and different environmental profile, which in turn may result in cost savings. They postulate and illustrate that, beginning at a certain level of economic success; every environmental protection activity will reduce the economic success, which can be expected to decrease in the short term. As long as companies are able to develop environmentally friendly technologies, which reduces the marginal costs, the economic performance improves. Since there might be systematic differences in marginal costs of environmental protection across industries and across countries (due to legislations), various economic outcomes are possible. The major conclusion that can be drawn from Schaltegger and Synnestvedt (2002) theoretical framework is that, relationship between environmental performance and economic success can vary at given level of economic success. The economic effect of corporate environmental performance can also vary at a given environmental performance level. The correlation between economic and environmental performance, or in other words the question of ‘when it pays to be green’, does not only depend on company external variables (regulations, for example) but it substantially depends on internal variables influenced by management.

Wagner and Schaltegger (2003) put forward neoclassical environmental economics viewpoint linking environmental and social issues. According to this view, the purpose of environmental regulations is to correct for negative externalities, which diminish social welfare. Environmental regulations reduce these negative externalities; however, create additional costs thus reducing profits. They argue that firms in industries with higher environmental impact face a competitive disadvantage, if stringent regulations burden them with higher environmental costs relative to other industries (see also e.g., Epstein 1996). However, another opposing “revisionist view” suggest that, environmental performance would induce cost savings, increase in sales and thus improve economic performance. According to this revisionist view, an inversely U-shaped curve is the best possible description of relationship between environmental and economic performance (Wagner and Schaltegger 2004). In the ‘revisionist’ view companies have an incentive to research new technologies and production approaches to reduce negative externalities. In this regard, Environmental Management Systems (EMS) has helped companies to systematically identify, measure and appropriately managed their environmental obligations and risk (Epstein and Roy 2001). Thus, according to the ‘revisionist’ view, at least in a dynamic perspective (or possibly even in the short term); the ability to innovate and to develop new technologies and production approaches is a greater determinant of competitiveness and economic success. According to Rimmer et al. (1996) a critical problem for sustainability is winning time, especially during periods when it is perceived that costs exceed benefits, and in such a period of uncertain duration, best practice may be discontinued as not cost effective. However, in the long-run, perceived benefits are greater than perceived costs.

Wagner (2007) proposed an integration framework in which social and environmental aspects are integrated with business management. The notion of ‘integration’ means the linkages of goals and activities related to socio-environmental management with core managerial processes and functions in those areas which are of strategic importance to the firms, namely corporate strategy, quality management, health and safety, and social issues. He identified four intermediate drivers of economic performance—efficiency-related, market-related, image-related, and risk-related. He integrates social and environmental management with the core processes. This integration, leads to cost savings, innovative products, high market share and better profit margins, and reduction in work-related accidents and injuries. Wagner (2011) posits that ‘integration’ of environmental and sustainability aspects with general management have effect on both, economic performance and environmental performance. This idea is similar to Pivato et al. (2008) who drew attention to the importance of mediating variables in the study of social responsibility and corporate performance relationship. The authors argue that the researchers should pay attention to the intermediate performance measures such as customer satisfaction and brand loyalty. Those companies which value environmental protection, philanthropic behavior and ethical business practices are perceived by customers to be good corporate citizens, and are able to differentiate themselves from competitors and attract customer loyalty (Cacioppe et al. 2007).

According to the sustaining organization change literature (see, e.g., Buchanan et al. 2005; Rimmer et al. 1996; Pettigrew 1985), several changes in organizational configurations, processes, and initiatives such as employee training (Waddock and Graves 1997) for product quality and safety all have direct costs. However, a carefully conceived corporate social responsibility strategy directed at managing community relations may result in cost and reductions. Philanthropic financial commitment is a reflection of organizational adjustment to socio-economic inequity. Godfrey (2005) asserts that philanthropic giving must be perceived as a genuine manifestation of the firm’s underlying social responsiveness in order to increase firm value. Patten (2008) finds evidence of the relationship between the announcement of corporate contributions to the tsunami relief effort and subsequent change in the market value of such donating firms. In reality, the relationship between social responsibility and corporate financial performance varies from one firm to the other due to stakeholder influence capacity and situational contingencies (Barnett 2007).

Hypotheses

This paper builds on the study by Lopez et al. (2007) which examines the relationship between sustainability and corporate performance using a multidimensional construct based on economic, environmental, and social indicators. Lopez et al. (2007) used a sample of 55 firms from the Dow Jones Sustainability Index (DJSI) and compared them with 55 firms from the Dow Jones Global Index (DJGI) for the period of 1998–2004. Furthermore, they modeled the direction of causality from the Corporate Social Responsibility (CSR) variable to Profit before taxation after controlling for firm size, leverage, and other factors. They found a negative coefficient for the CSR variable.

Our work is different from that of Lopez et al. (2007) in that firstly, we re-screened 100 sustainable global companies using the four indices highlighting their commitment to sustainable practices. Secondly, in Lopez et al. (2007), the differentiation exists between sustainable firms and non-sustainable firms by virtue of information disclosure on sustainability, but our methodology is superior to this approach because we further graded a company’s sustainable contribution on a scale of 0 to +4. Moreover, Lopez et al. (2007) tested the difference in the financial performance of companies irrespective of their industrial classification, thereby comparing the performance of companies in the Information Technology sector with those in the Petroleum sector, which we believe is inappropriate and leads to unreliable conclusions. We test hypotheses relating to whether significant differences exist in the performance of companies included in the list of the Top 100 sustainable companies and those which are not (hereafter referred to as the control sample). We designate a company as a control company in the same industry sector if its total sales are within plus/minus 10% of the sample firm’s total sales in that year. Where it was not possible to find a matching company using total sales, we used total assets or even total market capitalization as at financial year end.

We selected a series of variables to measure the company performance, focusing on the growth, return, profitability and cash flows of the companies adopting the variables used by Lopez et al. (2007). These variables are sales (revenue) growth (SG), return on assets (ROA), profit before tax (PBT), and cash flows from operating activities (CFO) in US$.

