1. Introduction
Currently, we facilitate an increased discussion over the themes around the idea and implementation of sustainable development, both on the firm (micro) level, as well as on the policy (macro) level. Our better understanding of the drivers of firms’ sustainable performance, as well as the development of the related measures and monitoring schemes, seem essential on the route to the successful implementation of the United Nations’ Sustainable Development Goals (UN 2030). In the academic debate, we observe a multiplicity of works that address these issues in their link to the corporate social responsibility considerations. The perspectives are very diverse in their orientation, including the concerns on how to proxy sustainable performance, or the motivation behind and effects of sustainable performance on a firm’s reputation, strategic position, and financial results [
1,
2,
3]. Our work, however, is designed to add to the latter aspect, namely, the interplay between the sustainable and financial performance of a firm.
The main aim of our study is to identify the drivers of sustainable performance in firms that operate in the energy sector. Guided by prior literature, we consider the factors that could explain the link between sustainable and financial performance, in light of neoclassical theory, the natural-resources-based view, and instrumental stakeholder theory. In the empirical dimension, we apply regression to explain firms’ sustainable performance and the financial-performance-related variables. We expand considerations of the resources-based view, by addressing various types of firms’ slack resources. We also add to the existing debate by revising the importance of a set of sustainability-policy-oriented variables, with particular attention given to the effects of sustainability reporting.
The major contribution of our work is that we examine the energy sector in isolation. Prior empirical works commonly revise a wider range of sectors (e.g., [
4]). However, we control for the energy sector selectively, to obtain a relative homogeneity of the sample, given the effects of their performance from an environmental perspective (and, in particular, their position within ESIs—environmentally sensitive industries). Further, we focus on European firms only, as the regional differences seem to be influential on the understanding and pursuance of the idea of sustainable performance. For instance, the European Union enhances and initiates strategies within environmental considerations, which could create a unique environment for the scope and nature of the sustainable behavior of firms located in Europe. Our work also contributes by providing evidence on a large number of firm-year observations, in a relatively long time horizon (2013–2020).
Another important contribution of our work is that we consider the potential effects of the stakeholders’ pressure, by addressing the set of variables that are commonly used to explain a firm’s sustainability policy. In particular, we focus on the effects of sustainable reporting, to answer a question on the role of sustainability reporting in enhancing a firm’s sustainable performance. In other words, we address the problem of transparency and the role of a sustainable report as a tool of positive pressure. In this aspect, our study adds to the very current debate on the overall role of sustainability reporting and the related regulatory framework [
5,
6], as well as to the recent findings targeted at the energy sector (e.g., [
7]).
The remainder of this paper is organized as follows. In the second section, we develop two research hypotheses, based on the literature review within the interplay of sustainable and financial performance and stakeholders’ pressure on firms’ transparency. In the third section, we explain the empirical design of our study, in this, the composition of the sample, variables selection, and model. In
Section 4, we present and discuss the results.
Section 5 concludes.
3. Research Design and Methods
3.1. Sample Selection Scheme
For the purposes of this study, we use the data available in Refinitiv Eikon Datastream. The database offers i.a. accounting-based figures for the listed firms that perform worldwide. We requested for data in the 2013–2020 time span, for the listed firms that perform in European countries in the energy sector. To select the companies that operate in the energy sector, we controlled for both the Refinitiv Eikon sector classification (the TRBC Economic Sector Name), as well as the NAICS international industry name and NAICS industry group name (which is provided by Refinitiv Eikon as well). In addition, we have manually controlled for the correctness of this classification, by revising the convergence of industry classification for each firm in our sample.
Under the above specified request terms, we have initially obtained 2665 firm-year observations. However, after filtering out the records with missing entries, we have finally obtained a panel of 2545 firm-year observations. The composition of our sample in cross country and time dimension is presented in
Table 1.
