Sustainability Reporting & Financial Performance

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Introduction

Sustainability has become an increasingly important issue as it provides the stakeholders with an understanding of organizations role and its contribution to the society (Shad, et al., 2020). The pace of growth of sustainability reporting requirement emerged when the studies claimed it to be linked with the improved business performance. Many studies indicated both positive and negative impact of sustainability reporting on the firms’ performance. As a result of which, two debates emerged (Herbert, et al., 2020; Buallay, 2019; Gnanaweera & Kunori, 2018; Asuquo, et al., 2018). The first was about the “increased costs associated with disclosures” while the other was the “value creation” (Carp, et al., 2019; Plumlee, et al., 2015). For the purpose of this research, value creation debate will be considered alongside with the reduction in cost of capital. 

In the recent past decade, sustainability reports have been recognized as the vehicle through which the firms documents the non-financial issues, from the customer service to climate change that can contribute towards the firm value creation. The way the organizations tend to respond towards the non-financial concerns can lead to firm’s growth through increased reputation, positive innovation and ultimately enhanced profitability (Buallay, 2019). In this context, the question of concern is to analyze sustainability reporting as a business strategy for confirming firm’s growth. This report has been documented in order to analyze the literature review associated with sustainability reporting and its impact on firms’ growth. The literature review will unfold several indicators of sustainability reporting alongside the indicators of firms’ growth including its sales growth, return on assets, net profit margin, gross profit margin and cost of capital. 

Literature Review

The efforts of firm towards the sustainable development in recent decades can be accessed by gauging the environmental protection and social actions taken by the entity. Only deeming the social responsibility by the management doesn’t bring its image, but making the actions public via sustainable reporting has recently appeared to be the most crucial strategic decision taken by firms. Several researches (Ahbabi & Nobanee, 2019; Asuquo, et al., 2018; Buallay, 2019; Hahn & Kühnen, 2013) have examined the role of sustainability reporting in generating economic benefits for the companies. It has been documented by several studies that the social and environmental efforts can substantiate in face of streamlined actions of the companies.

Sustainability reporting has so far attracted the attention of several corporations, researchers, regulatory bodies and government. Cui et al. (2018) postulated with growing sustainable development efforts, the companies are facing increasing opportunities and incentives to disclose their sustainability practices. Through sustainability reporting, the firms can indicate their own efforts towards dealing with strategic issues while keeping in view the sustainability concerns. The increased emphasis on the sustainability reporting has led the researcher bodies in analyzing the association between the sustainability disclosure and firms’ financial performance. However, little evidence is present on analyzing the deeper role of sustainability reporting on market value, profitability, cost of capital and overall firms’ growth (measured by sales growth). The performance of firms can be measured in terms of its growth (sales, total assets etc.), profitability (earning per share, net profit margin, gross profit margin, return on assets etc.) and market based proxies (market price per share). Therefore, this research aims at shedding some light on how sustainability reporting can create the firms’ value, reduce cost of capital, increase its sales’ growth and enhance its profitability for selected firms. 

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