CHAPTER I

BACKGROUND OF THE STUDY

1.1 INTRODUCTION

Corporations become the center of critique when there are environmental

destructions occur where the corporation resides, A good example when a particular
mining industry pollutes the rivers and the lakes. The destruction of the environment
will undeniably cost the health and the livelihood of the people due to the chemicals
that pollute the air that individual breathe. Various stakeholders demand to restore
what has been destructed, however, it will take years to return the environment to its
original state.

Companies serves as one of the economic drivers of the economy, it can

contribute to global sustainable development through their core businesses so that
they are both profitable and help development (World Business Council For
Sustainable Development, 2002). Businesses that focus on sustainability can be more
innovative and see an increase in profits (Young & Dhanda, 2013). As businesses
continue to grow, stakeholders demand for transparency on both the businesses’
financial and environmental operations. More importantly, they would also need to
know how the companies manage their social responsibilities which include, but not
limited to: environment care through use, production, and distribution of
environment-friendly products, health care services, and proper garbage disposal,
usage of water, and sourcing of materials (Young & Dhanda, 2013).
SIMPLIER VERSION:
In the modern day of corporate world, corporate entities are not just economic
drivers but are advocates of environmental protection. As such, stakeholders

1
nowadays vividly took into considerations various initiatives made by different
corporations which protects our Mother Earth.
The inevitable and pressing problem on climate change compels business
enterprises to intertwine profitability and sustainable development at its best.
Concomitantly, stakeholders demand for transparency on both the businesses’
financial and environmental operations.
According to United Nations report on its World and Economic Survey in
2013 that “The world is faced with challenges in all three dimensions of sustainable
development—economic, social and environmental. More than 1 billion people are
still living in extreme poverty, and income inequality within and among many
countries has been rising; at the same time, unsustainable consumption and
production patterns have resulted in huge economic and social costs and may
endanger life on the planet. Achieving sustainable development will require global
actions to deliver on the legitimate aspiration towards further economic and social
progress, requiring growth and employment, and at the same time strengthening
environmental protection”.
In fact, the United Nations report on its World and Economic Survey in 2013
showed that “the world is faced with challenges in all three dimensions of sustainable
development—economic, social and environmental.” Further, sustainable
development requires global actions to deliver on the legitimate aspiration towards
economic and social progress, growth and employment while, at the same time,
strengthening environmental protection. Over the years, though the quality of life has
improved worldwide, millions of people are still suffering from poverty and hunger
due to apathetic environmental concern.
Although the quality of life has improved worldwide, the environment is
threatened, and millions of people continue to suffer from poverty and hunger (Wang,
Mao-Chang, 2015).

The concept of sustainability introduced by The World Commission on

Environment and Development (WCED), also known as the Bruntland Report, that
states “Sustainable Development is the development that meets the needs of the

2
present without compromising the ability of future generations to meet their own
needs” (Bruntland, 1987).
The World Commission on Environment and Development, also known as
the Bruntland Report, introduced the concept of sustainability as the development that
meets the needs of the present without compromising the ability of future generations
to meet their own needs” (Bruntland, 1987). It has been defined as “the commitment
of business to contribute to sustainable economic development, and to work with
employees, their families, the local community and society at large to improve their
quality of life” (World Business Council For Sustainable Development, 2002).

Economic growth is necessary to fulfill the needs of the present and future
generations. However, this economic growth must be supported with the principles
such as environmental integrity and social equity Indeed, economic growth is
necessary to fulfill the needs of the present and future generations but it must be
supported with the significant principles such as environmental integrity and social
equity (Kates, Parris, & Leiserowitz, 2005) as cited by (Minguel, 2017). Corporate
entities are considered as one of the key drivers of the economy therefore corporate
sustainability is brought about an as integral aspect Similarly, sustainability is an
integral aspect of corporate profitability and economic growth (Ebdane, 2016).

Corporate sustainability is defined as “the commitment of business to

contribute to sustainable economic development, and to work with employees, their
families, the local community and society at large to improve their quality of life”
(World Business Council For Sustainable Development, 2002).
And to be sustainable companies, one should operate with integrity in respect
with fundamental responsibilities in the areas of human rights, labor, environment
and anti-corruption (United Nations Global Impact, 2014). In order to measure their
corporate sustainability development and to be transparent of various stakeholders’
companies come up with sustainability reporting, several measures in reporting their
corporate sustainability, globally known as “Sustainability Reporting”.

3
 Hence, a notable advancement globally known as “Sustainability Reporting”
is currently being adopted by private corporations in order to come up with a reliable
and transparent policy among its stakeholders.