3.2. Variable Measurement and Data
The set of variables that we implement in this study is presented in
Table 2. In light of our hypotheses, our main variable of interest is a firm’s sustainable performance, with control variables that refer to a firm’s financial performance and a firm’s sustainability policy.
To proxy the sustainable performance, we use the ESG score (ESG_SC), which is provided by Refinitiv Eikon Datastream. In the extant literature, various measures of a firm’s sustainable performance have been previously used, ranging from self-developed and disclosure-based indices (e.g., [
55]), through the use of the selected variables as proxies of environmental performance (e.g., greenhouse gas emissions in [
4]) to the sustainability ratings developed by various agencies (e.g., AR, Vigeo, Ethical Investment Research Service, ASSET4 by Thomson Reuters, or Down Jones Sustainability Indexes, among others, see [
56]). The variety of existing methodical approaches has resulted in a plethora of studies on the topic, but of limited possibilities to compare between the findings, due to the significant methodical differences between the computation of the scores [
12,
57,
58]. However, there is a growing number of recent works that apply the ESG scores from Refinitiv Eikon (formerly Thomson Reuters) to proxy firms’ sustainable performance. For instance, the Refinitiv Eikon has been recently applied by [
59,
60,
61,
62], and [
7] for the energy sector.
An important advantage of the ESG score from Refinitiv Eikon is that it is computed in a transparent and objective manner, given the data reported by firms in a public domain. The score weighs both the positives, as well as the controversies; thus, it could be regarded as not biased with window dressing and impression management. The ESG score from Refinitiv Eikon measures a firm’s sustainable performance across ten major themes. In the environmental component, it rates resource use, emissions, and innovation. In the social component, it rates workforce, human rights, community, and product responsibility. In the governance component, it rates management, shareholders, and CSR strategy. The components are differently weighted and cover in total more than 450 various firm-level indicators, both on a dichotomous level, as well as on a parametric level, where applicable. In the final ESG score, the environmental component prevails, followed by the social component and governance component. Ultimately, the Refinitiv Eikon Datastream provides the ESG score ranging from 0 to 100, and scores higher than 75 are interpreted as indicating excellent ESG performance and a high degree of a firm’s transparency in reporting their ESG performance in the public domain. In our further empirical procedure, we additionally implement the ESG-score-based dummy variable (ESG_dum), to demarcate between the energy firms (and the related firm-year observations) with the ESG score (1) and without the ESG score (0).
Further, we implement a set of measures that reflect a firm’s financial performance. The accounting-based figures needed to compute these variables have also been obtained from Refinitiv Eikon Datastream. To capture the context of a firm’s efficiency, we implement return on assets (ROA), consistently with prior works that revise the interplay between firms’ sustainable and financial performance (e.g., [
4,
27,
59,
63,
64,
65]). In addition, we implement a set of measures that are less common, but are informative in the context of a firm’s performance, if we consider the cost-related perspective. More specifically, we implement the operating profit margin (OPM), computed as operating profit to sales revenues, and the productivity of assets (PA), computed as sales revenues to total assets. High OPM indicates that a firm faces a relatively lower burden of operating costs and, thus, is favored with greater profitability on a sales-oriented level. High PA indicates that a firm is able to use its resources in a more productive way.