According to Lopez et al. (2007) changes in management practices should be reflected in the profit and loss statement, produced by an increase in business volume, implying an increase in sales volume (revenue) only in those companies which have adopted sustainable practices. Roberts and Dowling (2002) argue that companies with good corporate reputation in their communities are better able to sustain their superior outcomes over other firms because their intangible character makes replication by competing firms considerably more difficult. Adam and Zutshi (2004) suggest that firms’ adoption of sustainable strategies should grant them competitive advantages over other firms where no such implementation occurs. According to marketing literature, a stronger inimitable competitive advantage enhances product innovation and introductions and sales force effectiveness, thus increasing cash flows and profitability (Dowling 2001). Kurucz et al. (2008) identify four categories of benefits that firms may attain from engaging in corporate social responsibility activities: (1) cost reduction; (2) competitive advantage; (3) developing reputation and legitimacy; and (4) seeking win–win outcomes. Efficient and reliable contracting with suppliers, employees, and creditors should also lead to lower contracting and monitoring costs for the sustainable firm compared to other firms, thereby increasing the return on assets (Roberts and Dowling 2002). Lee et al. (2009) suggest that the leading corporate social performance (CSP) firms proactively manage their CSP profile and obtain lower cost of equity capital, thereby indicating that financial markets value CSP. We investigated all the firms according to their activity sectors to determine whether significant differences exist in the evolution of the performance indicators over the period of 2006–2010. In this connection the following hypotheses were tested:

H1

Sales/revenue growth (SG) of the Global most sustainable companies is higher than SG in the control companies over the period of 2006–2010.

H2

Return on Assets (ROA) of the Global most sustainable companies is higher than ROA in the control companies over the period of 2006–2010.

H3

Profit before tax (PBT) of the Global most sustainable companies list is higher than PBT in the control companies over the period of 2006–2010.

H4

Cash flows from operating activities (CFO) of the Global most sustainable companies are higher than CFO in the control companies over the period of 2006–2010.

Data and Methodology

Our research design combines both quantitative and qualitative methods. Specifically, the qualitative approach is used in the content analysis procedure and the quantitative approach is employed for statistical analysis. The following sections explain the characteristics of the target population, sources of data, sustainable practices checklist, content analysis procedure, and appropriate statistical techniques that are used for testing the hypotheses.

Characteristics of the Target Population

The target population for this study is the top 100 sustainable global companies in 2008. The names of these companies were obtained from www.global100.org which is an annual project of the Global Sustainability Research Alliance. These companies have been selected from a universe of 3,000 firms from the developed countries and emerging markets, and they represent 95% of equities in North America, Europe and Korea, and 30% of equities in emerging markets. The top ten per cent list of companies (or 300 companies) are screened by the Corporate Knights Research Group and Inflection Point Capital Management against ten equally weighted Environment, Social, and Governance (ESG) Key Performance Indicators (KPIs) and a Transparency Indicator which is defined as a percentage of data points on which the company provides data and the level of GRI disclosure. These KPIs are defined as follows:

1. Energy productivity

Sales (US$) divided by total direct and indirect energy consumption (gigajoules);

2. Carbon productivity

Sales (US$) divided by total CO2 and CO2 equivalents emissions (tones);

3. Water productivity

Sales (US$) divided by total water use (cubic meters);

4. Waste productivity

Sales (US$) divided by total waste produced (tones);

5. Leadership diversity

Women on the corporate board (%)

6. CEO-to-average worker pay

Ratio of highest paid officer’s compensation to average employee compensation (3 years average);

7. % Tax paid

Reported tax obligations paid in cash (3 years average, %);

8. Sustainability leadership

Composite score of whether there is a sustainability committee in the company and whether a director is on it;

9. Sustainability pay link

Whether or not at least one senior officer has his/her pay linked to sustainability;

10. Innovation capacity

R&D divided by sales (3 years average)

These KPIs were developed by the Corporate Knights Research Group (CKRG), a signatory to the United National Principles of Responsible Investment, with support from Inflection Point Capital Management, and with input from the Global 100 Council of Experts which is comprised of thought leaders at the interface of sustainability and finance. Given their pedigree, these KPIs reflect the most meaningful indicators in the widest sense. The CKRG identified these indicators after a comprehensive review of mainstream brokerage research, papers and reports contributed by fiduciary investors to the PRI Enhanced Research Portal, work by the Canadian Institute of Chartered Accountants, and the annual Thomson Reuters Extel/UKSIF Socially Responsible Investing and Sustainability Survey.

All companies were scored relative to their industry peers (these industry peers are not in the sample); each company receives a score of 0–1 per KPI and a score of 0–1 on the Transparency indicator. The sum of ten indicators and one Transparency indictor was normalized to a scale of 0–100 and then companies were ranked on the basis of this score. This process, in conjunction with a final round of vetting from teams at Inflection Point Capital Management and Global Currents Investment Management, was used to winnow down the short list of 300 to the Global 100 Most Sustainable Companies in the World, respecting the sector weightings for the MSCI ALL Country World Index (ACWI). Table 1 shows the sample distribution.
Table 1

Sample distribution

Country

N

GICS industry sector

N

Australia

4

Consumer discretionary

17

Austria

2

Consumer staples

7

Belgium

1

Energy

6

Canada

3

Financials

19

Denmark

3

Health care

6

Finland

6

Industrials

17

France

6

Information technology

9

Germany

6

Materials

9

Italy

2

Telecommunication

3

Japan

13

Utilities

5

The Netherlands

2

  

Spain

3

  

Sweden

5

  

Switzerland

3

  

United Kingdom

22

  

United States

17

  

Sources of data

We downloaded companies’ sustainability reports for the fiscal year end 2008 from their websites or the Global Reporting Initiative website www.globalreporting.org/GRIReports/. For some companies in our sample, a sustainability report was not available from either source; rather their sustainability accomplishments were narrated on their websites according to GRI Reporting categories. For these companies only, we searched their WebPages to collect information. For instance, Rio Tinto’s HTML sustainability report is located within the Sustainability section of its website. Inditex SA uses an interactive GRI Content Index navigating the sustainability report on its website. Two companies did not have 2008 sustainability reports and therefore had to be excluded from the analysis. Financial data for the testing of hypotheses were downloaded from Thomson financials Worldscope from 2006 to 2010 in US$ to facilitate comparison across countries.