Aptly, “Sustainability Reporting” is defined as the practice of measuring,

disclosing, and being accountable to internal and external stakeholders for
organizational performance towards the goal of sustainable development. This
enables organizations to be more transparent about the risks and opportunities
organizations face by enabling them to consider the impacts of sustainability issues.
In such a case, a sustainability report is used as a platform for companies to measure,
understand, and communicate the impacts of their economic, environmental, and
social performances [Global Reporting Initiative (2018)].

Interestingly, Philippine Business for the Environment (PBE), a non-stock,

non-profit organization was established in 1992 to assist private corporations and
institutions in exploring the vital connections between business and the environment.
To date, PBE has 57 corporate members who are paving the way for systematical and
innovative brand awareness of sustainability reporting. (PBE, 2018).
However, there have been few related topics that linked sustainability
reporting and financial performance in Asia particularly in the Philippines (Ebdane,
2016). Thus, the Philippines’ Securities and Exchange Commission (SEC) in one of
its latest memorandum already requires Publicly Listed Companies (PLC) to submit
sustainability reporting in order for the company to communicate with its
stakeholders and future investors and for them to have access on the companies’
performance on both operations, finance and non-financial information that are
material to the company (SEC, 2009).
Meanwhile, PBE continue to influence private companies to comply with
policy reforms that would serve as a government measure to address environmental
and social challenges vis-a-vis its international commitments (PBE, 2018).

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 MAGULO NA UNG PART NA ITO….KULANG…OR MEDYO MALABO
UNG GRI…
[In addition, the Philippine Business for the Environment (PBE) is a certified
training partner of the Global Reporting Initiative (GRI) (PBE, 2018). MISPLACED]
According to PBE there were 29 sustainability and integrated reports have
been published according to their 2018 sustainability report. 57 NA UNG
MEMBERS PERO 29 PALANG ANG NAG-REREPORT?
In this study, we will utilize the data provided by the Global Reporting
Initiative (GRI), will be utilized since such data provides common ground for
sustainability reporting and has very successful in terms of adoption rate,
comprehensiveness, prestige, and visibility (Brown, H. S; De Jong, M; Levy, D.L.,
2009) as cited by (Loh, Thomas, & Wang, 2017). GRI provides guidelines on
disclosure of Economic, Environmental and social impacts that are material to the
company. [WALA KANG INTRO FOR GLOBAL REPORTING INITIATIVE
(NON-PROFIT ORG OR COMPANY BA ITO OR WHAT?]

Thus, this study examines the relationship of sustainability reporting on

financial performance on Philippine companies in order to analyze the overall impact
such to the companies’ financial performance.

1.2 STATEMENT OF THE PROBLEM

This study aims to analyze the overall impact of sustainability reporting on

financial performance using the data from the GRI and financial reports

retrieved from the company’s website, the research aims at answering the
following questions:
1. What is the impact of overall sustainability reporting to financial performance?

2. What is impact of economic, environmental and social disclosures to financial

performance?

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 3. What is the impact of the board of directors to the sustainability

reporting of financial performance?

1.3 OBJECTIVES OF THE STUDY

The objectives of this research are to study the impact of sustainability

reporting on financial performance of Philippine companies from 2012 to 2017.
In this research the financial performance will be presented by Return on Equity
(RoE), Return on Assets (ROA) and Profit Margin (PM). In addition, the research
highlights the importance of sustainability reporting that includes social,
economic, and environment, data can be retrieved from the Global Reporting
Initiative.

1. Determine the overall sustainability disclosures will demonstrate better

financial performance; and
2. Determine if economic, environmental and social disclosures will demonstrate
better financial performance;

3. Determine if company profile to the sustainability reporting will demonstrate

better financial performance.

1.4 SIGNIFICANCE OF THE STUDY

The research delivers impact various stakeholders of the society and its relevant of the
current issues today.

1. Management. This study can serve them as their reference of potential impact
based on the decisions of a management to participate in the conduct
sustainability reporting.
2. Companies that are not yet members of the Global Reporting Initiative (GRI).
This study can shed light to the impact of sustainability reporting to a
company’s financial performance. This can also serve as inspiration for those
corporations to report.

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 3. The Philippine government. The research results can serve as the basis to craft
laws and to make sustainability reporting mandatory to all companies.
4. Academe. Sustainability is not common in school teaching. Thus, this paper
will encourage educators of the academe to teach the individuals about
sustainability reporting and development.
5. Future Researchers. This can serve as a reference for future studies of any gaps
exist.

