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

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON THE IMPACT OF SUSTAINABILITY PRACTICES ON FINANCIAL PERFORMANCE: EMPIRICAL EVIDENCE FROM SWEDEN DO THI NGOC ANH ID No: 19046135 Intake Supervisor: Assoc Prof Dr Pham Duc Cuong September 2020 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014129079061000000 Executive summary Sustainability issues are one of the fields that managers and investors have taken detailed consideration when handling their operations and activities Despite a number of empirical findings on the effects of sustainable development on financial efficiency, the results are still inconclusive due to numerous specific factors and conditions of each research scope In our globalized world, every business is connected with one another in the complex web of cross-cultural interaction and influences the lives of people in different ways Therefore, sustainability is never a solo mission This study aims at empirically exploring the influence of green initiatives on the financial results of 116 listed Sweden companies in the year 2019 Furthermore, the thesis contributes by identifying opportunities and providing recommendations for companies, organizations, and authorities regarding the implementation of sustainability strategies With the support of theories and previous research studies, a positive relationship is supposed between sustainability performance and financial success The findings indicate a positive relationship between corporate sustainability and financial performance that is measured by earnings yield, return on asset, return on equity and return on capital employed When it comes to Tobin’s Q, which is a marketbased financial measure, the result is inconclusive Finally, it is recommendable for firms to be engaged in Dow Jones Sustainability Index, prepare their sustainability report in accordance with GRI Standards, improve their sustainable growth rate, as well as keep a high position in the corporate social responsibility ranking There are some limitations and room for further study Reasonably, the matter needs to be handled in a mutual effort of different countries and to be approach from an i international perspective There is also a concern about newer data when addressing environmental problems since sustainability concept is considered as a hot topic in recent research forums Besides, further studies should take into account the factor of business nature of each company, represented by such variables as sales, number of employees, size of the company, etc Each business has its own ability and approach to placing an emphasis on sustainability, as well as different extents of pressure to taking sustainable responsibility ii Acknowledgements First and foremost, I would like to express my deepest gratitude to my respectful supervisor, Assoc Prof Dr Pham Duc Cuong, for his supportive advice and constructive comments during the conduction process of the dissertation Thanks to his practical expertise and hands-on experience in multiple research aspects, I was able to explore the highlights of the problem mentioned in the thesis and reach new heights in my academic pursuits He was always willing to lend an ear to any problems or issues I may have had I have learned so much under his mentorship and I could not be more grateful to have him as my supervisor Furthermore, I have also benefitted from discussions with Mr Dang Tien Dat and Ms Tran Thao Linh I must express my sincere appreciation and gratitude to these people who have given so much of their time and boundless enthusiasm to helping me in my research Indeed they are a source of continued support throughout the process Last but not least, I want to thank all my family members and friends who stood by my side during my journey As always, they have been an unfailing source of support – both emotional and practical – throughout this process Without them, I could not have accomplished all the things I have done for the last few months iii Table of contents Executive summary i Acknowledgements iii Table of contents iv List of tables List of figures Chapter Introduction 1.1 Research background 1.2 Research aims and objectives 1.3 Research questions 1.4 Introduction to research methodology 1.5 Dissertation structure Chapter Literature review and theoretical framework 10 2.1 Defining sustainability and sustainable development 10 2.1.1 Sustainability 10 2.1.2 Sustainable development 15 2.1.3 Financial performance 17 2.2 The relationship between sustainability and financial performance 19 2.3 The necessity and importance of sustainability practices 25 2.4 Current challenges and opportunities for firms regarding sustainability practices 29 2.4.1 Customer preference 29 2.4.2 Resource 31 2.4.3 Finance 34 2.4.4 Organization 35 2.5 Research gap 36 Chapter Research methodology 37 3.1 Research design 37 3.2 Financial performance measurement 38 3.3 Sustainability measurement 39 3.4 Control variables 43 3.5 Sample and data collection 45 iv 3.6 Formulation of hypotheses 46 Chapter Empirical results and analysis 51 4.1 Descriptive statistics 51 4.2 Autocorrelation test 54 4.3 Heteroskedasticity