Sustainability Evaluation Checklist

There are no universally accepted sustainability standards, or methodologies for measuring, assessing and/or monitoring a company’s progress towards sustainability. Indeed, various methods, such as external audit, third party awards/accreditation processes, standards/codes benchmarking of sustainability (Singh et al. 2009), indices (Lopez et al. 2007), and non-quantifiable sustainability initiatives (Székely and Knirsch 2009), can be identified. The environmental performance of a company can be defined by means of a firm’s physical performance with regard to environmental aspects based on physical environmental performance indicators (Wagner and Schaltegger 2003). Another approach is the use of Environmental Shareholder Value (ESV) and environmental competitiveness. ESV approach links environmental performance with shareholder value drivers (Wagner and Schaltegger 2004). Other empirical measures that have been used to assess corporate environmental performance are hazardous waste recycled (Al-Tuwaijri et al. 2004), toxic releases (Patten 2002), work-related injury rates (Epstein and Roy 2001), and environmental ratings of firms (e.g., Dow Jones Sustainability Index).

Recent studies have followed new approaches which use input–output method for approaching sustainability as a system-based concept. For example, Henri and Journeault (2010) have used an integrative matrix which ranks environmental performance on two scales: (1) process versus results and (2) internal versus external dimension. They argue that the junction of these two scales provides a framework for organizing the various views of environmental performance. We needed information to answer the question: how do companies actually integrate environmental and social responsibility activities within business processes? For this purpose, we focus on: (1) community, (2) environment, (3) diversity, and (4) the ethical standards dimension, using the stakeholder model. We chose these four dimensions because they are internally connected and serve as a reasonable reflection of progress toward sustainable development. Our approach is also supported by recent studies (see, e.g., Epstein and Roy 2001). Epstein and Roy (2001) sustainability performance indicators include work force diversity, environmental impacts, bribery, corruption, community involvement, ethical sourcing, human rights, product safety, and usefulness. Schaltegger and Synnestvedt (2002) suggested the use of level of environmental protection achieved and kind of environmental protection practiced to measure environmental protection. Their ideas are akin to Warhurst (2002) proposed sustainability measurement, which includes that the measurement of sustainable development in two step: firstly, an examination of the progress made in a number of selected individual fields (in our case four dimensions), and secondly, an assessment of the overall progress made towards sustainable development as determined by a combination of these individual fields. Bansal (2005) also proposed a corporate sustainable development construct based on three principles: economic integrity, social equity, and environmental integrity.

Content Analysis Procedure

Content analysis has been widely used in the CSR literature (Rondinelli and Berry 2000). The main idea underlying this approach is to search for specific corporate information and reduce it into mutually exclusive categories. It has been argued that companies that engage in socially responsible activities provide more informative and extensive disclosures than do those which are less focused on advancing social goals (Gelb and Strawser 2001, p. 11). As a first step, we generated a series of questions, portraying those issues in which companies show commitment to: (1) community, (2) environment, (3) diversity, and (4) ethical standards. These questions/items were adapted from Fadul et al. (2004). There are 22 items for environment, 21 items for diversity, 12 items for community, and 13 items for ethical standards. In the second step, each item was assigned a score from +4 to 0 using the wording of the sustainability report in the following manner: if a company reported a significant tangible positive contribution related to a question (item), we gave it a score of +4. A company’s significant tangible positive contribution might be in the form of financial commitments to needy communities, the adoption of specific codes of conduct, new technologies and/or redesigned products to conserve energy, water, materials and/or land. Diageo plc, UK, for instance, highlighted, “our financial commitment to our communities is to invest 1% of Diageo’s operating profit in social projects. In 2008 the total of £23.9 million actually represented 1.1% of operating profit” (Diageo Corporate Citizenship Report 2008, p. 13). Accor stated, “[In] February 2008, it has purchased electricity produced in part by wind turbines… partner with the US Environmental Protection Agency in searching for “green” electricity solutions… it will purchase 1,572,000 kwh of renewable energy a year, reducing CO2 emissions by around 900 metric tons” (Accor Annual Report 2008, p. 76). And Acciona stated, “In 2007, the Board of Directors approved the Code of Conduct, and with it, the creation of an Ethical Channel, a tool enabling any employee to file a confidential report about a breach of the Code… the Ethical Channel analyse all alleged breaches of the Code which may affect Acciona’s values and principles” (Acciona Sustainability Report 2008, p. 85).

If a company reported a tangible positive contribution, we gave it a score of +3. A company’s positive tangible contribution might be in the form of statistics and data related to its activities. Adidas, for example, provided key employee statistics such as: total number of employees, total employees − male (%), total employees − female (%), management positions held by males (%), management positions held by females (%), average age of employees (in years), employee turnover (in %), average tenure per employee (in years) and annual training hours by employee (Adidas Sustainability Performance Review 2008, p. 33).

If a company reported a relatively small positive contribution, we gave it a score of +2. A company’s relatively small positive contribution might be in the form of statements such as that provided by Intel, which states that the company “promotes equal employment opportunity for all applicants and employees, regardless of non-job-related factors, including but not limited to race, color, religion, gender, national origin, ancestry, age, marital status, sexual orientation, gender identity, veteran status, and disability” (Intel Corporate Responsibility Report 2008, p. 52). If a company reported no tangible contribution in the form of statistics and data, we gave it a score of 1; and if a company did not report any information at all, we gave it a score of 0 (see Appendix 1 for the list of questions). After grading the items for each company, as a last step we summed up the total scores for all the events to obtain a company specific index value.

