The impact of sustainability practices on financial performance empirical evidence from sweden

Introduction

Research background

The Fourth Industrial Revolution, or Industry 4.0, marks a transformative era characterized by the convergence of digital, biological, and physical realms, driven by advancements in technologies such as cloud computing, 3D printing, artificial intelligence, and blockchain While these innovations promise to enhance healthcare, extend lifespans, and reduce poverty, they also raise concerns about potential economic disruption and unpredictable socio-economic and environmental impacts.

In light of climate change and ongoing financial and energy crises, there is an urgent need for innovative economic growth models focused on sustainable development Humanity's progress hinges on adopting new principles and practices in the production, distribution, and consumption of goods and services that promote long-term human well-being while minimizing environmental risks for future generations.

In the aftermath of World War II, humanity sought innovative methods to transform the economy, with development primarily evaluated through economic metrics such as GDP growth and per capita income (Harrison, 1996) However, during the late 1980s and early 1990s, various authors introduced alternative theories that challenged this conventional understanding of economic progress.

Human development is fundamentally about enhancing human well-being by expanding individual choices and freedoms, as articulated by scholars like Desai (1991) and ul Haq (1995) While economic growth is significant, it alone does not equate to comprehensive development In recent decades, the concept of sustainable development has gained prominence alongside human development, influencing discussions on new economic models (Khasanov, 2016) These two concepts mutually reinforce each other, emphasizing that a development path must be sustainable to be recognized as true human development Despite differing theoretical approaches, both concepts center around the importance of human beings.

For years, businesses viewed environmental issues as a no-win situation (Walley and Whitehead, 1994) However, in today's landscape, both business and environmental sustainability can thrive together Going green has transformed from an expense into a driver of innovation, creating new market opportunities and maximizing wealth As UN Secretary-General António Guterres emphasized at the COP25 conference on December 2, 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.”

Sustainability is an increasingly important interdisciplinary research area that examines the economic impacts of environmental challenges across various industries The shift towards a sustainable economy has prompted significant changes in numerous sectors, highlighting the transformative effects of sustainable development practices.

Many companies recognize the importance of current trends and are adopting eco-friendly business models that incorporate corporate social responsibility Meanwhile, larger, established corporations are shifting towards the production of safer, more environmentally friendly products to align with societal demands.

As a young individual passionate about sustainable growth, I believe that fostering a sustainable society is essential for improving our world Government leaders recognize various factors influencing sustainable economic efficiency, including globalization, urbanization, per capita GDP, foreign direct investment (FDI), and technological advancements However, assessing the impact of these factors is complex, as it varies across different organizations, countries, and regions For example, China's sustainable economy may depend on fintech investments, while African nations often focus on poverty reduction Therefore, comprehensive research involving multiple firms within a nation is necessary, addressing both unique challenges and common issues that require collaborative solutions among governments Exploring global sustainability management holds significant practical importance for achieving these goals.

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

A study examining the bidirectional relationship between corporate social responsibility (CSR) and financial performance (FP) in Spanish listed companies reveals a significant positive correlation Analyzing data from 121 companies on the Madrid Stock Exchange in 2009, the findings indicate that an increase in the Social Behavior Index correlates with improved financial strength Furthermore, firms with better financial positions are more likely to engage in green initiatives and sustainable practices This conclusion highlights the importance of companies investing in CSR policies, as such investments can lead to enhanced financial performance.

While this exploratory analysis provides valuable insights, it has limitations that warrant further investigation The research is based solely on empirical data from Spanish enterprises, which may restrict the generalizability of the findings to other countries or regions Given that sustainability is a global concern, it is crucial to address this issue through international collaboration Additionally, there is a need for updated data on environmental challenges, as sustainability remains a prominent topic in contemporary research, driven by growing awareness of environmental management and sustainable development worldwide Furthermore, the study does not consider the impact of the nature of businesses involved.

Each company varies in aspects such as sales, employee count, and overall size, influencing its approach to sustainability Businesses possess unique resources and face differing levels of pressure regarding sustainable practices Researchers can enhance this methodology by incorporating additional features and current data This article aims to explore the effects of these added characteristics through empirical study.

Research aims and objectives

This paper aims to enhance the discussion on assessing and forecasting sustainable development dynamics in Sweden, particularly in the modern context By integrating and expanding existing sustainability evaluation frameworks, the study seeks to empirically quantify the relationships between key factors—economic development, social values, resources, and the environment—that influence corporate financial performance The relevance of this research lies in establishing a theoretical and empirical foundation for sustainability practices during the transition era and identifying criteria for evaluating their impact on business financial health.

The aim is supported by achieving the following fundamental objectives:

1 to describe the concept of sustainability and financial performance;

2 to analyze the development and evolution process of sustainability in the world;

3 to reveal fundamental factors affecting sustainability and financial performance and to gather firms’ data on predetermined indicators;

4 to discuss the peculiarities and problems of sustainability practice and scenarios of sustainable development;

5 to suggest methods to improve the efficiency of sustainability application for better financial performance

This study focuses on sustainability and its role in strengthening the financial resilience of contemporary businesses in Sweden It explores various analytical methods, tools, and approaches to understand how different countries perceive and implement sustainable practices.

Research questions

In this paper, the following questions are addressed in order to achieve the research objectives:

- What kinds of activities are included in sustainability practices and management?

- How important is it for companies to implement sustainable business practices?

- What is the role of sustainability in supporting corporate financial performance?

- What are the opportunities, challenges and recommendations for the future development of sustainability practice?

- How does the government best support the development of sustainability?

Introduction to research methodology

The research methodology aims to assess corporate financial health using company-specific statistics and employs observation to analyze economic phenomena Given the complexities of economic dynamics, fluctuations are influenced by various empirical and subjective factors, making it challenging to fully define economic relationships, which can only be speculated through external market indicators This research methodology can be generalized into three phases: first, developing a research model based on prior studies that explore the quantitative impact of sustainability on financial performance; second, meticulously collecting data for the research objectives.

The study analyzes a sample of 116 listed companies in Sweden using a combination of analytical methods, including abstraction, statistical techniques, econometric models, and hypothesis testing, while controlling for unintended factors This comprehensive approach aims to explore the economic relationships among fundamental variables related to the research event The findings include comparative data and provide conclusive insights to support future research endeavors.

Dissertation structure

The remainder of the paper will be organized as shown in table 1 below:

Table 1.1: Structure of the dissertation

Briefly introducing the topic of dissertation, its aims and objectives, methodology and structure

Discussing published reviews, studies and reports related to sustainability and financial performance to identify trends, debates and gaps in the research

Gathering relevant data for 116 listed companies in Sweden Building multiple regression models to conduct statistical analyses

Giving the descriptive statistics of the model, presenting the results of hypothesis tests and discussing the relevant findings

Summarizing the research project, presenting limitations, recommendations and future development in a similar research field

6 Appendix Samples of listed companies

Written and electronic material used in the dissertation project.

Literature review and theoretical framework

Defining sustainability and sustainable development

In today's world, "sustainability" and "sustainable development" are frequently referenced concepts in numerous studies Despite their popularity, establishing a universal definition for these terms remains challenging This section explores definitions from existing literature, summarizes the key components commonly accepted, and clarifies the specific meanings of the terms relevant to this research.

The concept of sustainability, originating from a German forestry handbook in 1713, emphasizes the importance of harvesting resources at a rate that allows for natural regeneration, ensuring ecological balance.

The concept of sustainability has evolved to encompass a broader biological system, moving beyond just forests to include a complex network of living entities Throughout the 20th century, awareness of resource overuse and reliance on fossil fuels grew, leading to the term "sustainability" gaining prominence in the 1980s as it pertained to human lifestyles on Earth (Jessie, 2014) The term first appeared in 1972 in Edward Goldsmith's British publication, A Blueprint for Survival, and by 1978, it was featured in various United Nations documents and agreements, a trend that continues today (Heinrich et al., 2017).

The 1987 Brundtland Report by the World Commission on Environment and Development defines sustainability as the ability to meet current needs without compromising the ability of future generations to meet their own needs.

The concept of sustainability has evolved significantly since its initial definition, with various aspects being explored rather than simply listing definitions From the 1970s to the 1990s, sustainability was predominantly associated with environmental issues A significant milestone occurred during the 1992 UN Conference on Environment and Development (UNCED), which resulted in a global action program for sustainable development A key outcome of this conference was Agenda 21, which provided guidance and best practices for sustainability, emphasizing environmental considerations (Drexhage and Murphy, 2010).

The concept of sustainability has evolved to align with diverse political and economic agendas, guiding economic growth while addressing social sustainability issues It encompasses social justice, intergenerational mobility, human well-being, cultural identity, and biodiversity (Roberts et al., 2014) Thus, social sustainability is deeply interconnected with environmental, economic, political, and cultural factors, as noted by Ife and Tesoriero.

In 2011, it was proposed that evaluating the sustainability of contemporary social systems and institutions—such as families, public entities, authoritative bodies, and voluntary organizations—requires assessing their adherence to specific sustainability criteria throughout their operational processes.

In today's business landscape, sustainability is a critical topic, reflecting a company's ability to maintain financial performance and effective resource management over time Doane and MacGillivray (2001) emphasize that business sustainability focuses on the longevity of a corporation, while Dyllick and Hockerts (2002) define it as the ability to meet the needs of both current and future stakeholders without compromise.

