Impact of Sustainability Reporting on Financial Performance

Impact of Sustainability Reporting on Financial Performance

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Abstract on Impact of Sustainability Reporting on Financial Performance

The study examined the impact of sustainability reporting on the financial performance of selected quoted firms in Nigeria between 2012 and 2016.

Data for the study was generated from the financial reports of selected (10) firms and was analyzed with the use of panel least square technique. 

The findings of the study showed that: Expenditure on economic activities, which represents the costs incurred on production, distribution, exchange, consumption and trade of goods and services, positively and significantly impacted on financial performance (measured by price-earnings ratio) of selected firms in Nigeria; Expenditure on social activities, which represents the costs incurred on social development of host communities of selected firms,  positively but weakly impacted on financial performance (measured by price-earnings ratio) of selected firms in Nigeria; Expenditure on environmental activities, which represents the cost incurred on environmental protection of host communities of selected firms, positively and significantly impacted on financial performance (measured by price-earnings ratio) of selected firms in Nigeria

The study concluded that sustainability reporting practices strongly contributed to the financial performance of selected quoted firms in Nigeria between 2012 and 2016.

The study suggested that; There is need to have unified reporting standards and guidelines in Nigeria; There are no legislative requirements in Nigeria compelling companies to prepare and publish sustainability reports. Regulatory agencies such as Corporate Affairs Commission (CAC) and the legislative arm of government should enact regulations to promote sustainability reporting in Nigeria.

Chapter One of Impact of Sustainability Reporting on Financial Performance

INTRODUCTION

Background to the Study

Survival and continuity are important objectives every organization strives to accomplish. The accomplishment of these two key objectives centers on how well organizations adapt to their host environment. The adaption of organizations to their environment exemplifies a symbiotic relationship between both parties, in which the benefits flows from and to each other. It is expected of organizations to intervene in any crises prevailing in their host communities. Environmental crisis poses great threat consciously and unconsciously to the performance of organizations. Environmental crisis such as global warming, poor health care services, poverty, water deficit, food insecurity, population explosion, technological advancement, loss of biodiversity, air pollution, extreme weather conditions, noise and disrespect for the protection of immediate and future environment results in decline in the quality and quantity of environmental resources, which consequently translates to social and economic instability (Welford, 2000; Epstein, 2008; Ezeabasili, 2009).

Many observers in the corporate world look up to organizations to provide solutions to the environmental crises in their host communities. Welford (2000) opines that business seems satisfied to see the natural system on the planet disintegrating, people wallowing in abject poverty and social structures collapsing. Business is central to the problem and must equally be central to the solutions. Organizations are expected to discharge their social responsibility to their host communities in the areas of environmental protection, human rights, human capital, and product protection to mention few. Stakeholders such as shareholders, employees and financial institutions want organizations to be dedicated to the development of their host communities.

Unerman, etal, (2007) aver that human activities is a contributory factor to the dwindling nature of the society, ecology and economy which the immediate generation are facing and will further transcends to the unborn generations. Indeed, this position is accepted by significant fraction of people across the globe. Many people have also proposed that social injustice experienced by large number of people, and the growing damage to the ecosphere, are a result of dominant and almost unquestioned objective of maximizing economic growth. In these terms, economic growth indexed by energy use, intensive material production and exploitative social relations is socially and environmentally unsustainable.

Ekwueme (2011) notes that organizations are no longer working assiduously to maximize the wealth of their shareholders but are embarking on activities that will maximize the benefits realizable to all stakeholders. This indicates that organizations are responsive to the needs of their environment. The pressure for organizations to guarantee the public of their good conduct has risen. Organizations are giving their stakeholders quality attention. This approach of running organizations has to be inculcated in their strategies in order for them to attain organizational objectives. Organizations are expected to be transparent in their treatment to their environment, issues on corporate governance, employees and host communities. Organizations have become sensitive to societal issues and stakeholders matters and are striving to be recognized as good corporate citizens. Irrespective of the direction of motivation reinforcement, organizations are expected to effectively manage their social, economic and environmental impact (Epstein, 2008; Kwaghfan, 2015).

Statement of Problem

Virtually all organizations across the globe are now utilizing the practices of sustainability reporting. The statistics of Global Reporting Initiative unveils that thousands of organizations worldwide produce sustainability reports. Furthermore, available reports of KPMG in 2008 unraveled that about 80% of the 250 biggest companies across the globe produce sustainability reports. In the same vein, the international survey of KPMG in 2011, which covered 34 countries, with Nigeria inclusive, reported that 95% of the 250 biggest companies in the world now produce reports on their corporate responsibilities activities. This clearly exemplifies that organizations are now becoming more transparent in their social, environmental and economic activities, and their implications on stakeholders. Sustainability reporting has been acknowledged to be beneficial to corporate performance of organizations (Kwaghfan, 2015).  