test 55 4.4 Normality test 56 4.5 Correlation between variables 56 4.6 Regression results 59 Chapter Conclusions and recommendations 73 5.1 Research implications 73 5.2 Limitations of research 76 5.3 Recommendations for further research 78 Appendices 79 References 94 v List of tables Table 1.1: Structure of the dissertation Table 3.1: Financial variables (Financial Performance used as dependent variables) 38 Table 3.2: Sustainability variables (Sustainability Performance used as independent variables) 40 Table 4.1: Descriptive statistics for the sample 51 Table 4.2: Test for autocorrelation 55 Table 4.3: Correlation between social responsibility and financial performance 82 Table 4.4: Test for heteroskedasticity 59 Table 4.5: Regression Coefficients after Correcting Heteroskedasticity for models 1, 2, 3, and 61 Table 4.6: Verification of models’ hypotheses 72 List of figures Figure 2.1: Interplay of the environmental, economic, and social aspects of sustainability 13 Figure 2.2: Corporate Sustainability Priorities in 2025, 2017 (Percentage of all respondents) 25 Figure 2.3: Types of organizations involved in making the greatest impact on advancing sustainability over the next 10 years, 2017 (Percentage of all respondents) 26 Figure 2.4: Interest in sustainable products is growing over time (% of global internet users who say they would pay more for sustainable/eco-friendly products) 27 Figure 2.5: Global biofuels growth outlook 32 Chapter Introduction 1.1 Research background The world has been entering into the Fourth Industrial Revolution and Industry 4.0, which is a new production revolution associated closely with the fusion of the digital, biological and physical worlds, as well as the growing utilization of such unprecedented technological breakthroughs as cloud computing, 3D printing, sensor technology, artificial intelligence, block chain, advanced wireless technologies, etc Much of what would be considered to be in a scientific fiction few decades ago is now driving the globe toward the new era Many people foresee that it will be serving more meaningful purposes: extending lifespans, ameliorating healthcare practice, alleviating poverty, and more Notwithstanding, some see darker sides as it can usher in a period of economic disruption with uncertain socio-economic and environmental consequences for countries Along with climate change, which dictates the need for global transformations in the economy, financial and energy crises have also necessitated the search for new models of economic growth oriented towards sustainable development The development of mankind requires a transition to new principles and types of economic activity related to the production, distribution and consumption of goods and services that would enhance human well-being in the long run, without exposing future generations to significant environmental risks in an unfavorable condition To deal with the consequences, human beings have been trying to find new ways of revolutionizing the economy In the decades following World War II, development was defined primarily in economic terms and measured by growth in countries’ gross domestic product (GDP) and per capita incomes (Harrison, 1996) Nevertheless, several authors in the late 1980s and early 1990s proposed a different theory about what constituted development, conceptualized as “human development” (Desai, 1991; Streeten, 1994; ul Haq, 1995) Accordingly, development needs to be about human well-being, expanding people’s choices and freedom Though important, economic growth is not sufficient for full development Over the past three decades, in parallel with human development, another powerful concept sustainable development - also attracts a great deal of attention from scholars and authors on the discussion of new economic models (Khasanov, 2016) These two mutually enrich each other and gradually confirms the idea that if not being sustainable, the development path cannot claim the title of human development There may exists some difference in theoretical approaches, however, human being is at the center of these concepts For years, responding to environmental issues has always been a no-win proposition for businesses (Walley and Whitehead, 1994) In this new world, both the business and the environment can be winning Put it another way, going green is no longer an expense of doing business, as it is a catalyst for renovation and innovation, new market opportunities and the wealth maximization As stated by UN SecretaryGeneral António Guterres at opening ceremony of UN Climate Change Conference COP25 on December 2019, “a green economy is not one to be feared but an opportunity to be embraced, one that can advance our efforts to achieve all the Sustainable Development Goals.” Needless to say, sustainability is an emerging and rapidly growing interdisciplinary field of research, closely related to the economic implications of environmental issues for different industries and firms, and the need of transition to a sustainable economy And yet there is no denying that the practices of sustainable development have triggered transformation in a wide range of industries Keeping this in regard,