The information technology (IT) sector is significantly impacted by sustainability considerations In 2011, Mahaux, Heymans, and Saval highlighted a software project that prioritized sustainability as a key quality requirement, examining how existing sustainability techniques enhance IT activities and contribute to system stability Building on these concepts, Nauman et al (2011) developed the GREENSOFT Model, an innovative framework that categorizes essential features of sustainable software, further promoting the integration of environmental considerations in software development.

The article outlines a comprehensive roadmap for the future development of the interconnection between information communication technology and sustainability Calero, Bertoa, and Moraga (2013) have significantly contributed to enhancing energy performance in software production, aiming to create a new approach that effectively integrates sustainability with quality in the development process.

Sustainability can be understood through three key perspectives: economic activity, social responsibility, and environmental impact These dimensions highlight the interconnectedness of sustainable practices in various sectors.

Figure 2.1: Interplay of the environmental, economic, and social aspects of sustainability Mark Fedkin Adopted from the University of Michigan Sustainability Assessment

These three pillars cover many areas of development, from urban to agriculture development, transportation, infrastructure, energy consumption, water access and electricity availability

 Economic sustainability means that human capital and material resources should be employed, preserved and maintained efficiently by optimal use, recovery and recycling to create long-term sustainable values (Lửf, 2018)

Environmental sustainability, or ecological sustainability, sets boundaries on our current consumption to preserve ecosystem quality for future generations (Kaswana et al., 2019) Key aspects of environmental sustainability include protecting the environment, responsibly managing resources, reducing atmospheric pollutants, and promoting green jobs.

Social sustainability involves managing the positive and negative impacts of systems, organizations, and activities on human and social life, focusing on human rights, equality, and cultural identity (Balaman, 2019) It aims to uphold social values, justice, and respect for diverse races and religions Achieving sustainability requires a balanced relationship among these aspects, making it crucial for strategic leaders and officials to understand the interactions and trade-offs between them This awareness is essential for fostering responsible behaviors and actions at individual, regional, and national levels.

15 international levels, with a view to safeguarding and promoting the necessary values for the sake of human development

Communication and information are as essential to our daily lives as food, with newspapers, radio, and forums offering valuable insights into current issues The term "sustainable development" frequently appears in these discussions, raising questions about its meaning and impact on our daily lives.

The concept of "sustainable development" originated over 50 years ago, first appearing in an official document signed by 33 African nations in 1969 This milestone was facilitated by the International Union for Conservation of Nature (IUCN), marking a significant step in the global dialogue on sustainability.

The relationship between sustainability and financial performance

While definitions serve as a useful starting point for grasping concepts, numerous efforts have been made to explore deeper principles and interconnections These insights significantly aid practitioners in their ongoing work with the concept.

Friedman (1970) argues that a business's sole social responsibility is to manage resources effectively to enhance profits, suggesting that sustainability practices can lead to increased costs that hinder positive financial performance This perspective posits that investments not benefiting employees, shareholders, or clients may constitute a misuse of company resources Additionally, Preston and O'Bannon's (1997) managerial opportunism hypothesis indicates that social responsibility can negatively impact financial results, as managers may cut social expenditures to boost personal gains during profitable periods or engage in extravagant social programs to offset poor financial performance.

1 the ratio between a physical asset's market value and its replacement value

Jensen (2002) posited that the pursuit of sustainability solutions by business managers could conflict with the objective of maximizing firm value In a study of the 50 largest US and Japanese companies, Ho and Taylor (2007) found that triple bottom line (TBL) reporting diminished as firm profitability, indicated by return on assets (ROA), increased Additionally, López et al (2007) examined 110 companies and discovered a negative correlation between corporate social responsibility (CSR) and firm performance, measured by profit before tax (PBT) growth, in the short term Their analysis also indicated a negative relationship between performance indicators and the Dow Jones Sustainability Index (DJSI), suggesting that the initial impact of sustainability practices on firm performance may be unfavorable.

Montabon, Sroufe, and Narasimhan (2007) explored the positive relationship between sustainability management practices and financial performance metrics such as return on investment (ROI) and sales growth Their study, supported by statistical data, reveals that various environmental management practices (EMPs) are significantly linked to improved firm performance This finding aligns with the slack resource theory and good management theory proposed by Waddock and Graves (1997) Additionally, Fauzi and Idris (2009) conducted a questionnaire-based survey, examining factors like corporate financial performance, business strategy, and organizational structure from the viewpoint of company managers, further confirming the positive impact of sustainability on financial outcomes.

The triple bottom line (TBL) framework encourages companies to prioritize social and environmental issues alongside their profit goals, advocating for a balanced approach that considers three key areas: profit, people, and the planet.

21 relationship between corporate financial performance and corporate social performance

In their empirical analysis, Lopez et al (2007) showed connection between Dow Jones Sustainability Index (DJSI) and active corporate social responsibility policies

In 2010, Kapoor and Sandhu found that Indian companies showed a positive relationship between sustainability performance and key financial metrics such as return on sales (ROS), return on assets (ROA), and return on equity (ROE), although growth impact was insignificant A study by Amouzesh, Moeinfar, and Mousavi (2011) on 54 firms in the Iranian financial market from 2006 to 2009 indicated a significant correlation between the deviation of actual growth rates from sustainable growth rates and ROA and price-to-book (P/B) ratios Furthermore, Ameer and Othman (2012) conducted global research on 100 sustainable companies, revealing that those prioritizing sustainable practices achieved superior financial performance, as evidenced by higher ROA, profit before tax (PBT), and cash flow from operating activities compared to their less sustainable counterparts.

A study by Strand (2013) revealed that companies prioritizing corporate social responsibility (CSR) are three times more likely to participate in the Dow Jones Sustainability Index (DJSI) Additionally, research by Pan et al (2014) on 228 mineral firms in China indicated that sustainability positively influences profitability, as measured by return on assets (ROA), return on equity (ROE), and earnings per share (EPS) Similarly, Akisik and Gal (2014) examined the relationship between financial performance and various evaluations—self-reviews, Global Reporting Initiative (GRI) assessments, and third-party reviews—of CSR reports from North American companies.

Between 2006 and 2012, reviews of sustainability reports were found to significantly influence key financial performance metrics, including Return on Assets (ROA), Return on Sales (ROS), Return on Equity (ROE), and overall sales In a 2017 study, Rahim analyzed data from 226 companies across various sectors, excluding the financial sector, listed on Bursa Malaysia over an 11-year period from 2005 to 2015 Utilizing descriptive methods and multiple regression analysis, the study revealed a significant relationship between debt ratio, equity ratio, total asset turnover, and firm size with sustainable growth rates.

Research by Aupperle, Carroll, and Hatfield (1985) in The Academy of Management Journal revealed no significant link between sustainability and financial performance, suggesting that having a corporate social responsibility (CSR) committee does not guarantee higher profitability Further investigation by Alexander and Buchholz (1978) also found no notable relationship between CSR and market share performance, even when adjusting for stock risk levels Similarly, Inoue and Lee's studies support these findings, indicating a lack of significant correlation between CSR initiatives and financial success.

In a 2011 study examining four tourism-related industries—hotels, restaurants, airlines, and casinos—researchers identified five distinct dimensions of corporate social responsibility (CSR) The findings revealed that not all CSR dimensions positively influenced short- and long-term profitability, as measured by Return on Assets (ROA) and Tobin’s Q, indicating varying impacts across the different industries.

Using Global Reporting Initiative (GRI) G3 standard to evaluate firms’ commitment to sustainability reporting, Dilling (2010) randomly selected 124 G3 reporting and non-G3 reporting firms from 25 countries He found a positive association between a

Research indicates that there is a negative correlation between sales growth and sustainability reporting, while a company's profitability positively influences the quality of its sustainability disclosures Additionally, firms with established long-term sales growth tend to produce lower-quality sustainability reports, and corporate governance appears to have no significant impact on sustainability practices.

Nunes et al (2012) found no significant differences in accounting variables such as ROA, ROE, asset turnover, and net margin between sustainable companies and their counterparts in the energy and banking sectors Similarly, Hussain, Rigoni, and Cavezzali (2018) examined the sustainability reports of the top 100 US firms and discovered that no environmental, social, or governance (ESG) parameters had a significant correlation with financial performance, measured through both accounting metrics (ROA and ROE) and market-based performance (Tobin’s Q).

In addition to slack resource theory and good management theory, stakeholder theory, agency theory, and legitimacy theory play significant roles in addressing corporate governance issues related to environmental concerns and the level of corporate environmental impact disclosure.

Stakeholder theory posits that companies are responsible to various stakeholders, impacting their operational environment positively or negatively (Jabłoński, 2019) Freeman, known as the father of stakeholder theory, defines stakeholders as any group or individual that can influence or is influenced by the organization's goals (Freeman, 1984) Effective stakeholder management is crucial for corporate social responsibility and overall business success.

Responsibility in business is fundamentally relational, emphasizing the importance of prioritizing customers, suppliers, employees, communities, the planet, and other societal segments over mere shareholder interests.

When it comes to agency theory, we concentrate on the relationship between a principal (e.g., buyer) and the agent (e.g., supplier) (Boubaker and Duc Khuong,

The necessity and importance of sustainability practices

Implementing sustainable practices can significantly enhance business success by increasing productivity, boosting brand reputation, fostering innovation, attracting and retaining talent, reducing costs, and improving stakeholder relationships.