Sustainability reporting is been conceived as the act of publicizing information about how an entity has socially, economically and environmentally contributed to sustainable development (Hart, 2007; Jones, 2008; Epstein, 2008). Sustainability reporting discloses information on the social, economic and environmental performance of an entity towards promoting sustainable development. Sustainability reporting ensures opportunities open to an entity are fully exploited and risks inherent in social, economic and environmental development are mitigated. Sustainability reporting overtly or subtly affects the performance of an organization. The need for an entity to be transparent and to effectively respond to its social responsibilities geared the concept of sustainability reporting. However, the practice of sustainability reporting is not common in Nigeria and only few firms, especially those in manufacturing industry issue sustainability reports (Olawale, 2011; Kwaghfan, 2015). The obscurity of sustainability reporting in Nigeria is due to the fact that regulatory bodies such as Financial Reporting Council of Nigeria (FRCN) and Corporate Affairs Commission (CAC) did not mandate organizations to produce sustainability reports. This suffices to say that regulatory agencies in Nigeria attach more importance to financial reporting than sustainability reporting. This has made organizations to shy away from giving accounts of their social, economic and environmental performance towards sustainable development.

There have been variances in the findings of scholars as regard the effect of sustainability reporting on the financial performance of organizations. Some studies such as Munasinghe & Kumara (2013); Duke  & Kankpang (2013); Kwaghfan (2015) and Olawale (2011) reported a positive impact of sustainability reporting on financial performance of organizations while other studies like Aggrawal (2013) and Makori & Jagongo (2013) averred that sustainability reporting is injurious to financial performance of organizations. Burhan and Rahamanti (2012) recommend that further studies should accommodate other variables apart from profitability ratios to measure the financial performance of organizations. To this end, the study investigates the impact of sustainability reporting on the corporate performance of selected quoted companies in Nigeria.

Objectives of the Study

The main objective of the study is to empirically assess the impact of sustainability reporting on the financial performance of selected quoted companies in Nigeria.

The specific objectives of the study are:

1. To investigate the impact of expenditure on economic activities on the financial performance of selected quoted companies in Nigeria.
2. To assess the impact of expenditure on social activities on the financial performance of selected quoted companies in Nigeria.
3. To evaluate the impact of expenditure on environmental activities on the financial performance of selected quoted companies in Nigeria.

Research Questions

The study attempts to provide meaningful answers to the following questions:

1. To what extent has expenditure on economic activities influenced the financial performance of selected quoted companies in Nigeria?
2. How has expenditure on social activities affected the financial performance of selected quoted companies in Nigeria?
3. To what extent has expenditure on environmental activities impacted the financial performance of quoted companies in Nigeria?

Research Hypotheses

Based on the objectives of the study, the hypotheses guiding the study are stated as follows:

1. H01: Expenditure on economic activities has no significant impact on the financial performance of selected quoted firms in Nigeria.
2. H02: Expenditure on social activities has no significant impact on the financial performance of selected quoted firms in Nigeria.
3. H03: Expenditure on environmental activities has no significant impact on the financial performance of selected quoted firms in Nigeria.

Significance of the Study

This study through its findings is of immense benefits to organizations, regulatory authorities, professional bodies in accounting, stakeholders, host communities of organizations and academia.

This study will aid management of various organizations in ascertaining the specific sustainability guidelines and tenets to follow. This study will help to broaden the horizon of knowledge of regulatory agencies, legislative arm of government and relevant professional bodies in accountancy, by putting in place measures to encourage sustainability reporting amongst registered firms in Nigeria. This research will equally enlighten host communities where organizations operate and other stakeholders as regard the effectiveness of sustainability reporting to meet their information needs and help them hold companies accountable to social responsibilities. The study will also inform other companies that are yet to adopt sustainability reporting practices as it will educate them on its inherent impact on their financial performance.

In addition to these, this study will help future researchers who might want to dig deep on the subject matter as it serves as a basis of reserved knowledge to be consulted by future researchers.  

Scope of the Study

The study is restricted to non-financial firms that produced sustainability reports between the period 2012 and 2016 and also whose shares are quoted on the Nigerian Stock Exchange between 2012 and 2016. The time frame of (2012-2016) is chosen in order to observe the trend on the subject matter in recent years.

Definitions of Terms

Sustainability Reporting

This refers to an organization’s reporting on its social, economic and environmental performance.

Financial Performance

This represents a general assessment of the financial health of an organization at a specified period of time. The financial performance of an organization cannot be measured arbitrarily. Certain indices such as return on assets, return on equity, capital adequacy, managerial effectiveness, earnings and liquidity are used to assess the financial performance of a firm.

Quoted Companies

Quoted companies is a term used to classify all organizations whose shares are listed and tradable at the floor of stock exchange.

Environmental Impact

Environmental impact encompasses environmental benefits and environmental costs. Environmental benefits are gains derived from the use of natural resources due to the economic activities. Economic costs on the other hand, connote the cost associated with the actual and possible damage of natural resources due to economic activities.

Economic Impact

Economic impact can be angled from two perspectives namely economic benefits and economic costs. Economic benefits refer to the benefits that are quantifiable in monetary terms while economic costs indicates the total cost of choosing between alternative actions. Economic costs includes accounting cost, that denotes the actual fund expended to carry out an action and opportunity cost, which implies the cost incurred in terms of the forgone alternative.

Social Impact

Social impact can either be social costs or social benefits. Social benefits represent an improvement in the welfare of the society derived from a particular course of action. Some social benefits are quantifiable while some cannot be quantified. On the other hand, social costs refer to the expense expended to the society resulting from the actions of an organization.

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