1.5 SCOPE AND DELIMITATIONS OF THE STUDY

This study will cover all companies that submitted sustainability reports to
the Global Reporting Initiative (GRI) as of December 31, 2018. The total sample size
will depend on the number of companies that submitted reports. Sources for the
Annual financial reports will include Philippine Stock Exchange, Securities Exchange
Commission and company disclosures in the website.

Information on company’s sustainability reporting can be retrieved from the Global

Reporting Initiative’s sustainability database from the year 2018, and the data was
provided by GRI through submission of “GRI Reports List Request Form.”. Thus, the
researcher limits the study only to the data provided by GRI and excludes reports not
in accordance with GRI standards.

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 CHAPTER II
REVIEW OF RELATED LITERATURE

Doing business with sustainability enables corporations to progress beyond

pursuing efficiency measures to improve financial outcomes (Benn, Dunphy, &
Griffiths, 2014). The increase in globally environmental awareness redirects the
attention of companies to be sensitive of in the environment (Burnham & Rahmati,
2012), profit will no longer prioritized. Business leaders demonstrate that successful
companies are those who are willing to devote their time and effort to incorporate
their social responsibility into their business models. (Burnham & Rahmati, 2012).
Reporting on performance helps companies in tracking gaps exist then communicates
from top management to rank and assist in instructing file employees what needs to
be done and aids in monitoring their compliance.

Sustainability reporting performance is one of the primary ways for a

company to manage its impact on sustainable environment. (Young & Dhanda, 2013).
There are several sustainability frameworks that have been developed throughout the
years, The most recognized global standards originate from the following
organizations: the Global Reporting Initiative (GRI) Guidelines, the United Nations
(UN) Global Compact, the Organizations for Economic Cooperation and
Development (OECD) Guidelines for Multinational Enterprises (MNEs) and the
International Standard Organization`s Guidance on Social Responsibility (ISO26000)
(Fortanier, Kolk, & Pinkse, 2011) as cited by (Minguel, 2017).

Fostering on sustainable development depends on suitable assessment

approaches (Ebdane, 2016). The main challenges for nonfinancial performance is that
too many metrics can lead to low response rates that can invalidate the accuracy of
the results (Young & Dhanda, 2013) and also lack of standardization, credibility, bias,
and transparency (Ebdane, 2016).

GLOBAL REPORTING INITIATIVE

8
 Global Reporting Initiative (GRI), an independent international organization that
has pioneered sustainability reporting since 1997, it is the world’s most widely used
sustainability framework. GRI reporting framework has achieved wide spread
credibility because of stakeholder views (Wang, 2017). Sustainability reports based
on GRI framework can be used to benchmark organizational performance with
respect to laws, norms, codes performance standards and voluntary initiatives;
demonstrate organizational commitment to sustainable development and compare
organizational performance. GRI promotes and develops this standardized approach
to fulfill demand for sustainability information (Burnham & Rahmati, 2012) as cited
by (Ebdane, 2016). Whether the impacts are positive or negative on sustainability
reporting its approach towards creating a sustainable global economy. Sustainability
reporting can also allow the companies to respond to ever changing conditions, as it
keeps the shareholders informed and provide an element of transparency into
changing into firm activity (Whetman, 2018). Sustainability reporting helps boost
corporate transparency, improve profitability, strengthen risk management, and
promote engagement and communications with stakeholders (Loh, Thomas, & Wang,
2017). GRI works closely with the investor community and has recently released a
report examining how companies can frame their environmental, social and economic
disclosures to meet the needs of investors (Young & Dhanda, 2013).

It is widely believed that sustainability reporting lays a foundation for

preserving and enhancing value of firm through various strategic benefits such as –
improved stakeholder engagement or relations, better customer access, customer
loyalty, new products, new markets good brand image, improved employee morale,
retention and loyalty, risk avoidance, easier access to capital, strengthen license to
operate, cost savings productivity, etc. (Warren, J; Thomsen M, 2012), as cited by
(Aggarwal, 2017). Sustainability reporting plays an important role on the overall
firms’ business, how the company governed the business that affects its profitability
disregarding various laws, environmental impacts and human rights violations that
would make the companies bear high cost and potential closure that the society as a
whole will also suffer. Regardless of its impact either positive or negative,

9
 sustainability report also encompasses the company’s values, governance model, its
approach towards creating a sustainable global economy (Whetman, 2018).