Figure 1.2: Corporate Sustainability Priorities in 2025, 2017

In 2017, BSR (Business for Social Responsibility) published a report on the Results of the 9th Annual Survey of Sustainable Business Leaders One of the impressive

In a recent survey, participants were asked to prioritize various activities for their sustainability functions in 2025 The question posed was, "Thinking about the future, please indicate below how much of a priority you think each of these activities will be for your sustainability function to be carrying out in 2025." The results highlight the anticipated focus areas for sustainability efforts moving forward.

By 2025, respondents anticipate that their companies will prioritize core aspects of sustainable management, particularly addressing climate change, over emerging challenges like the technological impacts on workers This shift indicates that company leaders increasingly view sustainability-driven revenue opportunities as a crucial long-term business strategy (BSR, 2017).

Figure 2.2: Types of organizations involved in making the greatest impact on advancing sustainability over the next 10 years, 2017

Global companies are set to be key players in advancing sustainability, surpassing the efforts of national governments and NGOs Notably, a survey indicates that 69% of Europeans trust their government's ability to effect positive change, compared to 51% of North Americans and 55% of individuals from other regions (BSR, 2017).

Figure 2.3: Interest in sustainable products is growing over time (% of global internet users who say they would pay more for sustainable/eco-friendly products)

It would be wise to say, over and over, that it is crucial to stand in customers’ shoes

A recent Global Web Index survey of 1,711,325 internet users aged 16-64 in the US and UK revealed that over half of respondents reported reducing their use of disposable plastics in the past year This finding is based on average data collected from 2011 to 2018.

Going green not only saves money and reduces costs but also enhances productivity and workplace culture A 2012 study revealed that hospitals could save $15 billion over ten years by minimizing energy consumption and waste Additionally, research from UCLA's Clean Energy for Green Industry project found that employees at environmentally friendly businesses are 16% more productive than their peers These green firms foster a motivated and inspired workforce, improved training, and stronger interpersonal relationships, leading to greater efficiency Moreover, embracing digital solutions in shared workspaces can further contribute to cost savings.

Corporations such as Lockheed Martin and General Electric have projected savings ranging from $250,000 to $10 billion through the digitization of paper manuals and processes (Sarantis, 2002) To reduce paper waste, companies can encourage employees to print double-sided and utilize scrap paper for notes This approach highlights the substantial cost advantages associated with effective waste management and energy conservation.

Companies are increasingly focusing on sustainability to attract and retain talent, offering better salaries and benefits to enhance employee loyalty and long-term commitment A strong sustainability strategy can lead to increased productivity, innovation, and reduced fraud, motivating employees to achieve satisfactory results This approach is particularly appealing to Gen Z and Millennials, who prioritize working for environmentally responsible organizations A 2019 study by Swytch revealed that over 70% of respondents preferred companies with a strong green footprint, with nearly 40% of Millennials choosing one job over another due to a clear corporate sustainability plan Additionally, about half of the respondents expressed willingness to accept lower pay to work for a socially and environmentally responsible company, while 30% reported quitting a job due to a lack of sustainability vision.

3 the generation of people born between 1995 and 2012

4 the generation of people born between 1981 and 1996

29 economy, and more than 11 percent have done so more than one time (Sproull,

Despite being all the rage, a lot of industry leaders like Nike, Adidas, Walmart, IKEA and Unilever have demonstrated how sustainability initiatives look like (Haanaes,

Sustainability significantly enhances a brand's image and reputation among consumers, with a Natural Marketing Institute poll revealing that 58% of over 53,000 US consumers prefer businesses with positive social and environmental practices The Cause Marketing Forum highlights that consumers favor companies that engage in sustainable habits and support their communities, indicating that businesses thrive by doing good Effectively communicating a sustainability narrative that aligns with a company's products and services serves as a powerful marketing tool As a long-term strategy, cultivating brand name and prestige is essential for meeting market demands and reinforcing a strong company culture.

Current challenges and opportunities for firms regarding sustainability

Many consumers prioritize price, quality, and accessibility over sustainability when making purchasing decisions While a segment of the market is willing to pay more for sustainable products, others remain focused on immediate concerns, such as the cost and availability of items For example, when customers shop for Nike Air Force 1 sneakers, their interest in the brand's environmental policies may take a backseat to their desire for a good deal and product quality.

Older consumers prioritize price and quality when making purchase decisions, with studies indicating that in Spain and Germany, price is the primary factor, followed by environmental impact (Bolton, 2015; Stolz and Bautista, 2015) While consumer awareness of sustainability has increased, companies face challenges in offering competitive, high-quality, accessible, and sustainable products Educating consumers about sustainability is essential, yet many firms struggle with effective communication channels to convey their green initiatives Effective communication about sustainable practices significantly influences consumer behavior, and inadequate sustainability policies can negatively impact a company's reputation (Choi and Ng, 2011).

Sustainability practices have gained significant public awareness and appreciation Sailaway, a boat tour agency in Port Douglas, Australia, aims to educate its clients on sustainable development by including a CO2 offset tax in its ticket prices, which supports environmental initiatives like reforestation (Ordonez de Pablos, 2013) Additionally, Staples has leveraged the marketing of sustainable products as a competitive advantage by offering notebooks made from 80% sugarcane content, maintaining a price point that rivals traditional paper products (Staples, 2020).

The company has introduced 31 notebooks, showcasing its commitment to sustainability while resonating with environmentally conscious customers who value social responsibility.

The concept of resources spans various fields such as geography, economics, biology, and information technology, and is closely linked to competition, sustainability, conservation, and stewardship (Uzoma, 2018) Economists define resources as services or assets utilized in producing goods and services that fulfill human needs and desires (McConnell, Brue, and Flynn, 2011) This definition varies depending on the specific context in which the term is applied.

Resources are essential for fulfilling human needs and are crucial for businesses in their operations and the production of goods and services This underscores the importance of preserving and protecting these resources, as their sustainability has significant and lasting impacts Consequently, discussions about resources are inherently linked to environmental concerns.

The article highlights three critical resource challenges: climate change, water scarcity, and land degradation, which are essential for various industries' operations Recently, agricultural firms have experienced significant production losses due to extreme weather events, including temperature fluctuations, droughts, and severe storms These losses lead to economic downturns, food insecurity, poverty, malnutrition, price increases, and higher mortality rates Climate change is identified as the most pressing challenge for current and future generations.

The consequences of industrialization and societal indifference towards the environment have prompted many companies to seek ways to mitigate their negative impacts A significant barrier to promoting sustainability is the reliance on fossil fuels for industrial activities, a major contributor to climate change In response, EU member countries are required to meet renewable energy targets set by the European Commission by 2020 Consequently, some organizations are transitioning from fossil fuels to biofuels, which can lower carbon dioxide emissions and support corporate sustainability efforts According to the International Energy Agency's Renewables 2019 report, global biofuel production is projected to increase gradually, reaching 180 billion liters by 2024, marking a growth of approximately 20 billion liters from the current year.

Figure 2.4: Global biofuels growth outlook

Climate change poses a significant sustainability challenge, adversely impacting both revenue and expenditure for businesses To mitigate the detrimental effects of their economic activities, companies must develop and implement effective action plans.

Water and land are essential resources for industrial operations, but their scarcity presents significant sustainability challenges for companies Despite the increasing demand for food, goods, and services, the production process must continue even as these resources become limited A 2012 survey by CDP Water Disclosure revealed that 53% of 500 firms experienced negative water-related impacts in the previous five years, with 68% identifying water as a critical operational challenge In regions facing severe water scarcity, businesses are exposed to substantial operational risks The United Nations General Assembly recognized the human right to water and sanitation in Resolution 64/292 in 2010, emphasizing that the fulfillment of all human rights relies on access to clean drinking water and sanitation.

Sustainable development aims to ensure responsible use of water resources, yet some companies still neglect this crucial goal For instance, a Coca Cola bottling plant in Kerala, India was shut down after it was found that its groundwater extraction severely limited community access to essential water supplies (Hansia, 2014) Companies that mismanage scarce water resources risk damaging their reputation, especially when their practices negatively affect basic human needs or contravene legal regulations Ultimately, loss of goodwill can translate into significant economic repercussions.

Organizations often struggle with financial management, especially when it comes to implementing sustainability strategies, which many view as a cost to shareholders This perception creates reluctance to invest in such initiatives, as consumers may bear some of these costs, leading to decreased sales While financial resources allocated to social responsibility and sustainability can be considered investments, a substantial portion of these expenses remains unrecognized in companies' financial statements.

The accounting regulations impose strict requirements on the identification, measurement, and valuation of financial resources allocated to sustainability plans, making compliance a challenge for businesses In this context, transparency has emerged as a critical standard, particularly in relation to building trust Consequently, as business confidence declines, companies are increasingly compelled to disclose their activities openly.

Mandatory transparency is essential in financial matters like taxation, as it allows for the identification of defects and errors, which should be viewed positively Open communication about areas needing improvement is preferable to addressing failures after they occur (Upton, 2017) Additionally, there is increasing concern in both public and private sectors regarding environmental care, with banks playing a crucial role by financing sustainable projects In February 2020, the European Commission announced over €100 million in investments for the LIFE programme, aimed at fostering a green and climate-neutral Europe Banks are increasingly interested in offering loans with preferential interest rates to support these initiatives.

The article highlights 35 green projects focused on medium to long-term financing, alongside an ambitious initiative in France aimed at addressing knowledge gaps in green finance and promoting the mainstream adoption of green financial products (EC, 2020).