We also implement a range of measures that are informative in the context of holdings of slack resources. Following the set of indicators of organizational slack resources proposed by Bourgeois [
26] and further development of measures of slack by Bourgeois and Singh [
66], we distinguish between three types of slack resources: available, recoverable, and potential. Available slack is defined as cash hold by the company in excess of its needs and, thus, is commonly proxied with cash ratio (CA—cash relative to assets), consistently with [
67] or [
68]. However, following [
69,
70], we additionally employ a current ratio of liquidity (CR) as an alternative hallmark of available slack holdings. The recoverable slack is defined as the resources that have already been committed (absorbed), and it requires time to recover these resources. In this respect, consistently with Bourgeois and Singh’s [
66] suggestion, we measure recoverable slack with sales, general, and administrative expenses to sales (SGA/S). Lower levels of this ratio indicate a greater recoverable slack holding, as less sales revenues is consumed by a firm’s costs, thus increasing the firm’s profitability. The potential slack is defined as resources that could be obtained by the company in the future. Thus, a common measure of potential slack is a firm’s financial leverage, proxied in our study as debt to assets (DA). Higher levels of DA indicate lower potential slack, as firms with high debt burden are regarded as more financially constrained and, thus, have limited capabilities to obtain external funding [
31,
71]. Financial leverage and current ratio of liquidity have also been considered as control variables in prior works on the link between sustainable and financial performance (e.g., [
4,
25,
72]). Consistently with these works, we also control for a firm’s size, proxied by natural logarithm of a firm’s assets (SIZE). This is justified, given the pressure of mandatory sustainability reporting on large and listed firms in particular.
Finally, we implement a set of dummy variables that could be informative in the context of a firm’s overall policy within the sustainable performance. In light of our second hypothesis, our major variable of interest is a dummy of whether a firm issues a report on its sustainable performance or not (REPORT). However, we additionally implement the set of variables that could be influential on a firm’s pursuance of ESG actions. According to [
73], a firm’s incentives to meet stakeholders’ needs could be manifested by voluntary participation in UN Global Compact. Thus, following [
74], we implement a dummy of whether a firm is a signatory of United Nations Global Compact (UNGC). With similar reasoning behind it, we additionally control for the implementation of a firm’s CSR policy, by considering whether a firm has a CSR committee or team (CSR) or holds ESG-related certificates (CERT). All these dummies are obtainable from Refinitiv Eikon Datastream.
3.3. Methods
We test our first hypothesis in a two-stadial procedure. At the first stage of our investigations, we implement the U Mann–Whitney test to compare between the ESG score holders and non-holders, guided by the ESG_dum variable (more specifically, to compare firm-year observations with and without ESG score). At the univariate analysis level, we seek for the differences in a firm’s financial performance. At the second stage of our investigations, we revise more in depth the group of firm-year observations with the ESG rating (ESG_dum = 1). For this group, we perform weighted least square (WLS) regression for ESG_SC as the dependent variable and the range of explanatory variables that refer to a firm’s financial performance (to further develop Hypothesis 1). In this respect, our empirical model is as follows:
Further, to address the relevance of sustainability-policy-oriented factors, we perform univariate analysis (U Mann–Whitney test), to compare the medians of ESG_SC between the groups of firm-year observations (Hypothesis 2). Our groups are defined on a dichotomous level, depending on whether they fulfill the criteria defined in the set of policy-oriented variables: REPORT, UNGC, CSR, and CERT.
5. Conclusions
The purpose of our study was to revise the drivers of sustainable performance of firms that operate in the European energy sector, by considering the trade-offs with financial performance. This aspect of our research was conceptually rooted in the considerations of neoclassical theory, the natural-resources-based view, and instrumental stakeholder theory. In our study, we have additionally revised the impacts of sustainability policy that reflect the response to stakeholders’ pressure.
The first hypothesis tested in this study was that sustainable performance is positively associated with a firm’s financial performance. However, our evidence is vague, depending on which aspect of a firm’s financial performance we consider and on the level of empirical analysis. For a firm’s profitability (proxied in our study with return on assets), we find strong evidence on the positive link with sustainable performance. While comparing the firm-year observations with and without an ESG score on a dichotomous level, we observed higher profitability in the group of firm-year observations with an ESG score. While revising more in depth the group of firm-year observations with an ESG score, regression results have confirmed strong associations between higher ESG score and ROA. This evidence is consistent with the assumptions of the natural-resources-based view and instrumental stakeholder theory.
