Potential Impact of Sustainability on Corporate Financial Performance

Sustainable development strategy is the advantage of responsible companies that are aware of their impact on the environment and the local population. Such companies take into account the requirements and needs of society and provide open information about their activities. A sustainable development strategy is a certain mechanism that starts the irreversible process of positive transformation of the company. Now the sustainability and CSR as its main element represent an integral part of the strategy and corporate culture of almost any large company with a good reputation. The presence of strong social and environmental programs will not surprise anyone, but one can be surprised by their absence. In such circumstances, when society puts strong pressure on companies, and intangible assets determine a significant part of success, it seems important to understand the value of CSR for the companies themselves. The social activity of the business slightly reduces the amount of profit in the short term, but at the same time ensures its sustainable development and huge long-term prospects. Social and green investments contribute to the creation of a favorable environment and shape a positive corporate image, therefore providing stability for the company’s future profits.

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Definition and Forms of Sustainability in Relation to Financial Management

We live in the era of the Reputational Economy, which dictates its own rules and defines new priorities. In modern conditions, for most interested groups, the image of the company is one of the most important factors shaping loyalty. According to the 2017 Global RepTrak® 100 study, the key factors that have the greatest impact on corporate reputation are the quality of products and services (20.5%), management (15.0%), corporate citizenship (14.4%) (Lasrado & Pereira, 2018). In addition, it is important not only to engage in CSR initiatives but also to convince society of their sincerity. According to studies, 38% of CSR managers believe that their companies, in social projects, are more focused on creating a positive image than on achieving a useful result (Aagaard, 2016). Sincere and active participation in social projects creates many tangible benefits for the business.

The issue of sustainability concerns the business environment in all its dimensions: social, economic, cultural, and environmental (ecological). The social dimensions of sustainability address issues of poverty, violence, injustice, education, public health, employment, and human rights. In an economic sense, sustainability implies ensuring the ability to satisfy economic needs (for business, it is making a profit; for individuals, it is food, water, housing, household items). From an environmental point of view, it means protecting and restoring the environment (controlling climate change, conserving resources, preventing unnecessary losses, presenvation of biodiversity). In the cultural dimension, sustainability means supporting and recognizing the value of diversity (which provides for the identification of communities and the transmission of traditions) (Busco et al., 2018). Different companies have a different understanding of sustainability, focusing on the various aspects in which it is manifested. Nevertheless, most companies understand and realize the importance of this issue and the impact that its solution has on the business.

It is often difficult to find arguments to motivate the company and employees to look at sustainability issues. This happens for several reasons. Firstly, sustainability is a very long-term investment and calculating the benefits of it using the traditional economic approach is quite difficult. Secondly, it is often a challenge for managers to determine, measure, and control a business even in material aspects; therefore, many do not try to understand such intangible aspects as the impact of their business on the environment, society and human development in general. Thirdly, it is quite difficult to put the principles of sustainability as the main issues on the company’s agenda. At the same time, of course, the most difficult thing is to track and determine the success of actions related to participation in sustainable development. Nevertheless, those companies that take into account goodwill as part of their assets can quite cope with the task of assessing the impact of applying the sustainable business development model on financial performance.

Researchers at the Western University’s Institute of Business in London, using a case study, demonstrated the difference between “sustainable” and “responsible” activities and their long-term effects. Thus, most socially responsible areas of business activity, according to the authors, do not always meet the criteria for sustainable development, because, facilitating a social problem, they do not eliminate its cause and do not contribute to its complete solution (Aagaard, 2016). For example, the use of 3D printing is a practice that reduces material consumption and waste generation and can quickly adapt to changing demand, so it can be described as “sustainable” and “socially responsible” simultaneously, although when compiling reports on CSR, the application of these technologies is not taken into account.

Thus, it is obvious that the concept of CSR in its classical sense is not able to meet the challenges of the modern global agenda and fully ensure the sustainability of the business itself, i.e., sustainable development at the micro level (at the level of an individual organization). On the other hand, given that the stakeholder approach is the theoretical basis of social responsibility, CSR is also a stakeholder engagement area integrated into the company’s strategy (Lasrado & Pereira, 2018). At the moment, CSR is one of the important and requiring special attention tools to achieve the goals provided by the modern version of the concept of sustainable development. Studies allowed identifying five key arguments in favor of aligning a company’s performance with sustainability principles (Busco et al., 2018):

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  • Resource prices are constantly growing; companies that manage resources in a competent and efficient manner (observing the principles of sustainability) will be much less affected by price changes.
  • Consumers, shareholders, and regulators pay great attention to sustainability.
  • In the stock markets, players also attach great importance to sustainability; it represents one of the criteria for evaluating companies when making investment decisions, especially among institutional investors.
  • If the company is among the pioneers in accepting the principles of sustainability, it has greater chances of being among the leaders and thereby achieve significant competitive advantages.