Research gap

Research on the link between sustainability practices and financial performance reveals that interpretations of "sustainability" differ based on context and various factors It is crucial for enterprise managers to clearly articulate how sustainable strategies impact financial performance to inform decision-making Each study presents unique perspectives on assessing firm performance and sustainability engagement, leading to the development of new metrics and indicators for evaluating financial health across different industries and economic sectors.

The urgent need for further investigation into sustainable development in the region is underscored by a lack of updated research While environmentally-related issues are evolving globally, there remains an unclear understanding of how national and international firms are meeting the needs of their stakeholders Additionally, there is significant divergence in opinions regarding the relationship between sustainability practices and company performance, as existing scholarly articles vary widely in their timeframes and analytical approaches.

This study analyzes the relationship between sustainability and firm efficiency across 37 industries and regions, offering valuable insights for business leaders By examining various indicators in depth, the research aims to establish a clear understanding of how sustainable development impacts organizational performance and provides actionable recommendations for diverse business sectors.

Research methodology

Research design

This article explores the potential to enhance financial performance and create value for companies by incorporating social and environmental strategies into their operations The literature review reveals a strong connection between corporate social responsibility, assessed through sustainable performance, and the financial outcomes of businesses.

It is possible to generalize the methodology of research through three phases First of all, data is collected for research purpose The study selects a research sample of

In 2019, a study involving 116 listed companies in Sweden utilized various analytical methods, including descriptive statistics, correlation analysis, hypothesis testing, and multiple regression analysis, to explore the relationship between sustainability and financial performance A multiple regression model was developed to illuminate the intricate connections among social, economic, and environmental indicators The study's conclusions included comparative data and provided valuable insights for future research, while also examining corporate strategies and government policies to enhance understanding of these dynamics.

38 explain and interpret the relevant authorities’ decisions to advance green growth and better improve financial performance

The following generic model is used to test the hypotheses:

Financial performance = f (Dow Jones Sustainability Index, Global Compact, Global Reporting Initiative, Corporate Social Responsibility Disclosure, Corporate Social Responsibility Rank, Sustainable Growth Rate, Asset, Sales, Number of Employees)

Financial performance measurement

Generally, researchers often make use of accounting and market-based measures which provide an appropriate and more comprehensive evaluation of firms

Accounting metrics like ROA, ROE, and profit margin are useful for assessing a firm's short-term performance, while market-based indicators such as Tobin’s Q and stock returns provide insights into potential long-term growth Combining these two types of metrics offers a comprehensive understanding of a business's overall performance.

Financial measurements used in this research is presented in table 3.1 below:

Table 3.1: Financial variables (Financial Performance used as dependent variables)

Tobin’s Q Tobin’s Q = Market Capitalization/ Total Assets

EY Earnings Yield = Earnings per Share for the most recent

12-month period / Current Market Price per Share Accounting- based

ROA Return on Assets = Net Income / Total Assets ROE Return on Equity = Net Income / Shareholder’s Equity ROCE Return on Capital Employed = Profit/Loss before Tax /

Sustainability measurement

Assessing corporate environmental sustainability is crucial for promoting eco-friendliness in all aspects of life, including work Despite various approaches to sustainability, there remains a lack of consensus on effective measurement methods According to Montiel and Delgado-Ceballos (2014), two primary data collection approaches exist for evaluating corporate sustainability The first involves using secondary sources and established sustainability indexes, such as the Dow Jones Sustainability Index (DJSI), Global Sustainability Leaders Index (GSLI), FTSE4Good Developed Index, Supplier CSR Rating, Ethibel Sustainability Index (ESI), and Global Reporting Initiative Index (GRI), as benchmarks for measuring corporate sustainability outcomes (Caủamero et al., 2020).

Sustainability indexes are primarily based on various standards and metrics evaluated by third-party researchers through methods such as polls, interviews, and analyses of corporate disclosure reports Additionally, some researchers develop new indexes and scales to measure the effectiveness of corporate sustainability performance (Montiel & Delgado-Ceballos).

In 2014, researchers highlighted that assessing corporate performance can be conducted through surveys or by analyzing public corporate reports However, it's important to note that this approach often involves a level of subjectivity and value judgment.

Many Swedish companies are featured in sustainability rating databases, making it suitable to utilize secondary databases due to their accessibility and relevance The sustainability measurements utilized in this research are detailed in Table 3.2 below.

Table 2.2: Sustainability variables (Sustainability Performance used as independent variables)

The sustainability performance of publicly traded companies is measured through a strategic partnership between S&P Dow Jones Indices and RobecoSAM This index's universality and credibility make it a robust indicator for assessing corporate social responsibility (CSR).

It takes value 1 if the company belongs to the DJSI, and 0 otherwise The review results about companies belonging to the DJSI can be seen in the

2019 SAM Corporate Sustainability Assessment which is available on the RobecoSAM website

The article discusses the significance of an organization's commitment to the Global Compact, highlighting its importance as emphasized by CSR experts at the Ministry of Labor forum in 2005 This indicator, alongside others such as the Global Reporting Initiative (GRI), serves as a key measure of corporate social responsibility.

It takes value 1 if the company has signed the The United Nations Global Compact, and 0 otherwise The data proceed from The United Nations Global

41 chosen as one of the CSR measures

This article offers guidance on disclosing a company's sustainability practices, highlighting the importance of transparency in sustainability involvement It emphasizes the need for drafting sustainability reports that align with global standards (Alejandro and Santos, 2016) The research utilizes the GRI variable due to its widespread recognition in Europe and its effectiveness in classifying companies, making it a universal and comprehensive tool for sustainability reporting.

Based on the GRI index valuation, the following numerical values are suggested: A+: 1; A: 0.9; B+: 0.8; B: 0.7; C+: 0.6; C: 0.5; and, if no GRI index: 0 The information is gathered from the GRI official database

It’s a mechanism by which company entities provide information to stakeholders about their corporate activities related to environmental, ecological and other social issues (Abdulwahab, Abubakar and Mohammed, 2018)

It takes value 1 if the company chooses to disclose CSR in a sustainability report, and 0 otherwise The information is collected from the company’s official website

Mathews (1993) described CSRD as a voluntary disclosures of qualitative and quantitative information released by firms to educate or affect a variety of stakeholders

The CSR Ranking offers valuable insights by comparing a company's ratings against its competitors, highlighting customer perceptions of social responsibility This ranking is largely based on survey findings, reflecting which companies consumers believe demonstrate a commitment to social responsibility.

CSRHub takes information from its data sources and transforms it into a 0 to 100 scale

Sustainable growth represents the highest rate at which a company can expand without depending on financial leverage or debt (Todd, 2014) In the modern landscape, this type of growth is characterized by its repeatability, ethical considerations, and social responsibility Achieving sustainable growth is essential for a firm to secure long-term success.

The data is provided by Osiris Bureau van Dijk Database

Being environmentally and socially conscious is essential for businesses to ensure reliability and accountability in their impact on the community This awareness serves as a valuable tool for managers, enabling them to effectively control and monitor their operations.

Control variables

When examining the link between corporate sustainability performance and financial performance, it is crucial to consider various influencing factors that can impact a company's results Neglecting these factors may introduce bias into the findings (Saunders, Lewis, and Thornhill, 2012) or lead to endogeneity, which poses significant challenges for researchers (Darnell, 2017).

Common control variables used in research include industry/sector, risk, leverage level, and firm size, aiming to account for the notion that Corporate Social Responsibility (CSR) may be perceived as a luxury good Firm size can be quantified through various methods, such as the natural logarithm of sales or total assets Many authors utilize the statistical technique of standardization, specifically applying the natural log of a firm's assets prior to incorporating the variable into regression analysis.

Regarding the relation between firm size and sustainability practice, as maintained by Hillman and Keim (2001), stakeholders and related parties may express greater

Concerns regarding the responsibility of larger companies in their activities and campaigns are increasingly prevalent The size of a corporation significantly impacts its access to tools and resources essential for effective performance disclosures Research by Herbohn et al (2014) highlights this relationship, while Clarkson et al also contribute to understanding the implications of corporate size on accountability.

(2008) defined a positive association between the size of the company and the amount of corporate disclosure

Research by Legendre and Coderre (2013) and Kuzey and Uyar (2017) highlights that firm size is a crucial and positive factor influencing the decision to publish GRI-based sustainability reports Additionally, Shamil et al (2014) and Kiliỗ and Kuzey (2017) reinforce the notion that larger firms are more likely to produce stand-alone sustainability reports Based on these empirical insights, my study uses the natural logarithm of total assets and sales as an effective measure of firm size.

The number of employees is a key indicator of firm size and is often used to assess company growth, with research showing a correlation between employee count and CSR disclosure (Gavana et al., 2017) This aligns with the slack resources theory, suggesting that larger organizations face greater pressure to disclose information for legitimacy Employees increasingly prioritize their company's sustainability mission, finding their roles more fulfilling when they can contribute to meaningful impacts and engage in sustainable practices (Rila, 2016).

Sample and data collection

The empirical analysis employs a multivariate regression model, utilizing Eviews 11, a widely recognized econometric software, to perform the OLS regression for statistical analysis.