Our scoring approach is akin to SustainAbility and the United Nations Environment Program (UNEP) which also uses 0–4 scores, where “0 means that the area covered by the [SustainAbility–UNEP] is not discussed at all and “4” means that the reporting [on the issue] is comprehensive (SustainAbility–UNEP 1997). Though our choice of the number of items to gauge a company’s commitment to a particular social-environmental dimension is arbitrary but we argue that our grading approach provides a meaningful approach to assess the sustainable development commitments of the global organizations. Other comparative studies, for instance, Morhardt et al. (2002) have used more than 100 items or more items to assess companies’ commitment to social–economic–environmental issues but without grading.

Content Validity

We established the content validity of the items underlying each of these four indices by comparing them with the items used by CSR rating agencies worldwide to screen companies for socially responsible investment. A list of these CSR rating agencies was obtained from the Bertelsmann Foundation report entitled, ‘Who is who in Corporate Social Responsibility Rating? A survey of internationally established rating systems that measure Corporate Responsibility’. This report provides a profile and the screening methods of more than 50 independent CSR rating agencies worldwide (see Appendix 2 for details). We matched the wording of statements used by these agencies to rank companies according to their agreement with those statements under each of our four indices. Where an exact occurred, we considered that item a valid item, although for some statements we did not find the exact or near match, and in these instances, the statements were placed in the ‘others’ category. This procedure was repeated laboriously for all items in four indices, and the results of this exercise confirmed that most of the items were valid.

Reliability Analysis

Reliability refers to the purity and consistency of a measure, to repeatability, to the probability of obtaining the same results again if the measure were to be duplicated. A reliable measurement is one that allows for the same result to be achieved on repeated occasions (De Vaus 1986). Adequate reliability is a precondition of validity. The reliability of a scale indicates how free it is from random error. One of the most commonly used indicators of internal consistency is Cronbach’s alpha coefficient ranging from 0 to 1, with higher values indicating greater reliability. Ideally, a Cronbach’s alpha of in the range of 0.6–0.7 is acceptable, while alphas below 0.6 are considered poor, and those over 0.8, good (Nunnally 1978). We calculated Cronbach’s alpha for the items under EI, CI, DI, and ETI finding these to be equal to 0.885, 0.883, 0.858, and 0.904, respectively, thereby suggesting that selected items from Fadul et al. (2004) who adapted these items from Stone (2001) were reliable for the multidimensional construct of sustainability.

Results and Discussion

In this section, we report the findings regarding the four indices CI, DI, EI, and ETI, respectively, which are important not only in identifying the companies’ commitments to sustainable practices but also in helping to support (or otherwise) hypotheses for each respective industry sector. For CI, there were two clusters: (1) Australia, United Kingdom, and United States and (2) Canada, France, Japan, and Switzerland. European countries (excluding UK) Belgium, The Netherlands, and Spain have relatively lower values of the index (Table 2).
Table 2

Sustainability practices—country-level analysis

 

N

CI

DI

EI

ETI

Australia

4

30.00

26.75

51.00

20.75

Austria

2

18.00

13.00

44.67

27.50

Belgium

1

24.00

15.00

46.00

12.00

Canada

3

27.67

21.66

52.33

23.00

Denmark

3

10.67

26.00

46.67

15.33

Finland

6

11.67

13.66

47.17

11.33

France

6

27.50

28.00

53.00

20.17

Germany

6

20.17

18.67

40.17

11.17

Italy

2

14.50

14.00

25.50

11.00

Japan

13

25.92

27.46

59.00

21.08

The Netherlands

2

22.00

20.00

56.00

24.00

Spain

3

22.00

24.67

45.33

39.00

Sweden

5

18.20

19.67

48.20

22.00

Switzerland

3

26.00

26.67

22.67

22.67

UK

22

30.95

19.27

44.82

26.01

US

17

37.00

23.00

56.76

26.24

For DI, there were two clusters. This first cluster includes: France, Japan, Australia, and Switzerland. Although at the first ranking, some of the European countries such as Italy, Belgium, and Sweden appear very low, this is not surprising given the fact that these countries have greater concern for diversity through immigration. The performance among other European countries varies on the diversity matters. Furthermore, even on the diversity issues, the United States and Canada fall in the third clusters with index values less than 25. The Japanese companies have performed better than companies in European countries, which is surprising given the very high power distance observed in Japan. This shows that Japanese corporations have a distinct culture surpassing the national culture especially when the organization is widely spread across the map of the world, and thereby being susceptible to global influences that gradually reshaping the way they work. Also, in furthering organizational objectives, and for the sake of survival, the remolding of the organizational culture to one that is mostly acceptable in almost all countries is a necessity.

For the EI, there were also two clusters, the first including Japan and The Netherlands, and the second including countries such as Canada, France, and Australia. Though other European countries such as Belgium, Finland, Denmark, Spain, Sweden, and the United Kingdom have respectable index values, Italy has the lowest value of EI. Thus, our findings confirm that sustainability has been overwhelmingly associated with environmental performance by these global companies underlining their grave concern about the environment compared to other issues. Lastly, for the ETI index, the results contrast substantially with those obtained for the other three indices, an outcome which was mainly because most companies did not disclose their policies on issues such as fair dealings, and contribution to political parties. Information was limited in their reports. We can identify only one cluster including Spain, United Kingdom, and United States.

