Impact of Sustainability on Corporate Financial Performance

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For a long time, profit maximization was considered as the main management goal. However, it did not give the possibility to maximize the use of the economic potential of the corporation, as, in the pursuit of momentary profit, leaders do not think about future development prospects. As the economic situation on the market changed and the theory and practice of financial management developed, the list of local goals was replenished. Today, to practically achieve the Sustainable Development Goals (SDGs) outlined in the 2030 Agenda for Sustainable Development (adopted at the UN Summit in September 2015), business and financial markets have a key role to play in ensuring responsible financing. In the world, a movement for a sustainable economy is being launched, aimed at integrating the concept and principles of sustainable development into strategy, management systems, and current business practices, including financial management and organizational performance assessment. Particularly due to financial market incentives, the transition to investment in sustainability can become a stable trend.

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Definition and Forms of Sustainability about Financial Management

In the modern world, global changes are taking place that includes long-term social goals as a priority — sustainable development of the economy and society as a whole, an answer to the challenges of the new industrial revolution. All this requires the creation of an economic model capable of ensuring the predominance of precisely such goals over short-term economic benefits. To attract financing, it becomes expedient for companies to report on a wider range of factors, including ESG. If in 2011, only 20% of companies from the S&P 500 index reported on ESG indicators, in 2015, their share increased to 81% (Kopnina & Blewitt, 2018). Moreover, as a result of legislative regulation, non-financial reporting is becoming the norm.

Researchers have noted a sharp increase in interest in investments related to climate change and sustainable development by institutional investors. Some of these investors are beginning to avoid investments in companies whose activities pose a threat to sustainability (Maletic et al., 2015; Zein et al., 2020). There is a direct statistically significant correlation between companies’ sustainability performance and their financial results (Aggarwal, 2013). During its development, the concept of sustainability that emerged from a set of general principles and principles proposed for the sustainable and long-term development of mankind has reached a certain list of indicators for the corporate sector and behavioral recommendations for individuals.

Corporate sustainable development represents a new concept of CSR and combines the social, economic, and environmental aspects of the business. Involvement in activities that promote sustainably development and are consistent with the principles of sustainable development is increasingly seen by companies as a source of competitive advantage (Kopnina & Blewitt, 2018). The introduction of corporate sustainable development principles in a company’s activities can potentially have a positive impact on profitability by increasing revenue or reducing costs (Yu & Zhao, 2015). Most researchers agree that companies’ activities in the field of sustainable development have a positive impact on their market value and financial performance. Empirical studies also confirm the positive impact of corporate sustainability indicators on the capitalization of public companies (Kopnina & Blewitt, 2018). Corporate sustainability indicators measure the extent to which a company takes into account economic, environmental, social, and corporate governance factors in its operations, and, ultimately, the impact these factors have on the company and society (Alshehhi et al., 2018). It is reflected in the development and implementation of an integrated system of goals, including qualitative and quantitative indicators in social, economic, and environmental aspects.

Description of a Firm that Engages in Sustainability-Related Activities

When the Dubai Investment Corporation announced the establishment of the Emirates Group in 1985, few saw this as a sign of a new era in the airline industry. However, Emirates managed to expand its presence to 63 countries and six continents, as well as become one of the main reputation ‘ambassadors’ of the United Arab Emirates (de Mestral et al., 2018). Rapid take-off was provided by a special approach to management, innovation, and customer focus. Emirates was the only airline that did not stop flying in the Middle East at the height of the Gulf military conflict in 1991, thus demonstrating the introduction of critical elements of sustainability and responsibility.

One of the hallmarks of Emirates is its extremely efficient communications management. This company, better than any of its competitors, was able to use the influence of a third party to inform about its activities and increase popularity in the market. Using a leadership policy in introducing new technologies and expanding the range of services, the company made all the major media, industry representatives, and opinion leaders talk about it. In 2014, Emirates was recognized as the “Most Valuable Aircraft Brand” in the world (Emirates, 2020). The absence of major incidents and resonant scandals throughout the company’s history has made Emirates one of the most respected airlines globally. Numerous awards and positive evaluations are often associated with a successful personnel policy and high standards of staff performance. The staff of the Emirates group of companies consists of more than 57 thousand employees. The company provides equal career opportunities for both men and women, which in itself is a rarity for the represented region.

Emirates pricing policy can be called peculiar – the company does not seek to offer minimum prices for its services, as, for example, most low-cost airlines do. The goal of the Arab carrier is to provide the highest possible level of comfort and luxury at all price levels (in the first, business, and economy classes). High-quality food, free Wi-Fi, a sophisticated entertainment system, and a comfortable stay on board are available to all customers of the company, without exception, thereby indirectly promoting a policy of non-discrimination and equal opportunities.

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Sustainability Activities Effect on the Firm’s Corporate Performance

The company’s behavior is most influenced by the desire to manage costs, retain key employees, and build a reputation in the market. In addition, the company believes that by increasing the environmental friendliness of products, it can reduce costs and maximize financial profitability. The company evaluates its activities and sustainability level according to eight parameters: quality of management, quality of products and services, innovativeness, size of long-term investments, financial stability, ability to attract and retain talented specialists, social responsibility in relation to the community and the environment, and competent use of corporate assets.