In 2019, the study focused on Swedish companies listed on the OMX, initially identifying 801 firms through Osiris Bureau van Dijk via a UWE account However, due to incomplete financial and non-financial data, such as return on assets and sustainable growth rates, the population was narrowed down to 359 companies While sustainability is an ongoing concern, it presents both opportunities and challenges for firms to stay competitive and responsible Many companies have not updated their sustainable practices, resulting in missing data on key variables like corporate social responsibility rankings and adherence to global reporting initiatives Consequently, the analysis excluded firms lacking relevant information, relying solely on secondary data for the final sample.

Formulation of hypotheses

The primary hypothesis to be examined is whether a firm's financial performance is influenced by its sustainable practices Consequently, the alternative hypothesis posits a relationship between these two variables.

H1: Sustainability is positively and significantly related to corporate financial performance

Following the literature review, the thesis will derive sub-hypotheses and focus on testing statistically the relationship between sustainability and financial performance The equation is as follows:

+ 𝛃𝟕 𝐋𝐍𝐀𝐒𝐒𝐄𝐓 + 𝛃𝟖 𝐋𝐍𝐒𝐀𝐋𝐄 + 𝛃𝟗 𝐋𝐍𝐄𝐌𝐏 + 𝛆 Financial performance (FP) is the dependent variable, which is represented by Tobin’s Q, ROA (Return on Assets), ROE (Return on equity), ROCE (Return on Capital Employed) and EY (Earnings Yield)

Independent variables such as the Dow Jones Sustainability Index (DJSI), Global Compact (GC), Global Reporting Initiative (GRI), Corporate Social Responsibility Disclosure (CSRD), Corporate Social Responsibility Ranking (RANK), and Sustainable Growth Rate (RATE) capture various aspects of sustainability Control variables, including LNASSET, LNSALE, and LNEMP, account for company size by utilizing the natural logarithm of assets, sales revenue, and employee count Additionally, ε denotes the error term, reflecting all other unpredictable factors or omitted variables not incorporated in the model.

We have the following sub-models:

(1) TobinQ = c + β1 DJSI + β2 GC + β3 GRI + β4 CSRD + β5 RANK + β6 RATE

(2) EY = c + β1 DJSI + β2 GC + β3 GRI + β4 CSRD + β5 RANK + β6 RATE

(3) ROA = c + β1 DJSI + β2 GC + β3 GRI + β4 CSRD + β5 RANK + β6 RATE

(4) ROE = c + β1 DJSI + β2 GC + β3 GRI + β4 CSRD + β5 RANK + β6 RATE

(5) ROCE = c + β1 DJSI + β2 GC + β3 GRI + β4 CSRD + β5 RANK + β6 RATE

+ β7 LNASSET + β8 LNSALE + β9 LNEMP + ε From the models, the following sub-hypotheses are put forward and tested:

Companies belonging to the DJSI achieve a higher Tobin’s Q ratio

Companies signing the Global Compact achieve a higher Tobin’s

Companies obtaining a higher rating in GRI standard achieve a higher Tobin’s Q ratio

Companies having sustainability report/ disclosure achieve a higher Tobin’s Q ratio

Companies obtaining a higher ranking in corporate social responsibility achieve a higher Tobin’s Q ratio

Companies having a higher sustainable growth rate achieve a higher Tobin’s Q ratio

Companies belonging to the DJSI achieve a higher earnings yield

Companies signing the Global Compact achieve a higher earnings yield

Companies obtaining a higher rating in GRI standard achieve a higher earnings yield

Companies having sustainability report/ disclosure achieve a higher earnings yield

Companies obtaining a higher ranking in corporate social responsibility achieve a higher earnings yield

Companies having a higher sustainable growth rate achieve a higher earnings yield

Companies belonging to the DJSI achieve a higher return on assets

Companies signing the Global Compact achieve a higher return on assets

Companies obtaining a higher rating in GRI standard achieve a higher return on assets

Companies having sustainability report/ disclosure achieve a higher return on assets

Companies obtaining a higher ranking in corporate social responsibility achieve a higher return on assets

Companies having a higher sustainable growth rate achieve a higher return on assets

Companies belonging to the DJSI achieve a higher return on equity

Companies signing the Global Compact achieve a higher return on equity

Companies obtaining a higher rating in GRI standard achieve a higher return on equity

Companies having sustainability report/ disclosure achieve a higher return on equity

Companies obtaining a higher ranking in corporate social responsibility achieve a higher return on equity

Companies having a higher sustainable growth rate achieve a higher return on equity

Companies belonging to the DJSI achieve a higher return on capital employed

Companies signing the Global Compact achieve a higher return on capital employed

Companies obtaining a higher rating in GRI standard achieve a higher return on capital employed

Companies having sustainability report/ disclosure achieve a higher return on capital employed

Companies obtaining a higher ranking in corporate social responsibility achieve a higher return on capital employed

Companies having a higher sustainable growth rate achieve a higher return on capital employed.

Empirical results and analysis

Descriptive statistics

Table 4.1 shows the results of the company's performance level in general statistical measurements such as mean, standard deviation, and variance respectively

Table 3.1: Descriptive statistics for the sample

ASSET CSRD DJSI EMP EY GC GRI

Mean 3648353 0.853 0.138 11800.09 12.544 0.517 0.305 Median 977632.9 1.000 0.000 3040.000 6.290 1.000 0.000 Maximum 56438334 1.000 1.000 234505.0 264.994 1.000 1.000 Minimum 32957.64 0.000 0.000 7.000 1.166 0.000 0.000 Std Dev 7034390 0.355 0.346 28603.28 31.248 0.502 0.371 Skewness 4.665 -1.998 2.100 5.280 6.706 -0.069 0.574 Kurtosis 31.130 4.995 5.410 36.319 50.052 1.004 1.692 Jarque-Bera 4245.379 96.482 113.332 5904.711 11569.87 19.333 14.645 Probability 0.000 0.000 0.000 0.000 0.000 0.000063 0.000660 Sum 4.23 × 10 8 99.000 16.000 1368810 1455.173 60.000 35.400

RANK RATE ROA ROCE ROE SALE TOBINQ

Mean 68.370 5.379 6.183 10.349 13.998 2903134 1.325 Median 77.500 8.450 5.400 10.305 13.900 823282.4 0.905 Maximum 99.000 210.530 97.610 57.360 210.530 46452958 11.875 Minimum 1.000 -274.310 -34.830 -59.530 -73.620 2276.300 0.029 Std Dev 27.088 36.204 12.115 12.404 25.321 5916832 1.609 Skewness -0.892 -2.635 3.383 -1.039 3.427 4.550 4.635 Kurtosis 2.746 40.747 31.518 13.489 34.395 29.251 29.429 Jarque-Bera 15.717 7021.267 4152.363 552.648 4991.396 3731.037 3791.653 Probability 0.00038 0.000 0.000 0.000 0.000 0.000 0.000 Sum 7931.000 624.010 717.290 1200.580 1623.830 3.37 × 10 8 153.718 Sum Sq.Dev 84385.06 150739.4 16878.93 17694.33 73732.73 4.03 × 10 15 297.746 Observations 116 116 116 116 116 116 116

The sample companies in this study are predominantly large firms, with an average total asset value exceeding $3.6 million To enhance the analysis, both the total assets and the natural logarithm of total assets are included in the regression model.

The typical company in the study employs around 11,800 individuals and generates average sales revenue of nearly $3 million, with figures ranging from a minimum of $2,276 to a maximum of $46 million Additionally, the natural logarithms of both the total number of employees and sales figures are extensively analyzed in the regression.

In terms of sustainability performance, corporate responsibility rankings of surveyed firms range from a low of zero to a high of 99 with a mean score of 77.5

Osiris has demonstrated sustainable growth rates between -274 and 210, with an average of 5.4, indicating a slight positive trend Additionally, the GRI standard rating for Osiris shows a mean score of 0.30, significantly lower than the 0.94 reported in Fernandez's 2016 study.

Descriptive statistics for dummy variables are presented in the table, revealing that their mean values range from 0 to 1 The mean of Corporate Social Responsibility Disclosure (CSRD) indicates that approximately 85% of firms in Sweden prepare sustainability reports or disclosures annually, while the remaining 15% do not This suggests that the majority of Swedish firms are committed to implementing sustainability reports to evaluate their sustainability policies and activities.

Only 14% of Swedish companies are associated with the Dow Jones Sustainability Index (DJSI), highlighting a lack of familiarity with its inclusion requirements Additionally, approximately 51% of the sample firms have signed the Global Compact (GC) since its inception in 2000, which is notably lower than the 51.6% of DJSI and 80% of GC companies reported in Fernandez's 2016 research.

The financial indicators reveal that the maximum and minimum values for Return on Assets (ROA) are 97.61 and -34.83, while Return on Equity (ROE) ranges from 210.53 to -73.62 Additionally, the Return on Capital Employed (ROCE) shows maximum and minimum values of 57.36 and -59.53 The average values for these indicators are 6.18 for ROA, 13.99 for ROE, and 10.34 for ROCE.

The average earnings yield for Swedish firms stands at 12.54%, indicating a relatively low performance compared to a wide range of 6.3% to 265% Additionally, Tobin’s Q value varies significantly, with a minimum of 0.03 and a maximum of 11.85, while the average is merely 1.32.

Autocorrelation test

The Durbin-Watson (DW) test is essential for assessing autocorrelation in the proposed data, as it enhances the reliability of regression results Autocorrelation can significantly affect the accuracy of regression outcomes, particularly when the number of observations is substantial The DW statistic ranges from 0 to 4, indicating different levels of autocorrelation.