Our evidence is mixed, however, if we consider the recoverable slack resources. First of all, on a univariate level (comparison of firm-year observations with and without an ESG rating), we find strong evidence that firms with an ESG score have a greater operating profit margin, better productivity of assets, and are less loaded with an operating costs burden. The latter aspect supports the importance of recoverable slack resources in the pursuance of sustainable performance. However, if we consider the firm-year observations with the ESG score, the regression results have provided strong support for neoclassical theory and the greater cost burden in firms that perform in a more sustainable manner. Thus, our first hypothesis finds partial support for better financial performance proxied by profit–cost-oriented variables (OPM, PA, and SGA/S).
Finally, we have found sound evidence on the irrelevance of the slack-resources-based view if the available and potential financial slack resources are considered. For available financial slack, we have found statistically insignificant associations on a univariate level, which was further confirmed in the regression analysis for firm-year observations with an ESG rating. However, we have found strong evidence for the positive link between sustainable performance and financial leverage (proxied as debt to assets). Firms that are rated with an ESG score are distinguished by a higher level of financial leverage. Similarly, regression results indicate that the height of an ESG score is associated with financial leverage. Our evidence demonstrates that sustainable performance is linked to higher financial constraints and a lower level of potential slack resources. Thus, we do not find convincing arguments to support the slack resources view for potential financial slack in the energy sector.
Given this empirical evidence, our first hypothesis found partial support. In the energy sector, more sustainable firms are more profitable, but face higher costs and, thus, limited potential slack resources. However, these firms are also more financially constrained and, thus, are limited in their potential financial slack holdings. In light of this inconclusive evidence, we ask for further studies that will revise the ESG score holders in more depth, to examine the sustainable and financial performance trade-offs with the mediating role of capital structure decisions.
Our second hypothesis was that sustainability reporting positively impacts sustainable performance. We have considered sustainability reporting among other variables that could reflect a firm’s sustainability policy. We have found strong support for this hypothesis, as sustainability reporting was the most influential on the height of the ESG score, compared to the remaining sustainability-policy-oriented drivers (UNGC signatory, CSR policy implementation, or certification). This evidence could be regarded as a signal of the potential window dressing practices. However, we proxied sustainable behavior with an objective score (ESG score by Refinitiv Eikon), which also considers a negative loading of unsustainable practices. From our evidence, it clearly stands that sustainability reports play an important role in enhancing a firm’s sustainable performance. Thus, transparency and the mandatory reporting requirements emerge as relevant policy tools in fostering the Sustainable Development Goals.
There are several limitations of our study. A first important limitation of our work is that it does not account for the impact of country specifics. Our evidence is driven primarily by the practices of energy firms that operate on core European Union markets, as these countries were visibly prevalent in our sample if we consider their loading on the firm-year observations level. On one hand, this strengthens our evidence, as our sample covers countries where the pursuance of firms’ sustainable behavior has a longer history and is supported by stronger regulatory mechanisms. On the other hand, it justifies the need to design further inquiries that will address in more depth the situation in the emerging European economies, as isolated country settings. Finally, on the country level, further inquiries should be placed to detect the possible differences between the countries and to revise the rationale (or lack of) behind the prevalence of studies that assume country-level homogeneity. Similar consideration applies to the energy sub-sectors, as the differences between the firms that produce energy or are involved in the related utilities sector could be potentially important. Thus, we recommend that further works (on smaller samples or more case-study-oriented ones) should address the country-level and sector-specific differences in the understanding of the foundations of sustainable performance, then, the stage of its implementation, and finally, the specifics of the energy sector’s performance in domestic market contexts.
Our study has highlighted the importance of sustainability reports in achieving higher ESG ratings by firms. Thus, we believe that further studies could address in greater detail the potential power of the implementation of mandatory regimes for sustainability reporting. There again, there are differences in the pursuance of regulatory frameworks both on the country level, as well as in the time dimension. Thus, we believe that more detailed studies on the situation in energy companies, on the given country level, could add to the debate on the drivers of sustainable performance. In particular, the qualitative studies of greater granularity could be informative in this respect, with a focus on particular activities implemented by energy companies in the pursuance of their sustainable goals.