Sustainable Practices—Industry Clusters

This section reports on the clusters based on the industrial classification. Overall, the Utilities sector is top among the activity sector with the highest index value for Community—31.8; Environment Index—53.80, Diversity and Ethical practices—27.8. This is followed by the Consumer Discretionary sector. Overall these findings show that most industries have performed better in their Environment Index category compared to other categories. The Energy and Materials sector has a higher index value for the Environment and Ethical indices but is lower on the Community and Diversity indices. Interestingly, the financial sector has the lowest Ethical index value compared to activity sectors, a factor which can be said to underlie the current public discontent with the opacity of financial products. The Industrials, Information Technology, and Telecommunication sectors lag behinds other activity sectors in three of the four indices. Morhardt et al. (2002) have also found significant dispersion in the environmental performance scores of industrial sectors using SustainAbility/UNEP guidelines. This analysis reveals that among the top global sustainable organizations there is a considerable dissimilarity in the progress towards the attainment of sustainable development. These indices show more emphasis on the eco-concentric issues than ethnocentric issues.

Besides country and industry-level analysis, we also analyzed the items in each index (see Appendix 3) to expose differences in grading of the underlying constituent items of the index values. Clearly, there are differences across underlying items within each index, and the dispersion in the scores further highlights that not many companies have made tangible positive contributions, and that several others have only made small inroads in this direction. The adoption of superior sustainable practices is expected to produce improved performance for such companies, i.e., increased profitability could be observed as a result of the exploitation of new resources and innovations in manufacturing processes, which may be reflected in increased sales (revenue) volume and greater profit growth due to reduction in costs. To sustain environmental protection, a few companies in information technology and automobile industries, have implemented Product-based Environment Management System (PBEMS) and Sustainability Management Systems (SMS) (McElhaney et al. 2005). The next section explores whether there are significant differences between the economic and financial performance of companies with better practices and otherwise as disclosed in their sustainability reports.

We find significant higher mean SG, ROA, PBT, and CFO in some activity sectors of the Global 100 most sustainable companies compared to the control companies over the period of 2006–2010. H1 was accepted for the Global 100 most sustainable corporations operating in the Industrial sector, i.e., these companies have significantly higher sales growth compared to control sample companies in the same sector. H2 was supported for the Consumer Discretionary and Telecommunication services sectors, whose companies have significantly higher ROA compared to control sample companies in the same sector. Last but not the least, H3 and H4 are accepted for the Consumer Discretionary, Consumer Staples, Industrials and Telecommunication services sectors, respectively. When we compared the t test results in Table 4 with the values of the four indices in Table 3, the findings are less than ordinary.
Table 3

Sustainability practices—industry-level analysis

 