The interpretation of autocorrelation values reveals significant insights: a figure close to 2 suggests no autocorrelation, while values approaching 0 indicate positive autocorrelation, and those nearing 4 represent negative autocorrelation Typically, an acceptable range for these values is between 1.50 and 2.50 (Sap, 2020).

Table 4.2: Test for autocorrelation Dependent variables Durbin-Watson value

The analysis of the dependent variables in Table 4.2 shows DW values between 1.978 and 2.251, indicating a lack of autocorrelation in the study variables This finding is not concerning, as values below 1 or above 3 are the primary indicators of autocorrelation (Field, 2013).

Heteroskedasticity test

To assess heteroskedasticity, the Breusch-Pagan-Godfrey tests are performed, with the null hypothesis stating that homoscedasticity exists A significance level of 5% is typically applied for this analysis, and the findings are detailed in Appendix B.

In the analysis of the first four models, the P-value is less than the significance level of 5%, leading us to reject the null hypothesis and conclude that heteroskedasticity is present Conversely, in the last model, the P-value exceeds 5%, indicating that heteroskedasticity is not present, and we accept the null hypothesis.

To improve the estimators of the coefficients in the presence of heteroskedasticity, we can apply Weighted Least Squares for correction Following this adjustment in the first model, the results are detailed in Appendix C Currently, the models show no indications of heteroscedasticity issues.

Normality test

To assess the normality of the data distribution, the thesis utilizes the Jarque-Bera statistic, which evaluates the discrepancies in skewness and kurtosis between the dataset and a normal distribution.

H0: The sample data are not significantly different from a normal population

H1: The sample data are significantly different from a normal population

Appendix C illustrates the results of normality tests

In the output, the probabilities are less than 0.05, so we reject Ho at 5% significance level, meaning that these data are significantly different from normality.

Correlation between variables

Table 4.3 presents the correlation matrix for non-dummy variables in the regression model of Swedish firms, highlighting a significant relationship between sustainability and financial performance indicators such as Tobin's Q, EY, ROA, ROE, and ROCE at both the 0.01 and 0.05 significance levels The strong correlations among these variables complicate the assessment of each independent variable's unique contribution to explaining the dependent variable.

Table 4.3: Correlation between social responsibility and financial performance

CSRD DJSI EY GC GRI LNASSET LNEMP LNSALE RANK RATE ROA ROCE ROE TOBINQ

Table 4.3 indicates a weak positive correlation of approximately 10% between Tobin’s Q and the sustainable growth rate In contrast, the earnings yield demonstrates a significant positive correlation of 0.33 with the sustainable growth rate These findings support hypothesis 2.6, which posits a positive relationship between corporate sustainability activities and financial performance.

The correlation between Return on Assets (ROA) and Return on Equity (ROE) with sustainable growth rate is notably positive, at 56% and 63%, respectively, reinforcing hypotheses 3.6 and 4.6 This indicates that companies with a higher sustainable growth rate tend to achieve better returns on both assets and equity Additionally, the Dow Jones Sustainability Index (DJSI) serves as a strong indicator of a company's financial performance, evidenced by a 25% correlation.

58 can be observed between DJSI and ROA (as well as ROE), which strengthen hypotheses 3.1 and 4.1

The commitment to the Global Compact and the sustainable growth rate significantly influence Return on Capital Employed (ROCE), showing correlations of 19% and 26%, respectively These findings align with the expectations outlined in hypotheses 5.2 and 5.6.

The logarithmic transformations of employee numbers (LNEMP) and sales (LNSALE) exhibit a strong positive correlation of 91%, leading to their exclusion from simultaneous use in regression analysis This relationship suggests that an increase in the number of employees typically corresponds with a rise in revenue, a key insight highlighted in Kalm's (2012) analysis.

On the logarithmic scale, sales revenue (LNSALE) and assets (LNASSET) exhibit a strong positive correlation of 82%, indicating their potential to explain a firm's profitability However, the high correlation suggests that these two variables may provide overlapping information, which could limit their effectiveness in a regression model Therefore, to enhance the model's clarity and accuracy, it is advisable to remove LNSALE from the analysis.

Hence, the model should be as follow:

Regression results

To check heteroskedasticity Breusch-Pagan-Godfrey tests are conducted, and the null hypothesis is that there is homoscedasticity Significance level of 5% is commonly used for this test

Obs*R-squared 20.08642 Prob Chi-Square(8) 0.0100

Table 4.4 indicates that in the first four models, the P-value is less than the significance level of 5%, leading us to reject the null hypothesis and conclude that heteroskedasticity is present Conversely, in the last model, the P-value exceeds 5%, allowing us to accept the null hypothesis and confirm the absence of heteroskedasticity.

To improve coefficient estimators in the presence of heteroskedasticity in regression analyses, applying Weighted Least Squares can effectively correct this issue The results after addressing heteroskedasticity in the initial model are displayed in Table 4.5.

Table 4.5: Regression coefficients after correcting heteroskedasticity for models 1, 2, 3, and 4

Weight type: Inverse standard deviation (EViews default scaling)

Variable Coefficient Std Error t-Statistic Prob

Mean dependent var 0.864890 S.D dependent var 2.422842 S.E of regression 0.499884 Akaike info criterion 1.525529 Sum squared resid 26.73758 Schwarz criterion 1.739170 Log likelihood -79.48070 Hannan-Quinn criter 1.612255 Durbin-Watson stat 1.890503 Weighted mean dep -276.604

R-squared 0.112040 Mean dependent var 1.325155 Adjusted R-squared 0.045651 S.D dependent var 1.609066 S.E of regression 1.571909 Sum squared resid 264.3862 Durbin-Watson stat 2.124911

GC -0.295400 0.251081 -1.176514 0.2420 GRI -3.801772 0.830551 -4.577408 0.0000 CSRD 6.661284 0.862033 7.727410 0.0000 RANK 0.137339 0.020789 6.606282 0.0000 RATE 0.194611 0.037724 5.158863 0.0000 LNASSET 4.033567 0.609951 6.612934 0.0000 LNEMP -5.531379 0.585993 -9.439329 0.0000

Weight type: Inverse standard deviation (EViews default scaling) Variable Coefficient Std Error t-Statistic Prob

CSRD -4.359861 0.431705 -10.09918 0.0000 RANK -0.030220 0.015675 -1.927948 0.0565 RATE 0.673196 0.051282 13.12729 0.0000 LNASSET 1.559983 0.376152 4.147209 0.0001 LNEMP -0.805574 0.388149 -2.075424 0.0403

Unweighted Statistics R-squared 0.339269 Mean dependent var 13.99853 Adjusted R-squared 0.289869 S.D dependent var 25.32102

S.E of regression 21.33784 Sum squared resid 48717.47 Durbin-Watson stat 1.998857

Until now, the models do not present problems of heteroscedasticity

GRI -1.375501 3.571745 -0.385106 0.7009 CSRD -8.152973 3.214324 -2.536450 0.0126 RANK -0.088331 0.049986 -1.767097 0.0801 RATE 0.068714 0.030263 2.270542 0.0252 LNASSET 1.108989 1.071885 1.034616 0.3032 LNEMP 1.230301 0.890567 1.381481 0.1700

R-squared 0.215976 Mean dependent var 10.34983 Adjusted R-squared 0.157358 S.D dependent var 12.40418 S.E of regression 11.38649 Akaike info criterion 7.777142

Sum squared resid 13872.77 Schwarz criterion 7.990783

Log likelihood -442.0743 Hannan-Quinn criter 7.863868

P-value of the regression coefficients of the independent variables: GC, RANK, LNASSET and LNEMP are less than 0.05, so these variables are meaningful in explaining the dependent variable at 95% confidence level

The regression analysis reveals that the coefficients for GC, RANK, and LNASSET are negative, indicating an inverse relationship with the dependent variable Conversely, LNEMP shows a positive effect on the dependent variable, suggesting that it contributes positively to the outcome.

Based on the magnitude of regression coefficients, the level of impact (from strongest to weakest) of the independent variables to the dependent variable Tobin’s

Q is: GC (-0.313)> LNASSET (-0.174)> LNEMP (0.155 )> RANK (-0.011)

A commitment to the Global Compact significantly influences Tobin's Q, making it the most impactful factor Following this, the size of the company, indicated by asset value and employee count, ranks as the second and third most influential elements on Tobin's Q In contrast, the company's corporate social responsibility ranking has the least effect on this financial metric.

In section 3.2, we present six sub-hypotheses (H1.1 to H1.6), focusing on two key hypotheses: H1.2 and H1.5, which relate to the Global Compact and corporate social responsibility rank Notably, the coefficient signs for these hypotheses reveal a contradictory interpretation of the expected outcomes.

The sub-hypotheses related to DJSI, GRI, CSRD, and RATE have been excluded, as they do not influence the firm’s Tobin’s Q value and are therefore not significant in the regression model.

We arrive at the following regression equation:

TobinQ = 4.091 − 0.313 GC − 0.011 RANK − 0.174 LNASSET + 0.155 LNEMP + ε

It is clear that p-values of all variables except GC are lower than 0.01, meaning they are significant in illuminating the firm’s earnings yield

The regression analysis indicates that GRI and LNEMP have negative coefficients, suggesting they exert opposing effects on the dependent variable Conversely, all other variables demonstrate a positive influence on EY.