Description of a Company

One of the largest and most famous companies in the UAE, practicing the implementation of projects in the field of sustainable business, is the company Nakheel. This is one of the main and world famous developers of Dubai. Nakheel operates under the ‘umbrella’ of the Dubai World holding, which manages several projects on behalf of the government of the emirate of Dubai (Rettab & Mellahi, 2019). The company’s largest project is the Palm Islands in Dubai. Nakheel is the general developer of such residential areas as The Gardens, International City, JLT, Jumeirah Island. Shopping centers Dragon Mart, Ibn Battuta Mall also constitute a part of the company’s portfolio of projects. In its work, Nakheel strives to use advanced technologies and at the same time effective methods of urban planning. The developer declares that it puts the interests, comfort and safe of people at the forefront. In particular, it has affiliated company that takes responsibility for the maintenance of any facilities from tunnels to pools of Nakheel.

A company may not consider sustainability to be strategically important or not consider these issues; however, the need for sustainable existence will still determine how it conducts business. A sustainable business the one that can survive in the long run. The problems of accessibility and volatility of prices for resources, consumer demand, investor pressure, the attraction and preservation of talents, the emergence of new markets and the disappearance of old ones, changes in financial transactions – this is just an incomplete list of what is affected by the sustainability problem. If the problem of sustainability is embedded in the company’s approach to management and overall conducting of business, in a strategic sense, this provides reduction of cost, shaping of a new consumer base and efficient talent management in the organization. A company observing sustainable development has a long-term goal, whichis consistent with its core business, competitive advantages and strengths, motivate its employees and contractors.

The company states on its website: “As an organisation with business activities that directly impact the communities and environment in which we operate, Nakheel is committed to a full agenda of CSR initiatives” (Nakheel, 2019). Among the CSR initiatives of Nakheel, there are turtle rescues, blood donation drives and winter clothing donations to Syria. It should be noted that the company implements namely the principle of sustaiability, and not just CSR – its operation is based on green schemes, allowing the company to operate with maximum energy efficiency and provide effective ecological conservation. The company has waste management programmes aimed at minimization of the impact of its operations on the environment.

Analysis of how the Company’s Sustainability Activities are Expected to Affect the Corporate Performance

Often companies lack information on the basis of which they can make decisions. They simply do not realize the essence of the concept of “sustainability” and the whole importance of the problem of sustainable development for the company. Leaders do not have enough knowledge about the driving forces, about problems and tools to participate in resolving relevant issues (Nosratabadi et al., 2019). Secondly, there is no general definition of sustainability. Accordingly, there is no common terminological base, no common language that will allow free discussion of issues related to sustainability, especially at the business level. Thirdly, the advantages and opportunities that a company can get are often very vague or have a poor understanding in the organization. Also, there is often a lack of understanding of how to determine how well the organization has succeeded in resolving relevant problems. The following considerations make it possible to distinguish sustainability as a separate working problem in the company under consideration (Mahajan & Bose, 2018):

  • Sustainability can affect all aspects of a company’s business, from product development and production to sales.
  • Sustainability can also influence various levers of creating value, both in the short and long term.
  • The growing interest of employees, customers, partners in the supply chain, as well as competitors, investors, the press, society as a whole encourages action.
  • Sustainability decisions are complex and multidisciplinary; therefore, effective interaction with stakeholders is very important.
  • Decisions related to sustainability have to be made in the face of uncertainty, which is formed by factors such as state legislation, the interests of workers and consumers, and geopolitical events.

The model of sustainable business, still relatively new for the Arab world, is considered by Nakheel as a possible way to get a more complete picture of the activities of the enterprise, reflecting risks and opportunities and more logically linking ESG (environmental, social and governance) factors and financial results. The goal is to create a single and comprehensive concept of corporate reporting, which would be structured around the strategic objectives of the organization, its business model and corporate governance. The objectives of this concept are formulated as follows (Rettab & Mellahi, 2019):

  • Satisfy the information needs of long-term investors, showing the consequences of decision-making in the long term.
  • Reflect the relationship between ESG factors and financial factors in decision-making affecting the long-term results of business activity, making clear and transparent the relationship between sustainability of a business and its economic value.
  • Provide a format for reporting on ESG factors for systematic inclusion in the decision-making process.
  • To shift the emphasis in the indicators of evaluating business results from short-term to long-term.
  • Reflect in reporting more information that management uses for daily operations management.

It should be emphasized that the company’s total equity has more than doubled in the last several years, showing AED49 billion in December 2018, compared to AED24 billion at the end of 2011 (Nakheel, 2019). These impressive results were achieved not least due to the continuous improvement of activities within the framework of a sustainable business, including in accordance with the triple helix model. The stakeholder model implemented by Nakheel allows coordinating the multidirectional interests of stakeholders – participants in corporate relations, and also requires the development of a system for measuring the achieved value of CSR, recognized by stakeholders. Carrying out CSR programs, the company pursues a pragmatic goal: by developing the company’s human capital, creating conditions for effective interaction with counterparties, to achieve an increase in value and investment attractiveness.