Global Reporting Initiative (GRI), through its sustainability reporting-

considered framework with its new GRI reporting standards under of reporting. The
content has been edited for greater clarity, with simpler language and a user-friendly
interface in order to encourage companies to submit sustainability reporting (Global
Reporting Intitiative, 2018). GRI focuses on the economic, social, and environmental
areas of sustainability reporting. Each area has its own sub-category in order for the
sustainability reports to become more comprehensive and relevant. GRI is to produce
a credible, reliable and sustainable reporting framework for all types of organization.
(Wang, 2017). For more overview of the said framework, is presented in figure 1
below.

Table 1

Sustainability Reporting Framework

Economic Social Environment

Economic Performance Labor Practices and Decent Materials
Work
Market Presence Human Rights Energy
Indirect Economic Impacts Society Water
Procurement Practices Product Responsibility Biodiversity
Emissions
Effluents and Waste

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 Products and Services
Compliance
Transport
Overall
Supplier Environmental
Assessment
Environmental Grievance
Mechanisms
Source: (Global Reporting Intitiative, 2018)

Table 2

Top 10 Countries worldwide submitted sustainability reporting in GRI format from 2013 to
2017.

Country Percentage Rank Region

Taiwan 8.67% 1 Asia
United States of America 7.72% 2 Northern America
Brazil 6.13% 3 Latin America & the Caribbean
Spain 4.58% 4 Europe
Sweden 3.78% 5 Europe
Germany 3.60% 6 Europe
Japan 3.37% 7 Asia
Colombia 3.05% 8 Latin America & the Caribbean
Mainland China 2.92% 9 Asia
Netherlands 2.75% 10 Europe
Source: Global Reporting Initiative

ARGUMENTS AGAINST SUSTAINABILITY REPORTING

Arguments of sustainability reporting pertaining to the GRI

frameworks, which creates confusion over the scope, lack of requirement for
independent verification of the report and the fact that different levels of application

11
permit selective reporting performance indicators and it would tend the company to
window dress their operations (Moneva , Archel, & Correa, 2006) as cited by
(Jimenez, 2017), However GRI requires organizations to disclose information on their
approach to external assurance and also provides incentives to hire these services,
notably through the inclusion of the “plus” sign in its Application Level to indicate
whether reports were verified. Nevertheless, the framework provides limited guidance
on how to verify reports. It only touches on a few issues related to hiring verification
services (Fonseca, 2010).

THE UNITED NATIONS GLOBAL COMPACT

The United Nations Global Compact is an initiative of the United

Nations (UN) launched in July 26, 2000. It is a group of companies around the world
that align their operations and strategies with ten universally accepted principles in
the areas of human rights, labour, environment and anti-corruption, and to take
actions in supporting UN Goals and issues embodied in the Sustainable Development
Goals (About United Nations Global Compact, 2019).
The Ten Principles of the UN Global Compact, a framework for companies
practicing Sustainability Reporting (UNGC, 2017). The Ten Principles are as follows:

1. Businesses should support and respect the protection of internationally

proclaimed human rights.
2. Make that they are not complicit in human rights abuses;

3. Businesses should uphold the freedom of association and the effective

recognition of right collective bargaining;

4. The elimination of all forms of forced and compulsory labour;

5. The effective abolition of child labour;

6. The elimination of discrimination in respect of employment and occupation.

7. Businesses should support a precautionary approach to environmental

challenges;

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 8. Undertake initiatives to promote greater environmental responsibility.

9. Encourage the development and diffusion of environmentally friendly

Technologies; and

10. Businesses should work against corruption in all its forms, including
extortion and bribery.

The UN Global Compact and GRI signed an agreement in May 2010 to align their work
in advancing corporate responsibility and transparency. As part of this agreement, GRI will
develop guidance regarding the Global Compact’s ten principles and integrate UNGC issue areas
into the next iteration of its Sustainability Reporting Guidelines (Global Reporting Inititiave,
2010). The UNGC will adopt the GRI Guidelines as the recommended reporting framework for
the more than 5800 businesses that have joined the world’s largest corporate responsibility
platform. (Global Reporting Inititiave, 2010). GRI are currently the most used framework for
sustainability framework for sustainability reporting. The GRI database of sustainability reports
and integrated reports is growing, advancing the objectives of both GRI and The UN Global
Compact (Minguel, 2017).