The analysis reveals the impact of independent variables on Earnings Yield, ranked from strongest to weakest based on regression coefficients: DJSI (8.788), CSRD (6.661), LNEMP (-5.531), LNASSET (4.033), GRI (-3.801), RATE (0.194), and RANK (0.137).

All the sub-hypotheses from H2.1 to H2.6 (except H2.2) are relevant in this case Nevertheless, the signs of the coefficients depict that only sub-hypotheses H2.1, H2.4, H2.5 and H2.6 are accepted

EY = −19.198 + 8.788 DJSI − 3.801 GRI + 6.661 CSRD + 0.137 RANK

+ 0.194 RATE + 4.033 LNASSET − 5.531 LNEMP + ε When P-value of the regression coefficients of the independent variables GC, CSRD, and RATE are smaller than 0.05, the result is trumpeted as significant at 95% confidence level

Regarding LNEMP, the p-value is less than 0.10, so we can consider the result as significant at 90% confidence interval

Based on the magnitude of regression coefficients, the level of impact (from strongest to weakest) of the independent variables to the dependent variable ROA is: CSRD (-4.924)> GC (-2.226)> LNEMP (-0.359)> RATE (0.173)

The coefficients for GC, CSRD, and LNEMP indicate a negative relationship between these variables In contrast, a positive coefficient for RATE suggests that a one-unit increase in the sustainable growth rate is associated with a 17% increase in Return on Assets (ROA), assuming all other variables remain constant.

Out of the six sub-hypotheses ranging from H3.1 to H3.6, only H3.6 is accepted, indicating that companies with a higher sustainable growth rate attain a greater return on assets Conversely, H3.2 and H3.4 are rejected due to their conflicting implications with the findings.

The other sub-hypotheses are removed, as DJSI, GRI, and RANK do not affect the firm’s ROA value At bottom, they possess no use in the regression model

The regression model shows that ROA is influenced by several significant variables, with GRI, CSRD, RATE, LNASSET, and LNEMP having p-values below 0.05, indicating their statistical significance at a 95% confidence level Additionally, RANK has a p-value of 0.0565, which, while slightly above the 0.05 threshold, is still significant at a 90% confidence level.

Based on the magnitude of regression coefficients, the level of impact (from strongest to weakest) of the independent variables to the dependent variable Tobin’s

Q is: CSRD (-4.359)> GRI (2.357)> LNASSET (1.559)> LNEMP (-0.805)> RATE (0.673)> RANK (-0.030)

The coefficients of CSRD and RANK are negative, meaning they have an opposite connection with the outcome variable On the contrary, GRI and RATE are positively

The analysis reveals that a 1-unit increase in either the GRI standard rating or the sustainable growth rate leads to an increase in ROE by 2.357 times and 0.673 times, respectively, while controlling for other variables Consequently, sub-hypotheses H4.3 and H4.6 are accepted, whereas H4.4 and H4.5 are rejected, and H4.1 and H4.2 are deemed nonsensical.

ROE = 2.357 GRI − 4.359 CSRD − 0.030 RANK + 0.673 RATE + 1.559 LNASSET

The analysis reveals that the p-values for CSRD and RATE indicate significance at the 95% confidence level, while the p-value for RANK, being less than 0.1, suggests significance at the 90% confidence level.

According to the magnitude of coefficients, the level of impact (from strongest to weakest) of the independent variables on the dependent variable ROCE is: CSRD (- 8.152)> RANK (-0.088)> RATE (0.068)

The negative coefficients of CSRD and RANK indicate an inverse relationship between these two measures Additionally, a positive coefficient for RATE suggests that a unit increase in sustainable growth rate is associated with an approximate 7% increase in ROCE, assuming all other variables remain constant.

This agrees with sub-hypothesis H5.6 (i.e companies having a higher sustainable growth rate achieve a higher return on capital employed) The remaining sub- hypotheses of this category are rejected

We can conclude the following regression equation:

Table 4.6: Verification of models’ hypotheses

Sub- model 5 Hypothesis 1 (+DJSI implies + FP)

Verified with EY Hypothesis 2 (+GC implies + FP)

Verified with ROE Hypothesis 4 (+CSRD implies + FP)

Verified with EY Hypothesis 5 (+RANK implies + FP)

Verified with EY Hypothesis 6 (+RATE implies + FP)

Conclusions and recommendations

Research implications

This analysis investigates the relationship between corporate sustainability success and financial performance among Swedish companies across various industries, expanding beyond previous research It contributes to existing literature by incorporating diverse financial metrics, such as earnings yield (EY) as a market-based indicator and return on capital employed (ROCE) as an accounting-based measure Additionally, the study offers new insights into the impact of environmental considerations on financial health, emphasizing the importance for management to prioritize sustainability and the social and environmental consequences of their operations.

The hypothesis suggests a positive correlation between organizational sustainability success and financial performance, a notion supported by research findings that indicate a linear relationship Exploratory results reveal that the implementation of specific sustainability practices is significantly linked to financial indicators such as EY, ROA, ROE, and ROCE However, additional tests show that the relationship is more intricate, with positive associations found for indicators like DJSI, CSRD, GRI, RANK, and RATE, while a negative relationship is observed for GC.

Joining the Dow Jones Sustainability Index (DJSI) sets clear expectations for an organization's future benefits, emphasizing the importance of sustainable growth This commitment not only facilitates access to financial resources but also enhances the overall performance of Swedish enterprises.

Inclusion in the Dow Jones Sustainability Index (DJSI) enhances a company's reputation and offers economic and strategic advantages that positively impact firm value, as it serves as a proxy for high environmental and social efficiency, leading to increased financial returns The Corporate Sustainability Reporting Directive (CSRD) encourages voluntary disclosure, enabling corporations to raise public awareness, enhance their reputation, and mitigate societal criticism A well-structured sustainability report provides comprehensive statistics on a business's sustainable development, including key performance indicators like carbon emissions, workplace injuries, and waste management, offering investors valuable insights into how a company's strategy generates and sustains value Research by Dias, Rodrigues, and Craig (2017) indicates that larger firms and those closer to consumers tend to exhibit higher levels of CSRD.

The Corporate Sustainability Reporting Directive (CSRD) enables companies to legitimize their actions and shape stakeholder expectations, ultimately enhancing their reputation and credibility This improved standing can attract foreign direct investments and foster beneficial relationships with vendors and suppliers, significantly boosting the earnings yield of Swedish firms Research indicates that sustainability reporting leads to notable financial performance improvements over time, making it a valuable strategy for increasing profitability and enhancing shareholder value.

The results of this study also suggest that by increasing corporate social responsibility ranking, Swedish companies can have certain benefits in terms of

75 growing earnings yield It could be more important, for example, to implement advanced technologies for environmental conservation, provide better customer service, or strengthen public relationships

Swedish businesses are strongly encouraged to adhere to the GRI Guidelines, as this study highlights that incorporating these principles in sustainability reporting yields financial benefits and advantages for all stakeholders This aligns with Fernandez (2015), who underscores the growing importance of GRI, suggesting that an increasing number of companies will seek to adopt these practices over time.

The research emphasizes the importance for Swedish managers to adhere to sustainability guidelines, highlighting that social and environmental initiatives are essential components of an organization's overall policy It is crucial for the Board of Directors to acknowledge this, as empowering boards to implement green policies can significantly enhance corporate performance and improve visibility.

Swedish companies can sustain their growth by identifying key factors that directly influence their performance To enhance the sustainable growth rate, microeconomic policies should focus on optimizing financial and operational management This approach is closely linked to critical performance indicators such as earnings yield, return on assets, return on equity, and return on capital employed.

The adoption of sustainable activities has sparked a vital discussion about the true essence of sustainability and its long-term effects on organizations Engaging in initiatives like the Dow Jones Sustainability Index (DJSI), participating in the Global Compact (GC), or adhering to the Global Reporting Initiative (GRI) raises the question of whether these actions serve as a means of strategic differentiation for businesses.

76 that can support higher financial performance? Or is it a strategic necessity that can guarantee corporate survival in the market?

Many companies adopt environmental, water, or waste management strategies to enhance cost efficiency and improve profitability While these initiatives may be perceived as sustainable practices contributing to economic success, the question arises whether they truly provide a competitive advantage By implementing common sustainability practices, firms can achieve legitimacy and align with industry standards, such as sustainability reporting, which has become a best practice However, some businesses gain a distinct competitive edge by adopting unique environmental policies that are challenging for competitors to replicate Ultimately, sustainability serves as both a necessary component and a differentiator in the marketplace.

To enhance business sustainability, it is widely suggested that the Swedish government establish a target for monitoring sustainable guidelines and encourage higher quality reporting among national companies The introduction of stronger measures is essential, and legislation requiring mandatory consequence analysis should be explored and proposed, enabling companies across various sectors to comply effectively.

Limitations of research

While the findings are encouraging, it is essential to acknowledge certain limitations The study's geographical and temporal scope is restricted to Sweden, suggesting that results may differ in other regions due to variations in national socio-economic conditions and population dynamics.

The statistical findings of this study are primarily based on Swedish firms, limiting the insights applicable beyond the country Expanding research on a global scale could uncover universally applicable practices and foster cooperation among national authorities to shape future business directions and enhance community well-being The current study's limited timeframe restricts its ability to assess the long-term impacts of sustainability practices Future research should consider longer periods, such as five to ten years, to better understand the time lags in relationships and accurately measure the enduring effects of sustainability initiatives.