CI

DI

EI

ETI

Consumer discretionary

27.24

26.24

52.29

24.47

Consumer staples

27.29

25.71

46.57

17.86

Energy

23.00

19.33

53.50

23.33

Financials

27.58

21.63

47.00

13.68

Health care

28.17

23.59

42.50

18.50

Industrials

21.88

20.71

47.82

14.70

Information technology

27.56

18.76

45.67

20.88

Materials

21.33

21.22

53.11

23.44

Telecommunication services

25.00

25.00

45.33

22.66

Utilities

31.80

22.80

53.80

27.80

Table 4

Results from the hypotheses testing using the independent sample t tests

GICS sectors

SG

ROA

2006–2007

2006–2008

2006–2009

2006–2010

2006–2007

2006–2008

2006–2009

2006–2010

Consumer discretionary

 t value

−1.7630

−2.1360

−2.267

−2.0576

1.5650

2.3098

2.5865

2.7879

 p value

0.0820c

0.0354b

0.0254b

0.0412b

0.1234

0.0232b

0.0112a

0.0060a

Consumer staples

 t value

−2.2340

−3.2580

−3.9667

−3.9207

1.4685

1.3802

1.4440

1.6290

 p value

0.0360b

0.0030a

0.0000a

0.0000a

0.1657

0.1820

0.1607

0.1120

Energy

 t value

1.0102

1.0060

1.0201

1.0124

0.7546

0.9820

1.3435

1.0720

 p value

0.3365

0.3290

0.3180

0.3211

0.4640

0.3403

0.1930

0.2956

Financials

 t value

−1.9160

−2.2222

−2.4381

−2.4651

−0.8621

−0.5312

−0.9531

−0.9790

 p value

0.0660a

0.0321b

0.0180b

0.0160b

0.3921

0.5970

0.3431

0.3291

Health care

 t value

−0.7850

−0.8780

−0.8800

−1.0945

−0.0270b

0.5631

1.0170

1.4520

 p value

0.4450

0.3890

0.3865

0.2817

0.9789

0.5771

0.3150

0.1530

Industrials

 t value

3.0605

4.0690

4.7167

4.7940

−1.6520

−1.7140

−1.6630

−1.7634

 p value

0.0030a

0.0000a

0.0000a

0.0000a

0.1070

0.0921c

0.1092

0.0812

Information technology

 t value

−1.3378

−1.6465

−1.9509

−1.8666

−0.0370

−0.5556

−0.5243

−0.8032

 p value

0.1923

0.1090

0.0570c

0.0645c

0.9713

0.5821

0.6053

0.4254

Materials

 t value

−1.5334

−1.6376

−1.7153

−1.9712

0.0321

07745

0.9203

1.1133

 p value

0.1441

0.1131

0.0942c

0.0550c

0.9751

0.4442

0.3625

0.2716

Telecommunication

 t value

−3.0178

−3.7102

−4.5412

−4.9470

3.0699

3.5143

3.7130

3.6413

 p value

0.0190a

0.0040a

0.0012a

0.0000a

0.0222b

0.0060a

0.0020a

0.0020a

Utilities

 t value

−1.5660

−1.7970

−1.7323

−1.5064

−0.4729

−1.4450

−1.5566

−1.4653

 p value

0.1402

0.0865c

0.0945c

0.1423

0.6443

0.1632

0.1280

0.1523

GICS sectors

PBT

CFO

2006–2007

2006–2008

2006–2009

2006–2010

2006–2007

2006–2008

2006–2009

2006–2010

Consumer discretionary

 t value

2.110

2.8043

2.8167

3.1010

2.0213

2.3140

2.5760

2.7998

 p value

0.0412b

0.0080a

0.0060a

0.0020a

0.0502b

0.0240b

0.0120b

0.0060a

Consumer staples

 t value

2.6580

3.0740

3.5730

3.6300

2.5730

3.1460

3.6470

3.6190

 p value

0.0140b

0.0040a

0.0010a

0.0010a

0.0170b

0.0030a

0.0010a

0.0010a

Energy

 t value

0.5004

0.6567

0.6330

0.4930

0.2943

0.3890

0.2660

0.2412

 p value

0.6234

0.5176

0.5303

0.6356

0.7254

0.7000

0.7920

0.8102

Financials

 t value

0.4851

−1.1361

−1.3609

−1.4592

1.9689

0.2990

−0.0982

−0.3360

 p value

0.6302

0.2601

0.1780

0.1481

0.0561c

0.7661

0.9352

0.7381

Health care

 t value

0.8679

1.0707

1.1474

1.1333

−0.9980

−0.9931

−0.9891

−0.9832

 p value

0.3986

0.2930

0.2580

0.2624

0.3412

0.3342

0.3333

0.3312

Industrials

 t value

2.0000

2.0491

2.6666

2.6391

1.8624

2.2934

2.5152

2.7062

 p value

0.0530b

0.0201b

0.0090a

0.0102b

0.0720c

0.0262a

0.0140a

0.0080a

Information technology

 t value

1.0923

1.2756

1.1560

1.1821

1.0990

1.1851

1.2521

1.3421

 p value

0.2821

0.2080

0.2521

0.2412

0.2809

0.2431

0.2125

0.1842

Materials

 t value

−0.5512

−1.5642

−1.2565

0.0514b

0.9172

1.3782

1.8552

2.0962

 p value

0.5890

0.8771

0.9000

0.9590

0.3392

0.1753

0.0680c

0.0403b

Telecommunication services

 t value

2.5460

3.0750

3.1245

3.1730

2.6940

3.4023

3.7509

3.7433

 p value

0.0460b

0.0130b

0.0080a

0.0060a

0.0404b

0.0090a

0.0030a

0.0012a

Utilities

 t value

−1.4213

−1.9132

−2.2046

−2.2040

−0.7832

−1.1145

−1.1444

−1.5332

 p value

0.1790

0.0670c

0.0345b

0.0340b

0.4450

0.2634

0.2615

0.1332

Summary of the results using independent sample t test

Hypothesis

Hypotheses accepted for activity sector

Hypotheses rejected for

H1

Industrials only

All other sectors except industrials

H2

Consumer discretionary, telecommunications

All other sectors except consumer discretionary, telecommunications

H3

Consumer discretionary, consumer staples, industrials, telecommunications

All other sectors except consumer discretionary, consumer staples, industrials, telecommunications

H4

Consumer discretionary, consumer staples, industrials, telecommunications

All other sectors except consumer discretionary, consumer staples, industrials, telecommunications

The performance variables are sales growth (SG) calculated as 5-year growth rate in sales/revenue; return on assets (ROA) calculated as profit before tax (PBT), and cash flows from operating activities (CFO)

a1% significance, b 5% significance, c 10% significance

The Consumer Discretionary sector has a relatively higher value for the four indices, and has significantly higher ROA, PBT, and CFO compared to the Utilities sector. Furthermore, it is intriguing that the Consumer Staples, Industrials and Telecommunication services sectors which have scored higher on only one of the four indices have significantly higher SG, ROA, PBT, and CFO compared to Health Care and Materials which have scored on two of the four indices, respectively. These findings beg a question: is a selective sustainable development strategy enough to achieve bottom-line results? It is plausible that since sustainable practices reduce waste generation, increase efficiency, and result in better products and services, the Consumer Staples, and Industrial sector are advantaged compared to other sectors. However, allt test results are less reliable due to non-normality of data (tested using Kolmogorov–Smirnov Z test), and hence, non-parametric Mann–Whitney U tests were used to test the robustness of results (see Table 5).
Table 5