For 22 consecutive years, Emirates has been showing profitable performance. An excellent reputation has helped the company quickly restore the status quo after the financial crisis of 2008-2009. Today, open data is available on Emirates fulfilling its obligations to pay taxes, dividends, and other payments. Each year, the Dubai government receives only in the form of dividends at least $100 million from the company. The total amount of dividends paid by Emirates is more than $700 million annually (de Mestral et al., 2018).

Emirates has also demonstrated strong activity in corporate citizenship. A separate area of activity is the support of local communities and charity projects in countries where the company is the largest carrier (India, Pakistan, etc.). Because of the use of the latest fleet, the company managed to achieve the lowest levels of emissions of less than 4 liters per 100 passenger-kilometers, which is 16.6% lower than the industry average (de Mestral et al., 2018). One of Emirates’ core citizenship goals has been to create a positive image of Dubai outside the country and the Middle East. Amid the political and economic instability demonstrated by other states in the region, Emirates, together with Dubai, remains an oasis of stability, progress, and sustainable development. 20 million tourists are expected in Dubai in 2020, which is projected to bring $ 82 billion in annual revenue to the city (Emirates, 2020). Emirates has a role to play in achieving this. The high results of the Dubai flagship airline, as well as its future successes, are directly related to the declared values and their effective implementation.

Emirates has decided to limit the use of disposable plastic items on board all of its aircrafts. The carrier introduced environmentally friendly paper straws that will soon replace their plastic analogues on all Emirates routes. Emirates has carried out various waste management activities on board of its aircraft, and the staff is constantly evaluating existing ideas for green initiatives and proposing new ones. As part of a long-term vision and at the suggestion of one of the crew members, employees transport large plastic bottles collected on board and transfer them for processing to Dubai and other cities around the world. It is assumed that due to this, 3 tons or about 150 thousand plastic bottles per month will not be thrown into landfills in Dubai (de Mestral et al., 2018). The above initiatives are part of the carrier’s ongoing efforts to ensure sustainable development.

Such initiatives not only increase the customer loyalty for the airline under consideration, but also represent the best practices for other carriers, including outside the UAE, on a global scale. The company is evidently characterized by excellence in pursuit of ESG goals. However, unfortunately, it does not draw up integrated reporting, thus depriving itself of broad opportunities to improve its investment attractiveness for institutional investors. Meanwhile, the genesis of integrated reporting indicates the rapid development and relevance of this new innovative approach to corporate reporting in world practice. The company’s transition to reporting in accordance with the triple criterion (economic, social, and ecological) increases its transparency, which, according to the theory of corporate finance, should affect the reduction of capital costs (Idowu & Del Baldo, 2019). Providing such reports allows demonstrating how the company’s mission, vision, and strategic goals are realized through socially responsible activities, the results of which are presented in non-financial reporting. Undoubtedly, non-financial reporting improves the image, reputation, and brand recognition of the company for all groups of society. Since the reputation consists of intangible assets such as trust, reliability, quality, transparency, customer relations, and tangible assets in the form of investments in human capital and the environment, the rejection of non-financial reporting can have a negative impact on the value of the company, despite the real availability of excellent practices in the field of sustainability. Thus, the implementation of integrated reporting can be highly recommended for Emirates airline.

Conclusion

Today, sustainable development is increasingly being integrated into the corporate strategy and culture of companies, manifesting itself in activities aimed at ensuring the effectiveness of the company while reducing the negative social and environmental consequences of its functioning. In turn, integrated reporting allows the company to show all stakeholders how it creates value, which enables it to ensure sustainable development in the short, medium, and long run. Thus, sustainable development helps to improve relations with stakeholders, while allowing them to obtain economic benefits from reducing costs (loss from spoilage, legal costs, costs of raising capital, and many others) and/or from increasing margins by creating an image of the premium segment products. A higher level of sustainability leads to improved financial results. Compliance with stakeholder requirements improves financial performance. Failure to fulfill the implicit requirements of stakeholders can lead to a negative perception of the company’s image, which increases the risk premium and negatively affects financial results. In practice, the benefits of social and environmental responsibility outweigh the costs of its maintenance.

References

Aggarwal, O. (2013). Sustainability reporting and its impact on coporate financial performance. Indian Journal of Commerce & Management Studies, IV(3), 51-59.

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Alshehhi, A., Nobanee, H., & Khare, N. (2018). The impact of sustainability practices on corporate financial performance: Literature trends and future research potential. Sustainability, 10, 1-25.

de Mestral, A., Fitzgerald, P., & Ahmad, T. (2018). Sustainable development, international aviation, and treaty implementation. Cambridge University Press.

Emirates (2020). Sustainability in operations. Web.

Idowu, S. O., & Del Baldo, M. (2019). Integrated reporting: Antecedents and perspectives for organizations and stakeholders. Springer.

Kopnina, H., & Blewitt, J. (2018). Sustinable business. Routledge.

Maletic, M., Maletic, D., Dahlgaard, J., Dahlgaard-Park, S., & Gomiscek, B. (2015). Effect of sustainability-oriented innovation practices on the overall organisational performance: An empirical examination. Total Quality Management and Business Excellence, 27(9-10), 1171-1190.

Yu, M., & Zhao, R.(2015). Sustainability and firm valuation: An international investigation. International Journal of Accounting and Information Management, 23, 289-307.

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Zein, S., Consolacion-Segura, C., & Huertas-Garci, R. (2020). The role of sustainability in brand equity value in the financial sector. Sustainability, 12, 1-19.

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