This study examines all sectors in Sweden, but its findings are not limited to specific industries due to constraints in raw data Consequently, companies in various fields, such as healthcare, banking, and marketing, may struggle to adapt their practices or develop new green initiatives to align with sustainable development goals Additionally, measuring corporate sustainability presents challenges, as the indicators used may not capture the full spectrum of sustainability practices Future research should aim to enhance the sustainability efficiency index to offer a more nuanced understanding of sustainability.

Lastly, as with any study, there is often a possible risk of biased results due to subjective interpretations of the outcomes and not only of the methodology.

Recommendations for further research

Future research should expand to European and international contexts, utilizing available data for empirical analysis Additionally, it is essential to assess whether the findings hold true over longer time horizons Incorporating both accounting-based and market-based measures of financial performance is crucial, as they provide a more comprehensive understanding of long-term financial performance.

An essential objective, driven by the increasing awareness of corporate social responsibility, is to create a comprehensive and accurate index for assessing sustainability levels The challenges in measuring sustainability hinder the analysis of various studies; therefore, a standardized index that defines sustainable practices would facilitate more uniform empirical research in the future.

Further investigation into the connection between Corporate Social Performance (CSP) and Financial Performance (FP) is essential The current model overlooks important factors like Research and Development (RD) expenses and geographical diversification, which could influence the CSP-FP relationship Future studies should incorporate these variables to enhance the understanding of this dynamic.

A deeper examination of the relationship between sustainability and financial performance in firms is essential Future research should consider industry-specific factors, including size, competitiveness, structure, trends, norms, and key success factors, to yield more accurate and relevant findings.

Appendix A: Sample of listed companies Aak Ab

Billerudkorsnäs AB, Bjorn Borg AB, Boliden AB, Bonava AB, Bong AB, Bufab AB, Bulten AB, and Byggmax Group AB are prominent companies in various sectors Cellavision AB, Clas Ohlson AB, Cloetta AB, and Collector AB contribute significantly to their respective industries Concentric AB and Concordia Maritime AB are key players in their fields, while Dios Fastigheter AB, Dometic Group AB (Publ), and Duni AB round out this diverse list of influential businesses.

Dustin Group Ab (Publ) Elanders Ab

Elekta Ab (Publ) Eltel Ab

Eolus Vind Ab Epiroc Ab

Evolution Gaming Group Ab (Publ)

Lammhults Design Group Ab Lifco Ab

Lindab International Ab Loomis Ab

Mekonomen Ab Midsona Ab Modern Times Group Ab Momentum Group Ab

Mq Holding Ab Mycronic Ab Ncc Ab Nederman Holding Ab Netent Ab (Publ) New Wave Group Ab Nibe Industrier Ab Nobia Ab

Nobina Ab Nolato Ab Note Ab Odd Molly International Ab Oem International Ab Pandox Ab

Peab Ab Proact It Group Ab Probi Ab

Rnb Retail And Brands Ab

Svenska Cellulosa Ab Sca Sweco Ab

Systemair Ab Tele2 Ab Telefonaktiebolaget Lm Ericsson Telia Company Ab

Tobii Ab Trelleborg Ab Vbg Group Ab Vitrolife Ab

F-statistic 2.699205 Prob F(9,106) 0.0072 Obs*R-squared 21.62797 Prob Chi-Square(9) 0.0101 Scaled explained SS 175.8692 Prob Chi-Square(9) 0.0000

Mean -3.87e-16 Median -0.185993 Maximum 9.076567 Minimum -2.238972 Std Dev 1.484346 Skewness 3.351949 Kurtosis 20.47638

Mean -3.47e-14Median -3.498137Maximum 207.0599Minimum -48.32684Std Dev 26.17463Skewness 4.820367Kurtosis 36.57555Jarque-Bera 5897.929Probability 0.000000

Mean -5.65e-15Median -1.646351Maximum 112.2677Minimum -47.34596Std Dev 18.06683Skewness 2.912969Kurtosis 19.58502Jarque-Bera 1493.521Probability 0.000000

Mean -3.65e-15 Median -1.049783 Maximum 39.04037 Minimum -54.73934 Std Dev 10.73404 Skewness -0.473186 Kurtosis 9.368344

Mean -3.65e-15Median -1.049783Maximum 39.04037Minimum -54.73934Std Dev 10.73404Skewness -0.473186Kurtosis 9.368344Jarque-Bera 200.3486Probability 0.000000

Appendix D: Regression coefficients after correcting heteroskedasticity for models 1, 2, 3, and 4

Huber-White-Hinkley (HC1) heteroskedasticity consistent standard errors and covariance

The analysis reveals a mean dependent variable of 1.261581 with a standard deviation of 3.164619, indicating variability in the data The regression's standard error is 1.303116, while the Akaike information criterion stands at 3.449657, suggesting a good model fit The sum of squared residuals is 179.9998, and the Schwarz criterion is 3.687035, further supporting the model's adequacy The log likelihood value is -190.0801, with a Hannan-Quinn criterion of 3.546019 The Durbin-Watson statistic is 2.129309, indicating no significant autocorrelation in the residuals The weighted mean of the dependent variable is -77.7275, and the Wald F-statistic is 5.703944, with a highly significant probability of 0.000002, underscoring the model's relevance.

R-squared -0.160912 Mean dependent var 1.325155 Adjusted R-squared -0.259480 S.D dependent var 1.609066 S.E of regression 1.805800 Sum squared resid 345.6567 Durbin-Watson stat 2.041539

Huber-White-Hinkley (HC1) heteroskedasticity consistent standard errors and covariance

GRI -2.192489 4.276442 -0.512690 0.6092 CSRD 2.943060 1.445769 2.035636 0.0443 RANK 0.097684 0.058727 1.663364 0.0992 RATE 0.144499 0.139993 1.032187 0.3043 LNASSET 0.687547 1.199561 0.573166 0.5677 LNSALE 0.567199 1.480872 0.383017 0.7025 LNEMP -2.436517 2.136101 -1.140637 0.2566

The analysis reveals a mean dependent variable of 8.858, with a standard deviation of 26.545 The regression's standard error stands at 10.653, while the Akaike information criterion is recorded at 7.652 The sum of squared residuals amounts to 12029.51, and the Schwarz criterion is noted as 7.889 The log likelihood is -433.806, with the Hannan-Quinn criterion at 7.748 The Durbin-Watson statistic is 2.071, indicating no autocorrelation in the residuals Additionally, the weighted mean of the dependent variable is -656.626, and the Wald F-statistic is 13.902, with a probability of 0.000, suggesting a statistically significant model.

Weight type: Inverse standard deviation (EViews default scaling) Huber-White-Hinkley (HC1) heteroskedasticity consistent standard errors and covariance

RANK -0.004565 0.027708 -0.164765 0.8694 RATE 0.392472 0.040686 9.646344 0.0000 LNASSET 1.104194 0.695308 1.588065 0.1153 LNSALE -1.905842 1.289279 -1.478223 0.1423 LNEMP 0.744263 0.803744 0.925994 0.3566

R-squared 0.664696 Mean dependent var 6.208096 Adjusted R-squared 0.636227 S.D dependent var 8.148738 S.E of regression 4.516932 Akaike info criterion 5.935806 Sum squared resid 2162.684 Schwarz criterion 6.173184 Log likelihood -334.2767 Hannan-Quinn criter 6.032168 F-statistic 23.34793 Durbin-Watson stat 2.163290 Prob(F-statistic) 0.000000 Weighted mean dep 5.746822 Wald F-statistic 19.06502 Prob(Wald F-statistic) 0.000000

R-squared -0.009041 Mean dependent var 6.183534 Adjusted R-squared -0.094714 S.D dependent var 12.11500 S.E of regression 12.67576 Sum squared resid 17031.53 Durbin-Watson stat 2.020685

Weight type: Inverse standard deviation (EViews default scaling) Huber-White-Hinkley (HC1) heteroskedasticity consistent standard errors and covariance

CSRD -5.386052 0.688364 -7.824426 0.0000 RANK -0.025445 0.013639 -1.865588 0.0649 RATE 0.629692 0.055360 11.37454 0.0000 LNASSET 0.188437 0.335330 0.561945 0.5753 LNSALE 1.861204 0.638054 2.917002 0.0043 LNEMP -1.252173 0.461067 -2.715817 0.0077

The analysis reveals a mean dependent variable of 14.13389 with a standard deviation of 54.52360, indicating significant variability in the data The regression model has a standard error of 2.177592, suggesting a reliable fit Key statistical criteria include an Akaike information criterion of 4.476579 and a Schwarz criterion of 4.713957, both of which are important for model selection The log likelihood stands at -249.6416, while the Hannan-Quinn criterion is 4.572941 Additionally, the Durbin-Watson statistic is 1.747216, pointing to potential autocorrelation in the residuals The Wald F-statistic is notably high at 3960.537, with a probability of 0.000000, indicating that the model is statistically significant The weighted mean of the dependent variable is reported as -2636.77.

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Tiêu đề	The Impact of Sustainability Practices on Financial Performance: Empirical Evidence from Sweden
Tác giả	Do Thi Ngoc Anh
Người hướng dẫn	Assoc. Prof. Dr. Pham Duc Cuong
Trường học	University of Finance
Chuyên ngành	Finance
Thể loại	dissertation
Năm xuất bản	2020
Thành phố	Tai

Định dạng
Số trang	116
Dung lượng	1,71 MB