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The economic and social components of business are more closely related than it might seem at first glance; separating these two concepts is a big mistake. Today, not many companies can afford to work exclusively for profit, especially considering the fact that recently corporate information has become increasingly open and accessible to a wide range of people. Nakheel understands this well, successfully adapting to today’s realities. In particular, in the countries of the Middle East, the concept of integrated reporting is becoming increasingly important. In December 2017, Richard Howitt, Director General of the International Council for Integrated Reporting, visited the United Arab Emirates and Saudi Arabia to discuss the importance of switching to integrated reporting and to support the efforts of these countries to integrate the concept of integrated reporting into their national strategies (Vision 2021 in the UAE and Vision 2030 in Saudi Arabia) (Rettab & Mellahi, 2019). The analysis revealed a number of problems associated with the implementation of integrated reporting, and also indicated a number of opportunities to overcome these problems, including providing guides and examples on the most complex aspects of integrated reporting.

In addition, soon UAE companies will have to allocate funds to socially responsible initiatives and participate in them. To implement the Year of Giving strategy, the Ministry of Economy launched 11 initiatives designed to create jobs that saw philanthropy as a core value and help the government maintain a database and monitor companies’ compliance with the principles of philanthropy (Rettab & Mellahi, 2019). This approach is consistent with the practices of the most advanced EU countries regarding the mandatory reporting by companies on CSR, social initiatives, etc.

It can be assumed that soon in the UAE, the preparation of annual integrated reporting will play the same role as ISO certification, improving the image of companies, and reporting on CSR will become a mandatory element like CE certification in Europe (CSR Law in the UAE, 2018). Nakheel is taking certain steps in the direction of the above reporting, however, it does not currently prepare annual integrated reports, thereby missing out on opportunities to significantly increase its investment attractiveness for European institutional investors.

Conclusion: The Importance of Sustainability for the Firm’s Performance

In recent years, the dependence of the business reputation of the company on the nature of the attitude towards it on the part of not only buyers, partners and customers, but also society, which is far from indifferent to the means by which the strategic goals of the company are achieved is increased. The way how the company fulfills its obligations and what social principles it adheres to are of great importance. The presence of social programs, sponsorship, the quality and effectiveness of relations with authorities, the local community increasingly affect the business reputation of the company, determine its investment attractiveness and competitiveness. However, initiatives related to global long-term sustainable development goals are even more important. A prerequisite for the long-term and effective functioning of a business is an understanding of the dependence of financial indicators on the quality of the company’ image in the eyes of investors, top management, consumers and the public.

In this context, integrated reporting, which reflects business initiatives in the field of sustainable development, differs from financial reporting in that it contains, along with financial, non-financial information. These statements include information on the following types of capital: financial, industrial, intellectual, human, social, reputational, and natural. The main goal of integrated reporting is to show the organization’s value creation for a certain period, group accounting information, and present it to interested users in order to obtain long-term advantages for the company both in the form of improved financial results and increased intangible assets value (goodwill).

Another important component of the sustainabilty report is the concept of integrated thinking. According to the International Integrated Reporting Council, the development of such thinking will contribute to the financial stability and sustainable development of any company, since such thinking is aimed at the efficient and productive distribution of capital (Busco et al., 2018). Moreover, the implementation of integrated reporting in the company itself requires the leaders of the company to conduct management based on social responsibility. The Nakheel company discussed above, having integrated thinking and contributing to the emergence of a synergistic effect in public-private partnerships in Dubai, nevertheless, not paying attention to draw up annual integrated reporting, is missing out opportunities to increase its investment attractiveness and partnership prospects in the international scale.

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References

Aagaard, A. (2016). Sustainable business: Integrating CSR in business and functions. River Publishers.

Busco, C., Grana, F., & Izzo, M. (2018). Sustainable Development Goals and Integrated Reporting. Routledge.

CSR Law in the UAE: Are you ready? (2018). Clyde&Co. Web.

Lasrado, F., & Pereira, V. (2018). Achieving sustainable business excellence: The role of human capital. Palgrave Macmillan.

Mahajan, B., & Bose, M. (2018). Business sustainability: Exploring the meaning and significance. IMI Konnect Volume, 7(2), 8-13.

Nakheel (2019). Nakheel announces 2018 profit. Web.

Nosratabadi, S., Mosavi, A., Shamshirband, S., Zavadskas, E., Rakotonirainy, A., & Chau, K. (2019). Sustainable business models: A review. Sustaiability, 11, 1-30.

Rettab, B., & Mellahi, K. (2019). Practising CSR in the Middle East. Palgrave Macmillan.

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NerdyRoo. (2022, February 21). Potential Impact of Sustainability on Corporate Financial Performance. Retrieved from https://nerdyroo.com/potential-impact-of-sustainability-on-corporate-financial-performance/

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