Results of hypotheses testing using the Mann–Whitney U tests

GICS sectors

SG

ROA

2006–2007

2006–2008

2006–2009

2006–2010

2006–2007

2006–2008

2006–2009

2006–2010

Consumer discretionary

 U value

512.00

1067.00

1831.50

2694.00

331.00††

726.50††

1400.50††

2027.50††

 p value

0.0780c

0.0460b

0.0330b

0.0720c

0.0160

0.0020a

0.0030a

0.0030a

Consumer staples

 U value

42.50

83.00

133.50

199.00

66.000

161.50

296.00

371.50

 p value

0.0310b

0.0010a

0.0000a

0.0000a

0.1507

0.1820

0.1380

0.1160

Energy

 U value

22.00

68.00

131.00

151.00

45.00

103.00

187.00

245.00

 p value

0.5833

0.4140

0.2245

0.3190

0.5540

0.3983

0.3190

0.3160

Financials

 U value

451.00

984.00

1676.00

2120.00

440.00

1077.00

1904.00

2283.00

 p value

0.7244

0.5040

0.2454

0.2453

0.1823

0.2340

0.1312

0.1070

Health care

 U value

64.00

137.00

258.00

401.00

68.00

135.00

222.00

267.00

 p value

0.6710

0.4433

0.5355

0.9499

0.8439

0.4050

0.1740

0.0920c

Industrials

 U value

277.00††

607.00††

1081.00††

1468.00††

390.00

928.00

1655.00

2090.00

 p value

0.0050a

0.0000a

0.0000a

0.0000a

0.3903

0.5187

0.4712

0.3444

Information technology

 U value

133.00

314.40

564.00

800.50

160.00

359.00

611.00

822.50

 p value

0.3723

0.3879

0.3470c

0.4695c

0.9636

0.9241

0.6770

0.2944

Materials

 U value

88.00

219.00

400.00

473.00

134.00

289.00

490.50

567.00

 p value

0.1556

0.1809

0.1589

0.1324

0.9869

0.6830

0.3960

0.2356

Telecommunication

 U value

21.00

45.00

78.00

121.00

21.00††

45.00††

83.00††

114.00††

 p value

0.0000a

0.0000a

0.0000a

0.0000a

0.0105b

0.0000a

0.0000a

0.0000a

Utilities

 U value

25.00

57.50

105.00

158.00

29.00

48.00

89.00

114.00

 p value

0.5052

0.4102

0.4020

0.3809

0.7986

0.1789

0.1490

0.1380

GICS sectors

PBT

CFO

2006–2007

2006–2008

2006–2009

2006–2010

2006–2007

2006–2008

2006–2009

2006–2010

Consumer discretionary

 U value

341.00††

739.00††

1421.00††

1933.00††

259.00††

625.00††

1162.00††

1659.00††

 p value

0.0412b

0.0080a

0.0060a

0.0020a

0.0502b

0.0240b

0.0120b

0.0060a

Consumer staples

 U value

39.00††

85.00††

151.00††

216.50††

38.00††

81.50††

140.50††

207.00††

 p value

0.0060a

0.0010a

0.0000a

0.0000a

0.0050b

0.0000a

0.0000a

0.0000a

Energy

 U value

25.00

57.00

102.00

116.00††

26.00

74.00

105.00

117.00††

 p value

0.0214

0.0040

0.0010

0.0010

0.0254

0.0250

0.0010

0.0010

Financials

 U value

465.00

1178.00

2181.00

2617.00

461.00

1648.00

2223.00

2732.00

 p value

0.3112

0.7471

0.8968

0.7480

0.2879

0.9568

0.9265

0.9881

Health care

 U value

40.00††

88.00††

156.00††

199.00††

50.00

123.00

211.00

261.00††

 p value

0.0680

0.0190

0.0060

0.0040

0.2190

0.2260

0.1123

0.0722c

Industrials

 U value

216.00††

532.00††

983.00††

1382.00††

233.00††

465.00††

937.00††

1243.00††

 p value

0.0000a

0.0000a

0.0000a

0.0000a

0.0010a

0.0000a

0.000a

0.0000a

Information technology

 U value

100.00

214.00

391.00

549.00††

98.00

225.00

381.00

582.00††

 p value

0.0503c

0.0090a

0.0040a

0.0010a

0.0440a

0.0160a

0.0030a

0.0020a

Materials

 U value

101.00

213.00††

385.00††

449.00††

103.00

233.00

394.00††

465.00††

 p value

0.1445

0.0360b

0.0190a

0.0080a

0.1579

0.1533

0.0864c

0.0150b

Telecommunication services

 U value

25.00††

54.00††

106.00††

147.00††

27.00††

57.00††

97.00††

135.00††

 p value

0.0260b

0.0040b

0.0010a

0.0050a

0.0650b

0.0120a

0.0010a

0.0002a

Utilities

 U value

23.00

50.00

94.00

117.00

24.00

54.00

110.00

135.00

 p value

0.1460

0.0530c

0.0360b

0.0250b

0.1730

0.0832c

0.1160

0.0502c

Summary of the results using independent sample t test

Hypothesis

Hypotheses accepted for activity sector

Hypotheses rejected for

H1

Industrials only

All other sectors except industrials

H2

Consumer discretionary, telecommunications

All other sectors except consumer discretionary, telecommunications

H3

Consumer discretionary, consumer staples, industrials, energy, health care, materials, telecommunications

Information technology, utilities

H4

Consumer discretionary, consumer staples, industrials, materials, telecommunications

Energy, financials, health care, information technology, utilities

The performance variables are sales growth (SG) calculated as 5-year growth rate in sales/revenue; return on assets (ROA) calculated as profit before tax (PBT), and cash flows from operating activities (CFO)

a1% significance, b 5% significance, c 10% significance

Mean rank for sample companies is lower than control companies

††Mean rank for sample companies is higher than control companies

The robustness of our findings in Table 4 is supported by using the Mann–Whitney U test values. H1 is supported for Industrials only, and H2 is supported for the Consumer Discretionary, and Telecommunications sectors. H3 is now supported for three sectors: Energy, Health Care, and Materials, respectively. Similarly, H4 is also accepted for the Materials sector. These findings confirm that the application of sustainable practices adopted by the Global most sustainable companies lead to long-term differentiation in their business practices which eventually produces better financial performance as measured by performance indicators in this paper. It is important to mention that though the global companies were ranked as at year end 2008, the evolution of performance from 2006 to 2007 shows that the differences measured by mean performance indicators existed between the sample and control companies, continued for the subsequent periods 2006–2008, 2006–2009, and 2006–2010, respectively.Last but not the least, while Lopez et al. (2007) arrived at the conclusion that differentiation between DJSI and DJGI companies with respect to the performance indicators studied by them was not consistent and did not increase over time over the period of 1998–2004, we find that differentiation in ROA, PBT, and CFO has been consistent and increases over the period of 2006–2010.

