The influence of financial and non-financial sustainability on firm performance

Abstract

The importance of the synergy between a firm’s financial and non-financial sustainability performance is becoming increasingly crucial due to the shift towards enhancing its financial and non-financial performance. The synergy involves maximising profit, enhancing companies’ reputations, fulfilling their social responsibility, and fostering a corporate culture of integrity and competence. Both the financial and non-financial dimensions of sustainability performance play pivotal roles in creating value for firms. In this study, the financial sustainability performance dimension encompassed three elements, namely growth opportunities, operational efficiency and innovation capabilities, measured using market to book value of equity, return on equity and research and development respectively. Similarly, the non-financial sustainability performance dimension consisted of three elements, namely environmental, social and governance, measured using the performance scores from the well-known Refinitiv Eikon database. This study adopted a multi-theoretic model to acknowledge the contributions of both financial and non-financial sustainability performance in creating an overall performance framework for firms. This approach integrated shareholder wealth maximisation theory, stakeholder theory, resource dependence theory and organisational legitimacy theory.

The study investigated the relationships between financial and non-financial sustainability performance and firm performance, measured using five proxies of measurement, namely Tobin’s Q, total shareholder return, weighted average cost of capital, market value added and economic value added. A deeper understanding of these relationships was obtained by considering the interaction effects among the three elements within each dimension of sustainability performance, demonstrating their potential to enhance firm performance.

To analyse the data, the estimated generalised least squares (EGLS) method was applied to the regression model, with period seemingly unrelated regression weightings and using White (diagonal) standard errors and covariance estimation methods. Therefore, the problems associated with autocorrelation and heteroscedasticity were mitigated. Regression analyses were conducted on the data for each of the five dependent variables representing firm performance. In addition to the regression analyses, the change in variance contribution of each independent variable was examined to identify the variable that explained the largest percentage of variation of the dependent variable in the regression models. Interaction terms were then introduced to the regression models to account for the overall interaction between financial and non-financial sustainability performance, as well as the interaction between individual elements within each dimension. This analysis covered a full sample of firms listed on the Johannesburg Stock Exchange from 2011 to 2021.

The results of the study indicated that the performance of a firm was most profoundly influenced by its financial sustainability performance. On its own, non-financial sustainability performance did not exert a significant influence on firm performance. The combined influence of financial and non-financial sustainability suggested that the pursuit of non financial sustainability efforts could potentially detract from firm performance because these efforts involved reallocating funds from shareholders to other stakeholders. However, the effects of non-financial sustainability initiatives became more evident when they interacted with financial sustainability performance.