Sustainability—corporate performance causal direction

There are different opinions about the interaction between environmental performance, social performance, and financial performance. The empirical research has not reached at a consensus. According to Friedman (1970) social responsibility involves costs and therefore can worsen firms’ performance. Preston and O’Bannon (1997) and Jensen (2001) argue that social responsibilities might constrain firms’ value maximization and lead to poorer financial performance. It is vital to establish the direction of causality: whether conscientious companies are more profitable, or is it that more financially successful companies are more conscientious? In order to answer the first question, we used regression model whereby the values of four indices CI, DI, EI, and ETI (hereafter independent variables) were regressed on the profit before taxation in year 2009 (hereafter dependent variable, PBT2009), for a firm i in country j
$$ {\text{PBT}}_{2009} = \alpha + \beta_{1} {\text{CI}}_{i,j} + \beta_{2} {\text{DI}}_{i,j} + \beta_{3} {\text{EI}}_{i,j} + \beta_{4} {\text{ETI}}_{i,j} + \varepsilon_{i,j,} $$
(1)
In order to answer the second question, we used a distributed −lag model, using two lags of profit before taxation (PBT2007, PBT2008)to measure the lag effect of past profitability on the four indices (CI, DI, EI, and ETI), respectively. Scholtens (2008) has used a similar approach for the US sample. In this way, our model would explain whether past financial performance has any effect on sustainability practice of the global companies in 2008 or not.
$$ {\text{CI}}_{2008} = \phi_{1} + \phi_{2} {\text{PBT}}_{2006} + \phi_{3} {\text{PBT}}_{2007} + \nu_{i,j,} $$
(2)
$$ {\text{DI}}_{2008} = \phi_{1} + \phi_{2} {\text{PBT}}_{2006} + \phi_{3} {\text{PBT}}_{2007} + \nu_{i,j,} $$
(3)
$$ {\text{EI}}_{2008} = \phi_{1} + \phi_{2} {\text{PBT}}_{2006} + \phi_{3} {\text{PBT}}_{2007} + \nu_{i,j,} $$
(4)
$$ {\text{ETI}}_{2008} = \phi_{1} + \phi_{2} {\text{PBT}}_{2006} + \phi_{3} {\text{PBT}}_{2007} + \nu_{i,j,} $$
(5)
These equations (25) will test whether more financially successful companies are more conscientious [sustainable]?
The estimation results of Eq. 1 show that coefficient of CI is significantly positive while coefficient of EI is significantly negative (see Table 6, Panel A). These results do not provide a stronger support to our conjecture that global organizations sustainability practices have significant positive impact on their profitability, as only focus on the community practices increases the profitability. Furthermore, these results show that focus on the environmental responsibilities involves high costs and therefore it reduces firms’ profitability. The estimation results of Eqs. 25 show that past profitability has significant positive impact only on the community and ethical responsibilities. Similar findings have also been reported by Al-Tuwaijri et al. (2004).
Table 6

Regression results

Panel A

Coefficients

Constant

CI

DI

EI

ETI

Adj. R2

N

Eq. 1: PBT2009 = α + β1CIi,j + β2DIi,j + β3EIi,j + β4ETIi,j + ɛi,j

 

7.0351a

0.0317b

0.0218

−0.0321c

0.0024

0.024

98

t value

12.3698

2.0466

1.5522

−2.5544

0.1811

  

p value

0.0000

0.0445

0.1252

0.0128

0.8568

  

Panel B

Coefficient

   

Adj. R2

N

Eq. 2: CI2008 = ϕ1 + ϕ2PBT2006 + ϕ3PBT2007 + νi,j

 

5.0628

−0.5881

2.9820c

0.0465

98

t value

0.5414

−0.4662

1.7550

  

p value

0.5896

0.6423

0.0829

  

Eq. 3: DI2008 = ϕ1 + ϕ2PBT2006 + ϕ3PBT2007 + νi,j

 

1.4195

−0.1720

2.9143

0.0312

98

t value

0.1518

−0.0322

1.2463

  

p value

0.8792

0.9342

0.2090

  

Eq. 4: EI2008 = ϕ1 + ϕ2PBT2006 + ϕ3PBT2007 + νi,j

 
 

4.4732

0.3441

3.4869

0.0342

98

t value

0.3914

0.1553

1.5436

  

p value

0.6964

0.8769

0.1265

  

Eq. 5: ETI2008 = ϕ1 + ϕ2PBT2006 + ϕ3PBT2007 + νi,j

 
 

3.4620

−2.4832c

4.4405a

0.0243

98

t value

0.4439

−1.8420

3.0712

  

p value

0.6652

0.0690

0.0020

  

a1% significance, b 5% significance, c 10% significance

Conclusion

This paper tests the hypothesis that companies with superior sustainability practices have superior financial performance and growth than those companies which do not place emphasis on sustainability. In this paper, first we examined the sustainability reports of the global sustainable corporations and developed four indices reflecting global companies’ commitment to their ethical, environmental, community, and diversity responsibilities. Our findings show that global sustainable companies put more emphasis on the eco-centric issues compared to ethno-centric issues. Overall our statistical results confirm that that companies which place emphasis on sustainability practices have higher financial performance measured by return on assets, profit before taxation, and cash flow from operations compared to those without such commitments in some activity sectors. Furthermore, our findings show that the higher financial performance of sustainable companies has increased and been sustained over the periods 2006–2008, 2006–2009, and 2006–2010, respectively. We find that ROA, PBT, and CFO have consistently increased over the period 2006–2010. Despite limitation of sample size and time period chosen for this study, overall these results provides reasonable evidence that, there is bi-directional relationship between corporate sustainability practices and corporate financial performance.

Despite debates on the worthiness of investing a corporation’s resources to become ‘more responsible’ in the eyes of the stakeholders, the findings indicate that these strategies have been proven as in the interests of the corporation and therefore, ultimately in the best interests of shareholders, the legal owners. The assessment of the social impact of companies is a complex task; in this paper we have mainly assessed corporate philanthropy and a small number of diversity issues. These practices constitute much of CSR activities these days and it is difficult to ascertain, from ethno-centric point of view, what is an ideal and/or optimal corporate social commitment? Thus, we propose that future research should develop ‘other’ performance indicators based on the multiple community perspectives to evaluate the impact of sustainable practices for for-profit organizations. A major limitation of our study is that we focused only on the top 100 global sustainable companies which are mostly from the developed economies; we argue that future research should endeavor to ascertain the influence of external and internal factors on the companies’ progress toward sustainable development in developing economies. Similarly, future research should investigate how not-for-profit organizations perceive sustainable development, what methods are suitable to investigate the sustainable practices of such organizations, and most importantly, how these organizations are evaluated since their performance indicators tend differ from those used in for-profit organizations.

Acknowledgments

We are thankful to Research Management Institute, University Teknologi Mara for the research grant for this paper.

Copyright information

© Springer Science+Business Media B.V. 2011