Organizations for Economic Cooperation and Development (OEC) Guidelines for

Multinational Enterprises ( MNES)

The OECD guidelines for MNEs are an annex to the OECD declaration on
International investment and Multinational Enterprises. The Guidelines are
recommendations jointly addressed by governments to multinational enterprises.
They provide principles and standards of good practice consistent with applicable
laws and internationally recognized standards. Observance of the Guidelines by
enterprises is voluntary and not legally enforceable. Nevertheless, some matters
covered by the Guidelines may also be regulated by national law or international
commitments. (OECD, 2011).

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 Similar to the GRI and UN Global Compact, the OECD Guidelines offers
advice and recommendations on a number of aspects relevant for companies. These
aspects are:
 Human Rights;
 Disclosure;
 Employment and industrial relations;
 Environment;
 Health and safety;
 Labour;
 Taxation;
 Financial incentives;
 Good Governance;
 Consumer Interest; and
 Science and Technology.

The GRI also closed partnerships with OECD same with United Nations
Global Compact. GRI entered a Memo of Understanding (MoU), to established three-
year program to encourage companies to use both the OECD and GRI’s guidance.
The MoU also outlined the way GRI and OECD can work together to make use of the
synergies between the two instruments and strengthen cooperation in other common
areas of mutual interest (Global Reporting Initiative, 2010).

ISO 26000

ISO 26000 is an international standard providing guidelines for social

responsibility, it was released year 2010, ISO 26000 provides guidance on the
underlying principles of social responsibility, recognizing social responsibility and
put into action thus contribute to sustainable environment, social and economic
development, This International Standard provides guidance to users and is neither
intended nor appropriate for certification purposes. Any offer to certify to ISO 26000
or any claim to be certified to ISO 26000 would be a misrepresentation of the intent

14
and purpose of this International Standard (ISO 26000:2010, 2010). ISO 26000
contains seven core subjects of social responsibility. The core subjects are:

 Human rights;
 Labour Practices;
 The Environment;
 Fair operating policies;
 Consumer issues;
 Community involvement and development.

The seven core subjects of social responsibility to every organization and

should be considered.
 Organizational governance;
 Human rights;
 Labour practices;
 Environment;
 Fair operating practices;
 Consumer issues; and
 Community involvement and development.
In summary the seven principles establish the underlying framework
for socially responsible for decision-making that contribute sustainable development.
GRI signed a memorandum of understanding in 2011 to increase their cooperation.
The GRI published a linkage document highlighting the synergies between ISO
26000 and the GRI sustainability reporting. This publication helps to relate the Social
Responsibility (SR) guidance in ISO 26000 to reporting guidance provided by GRI.
In particular, this publication aims to help companies and other organizations that
follow the GRI Guidelines to prepare their reports, understand how GRI reporting
aspects and indicators are related to ISO 26000 clauses. Although ISO 26000 does not
offer guidance on SR performance reporting, the ISO 26000 content does cover a
very similar range of topics to that in the GRI Reporting Guidelines. In doing so, the

15
ISO guidance provides a structure for companies to organize their activities, which
can influence a company’s reporting process” (Global Reporting Initiative, 2010).

Economic Disclosures as Sustainability Reporting

Sustainability disclosure is one of more commonly used approaches to

convey a firm’s commitment to sustainability (Alon & Vidovic, 2015). In the context
of GRI standards, the economic dimension of sustainability of sustainability concerns
an organization’s impact at local, national, and global levels (Global Reporting
Initiative, 2018). For example, SM Prime Holdings Corporation in its 2017 annual
report, the company generated Php92.3B revenue, 7.5% attributed to salaries that
leads to economic growth and high standard of living, 12.8% taxes to Philippines
government and China which in turn to finance the infrastructure, health, education,
social services, salaries to government employees that helped to stimulate the
economic growth of the country.

Environment Disclosures as Sustainability Reporting

A healthy environment is fundamental to a strong and sustainable

economy (Goldman Sachs, 2017). A sustainable economy requires caring for the
environment by reducing carbon footprints, recycling materials initiative, conserving
water and protecting our biological diversity to ensure the survival of plant and
animal species, genetic diversity and natural ecosystems (Global Reporting Initiative,
2016), an example of Ayala Land, through in its 2017 integrated report, the company
conserve and protect indigenous biodiversity integrating in their business model

16
 development plan which at present covers 4,870 hectares land with high biodiversity
value.
To mitigate the environmental impact is the main goal of the companies
operating in the society (AEV, 2017), Aboitiz Equity Ventures in its 2017
sustainability report stated that the company reached 63% of its goals to plant 9
Million trees until 2020. They also monitor the survival rate of the trees planted and
the renewable energy at net sellable capacity at 1,263 MW a clean energy and was
able to recycle 32 tons of waste material, the company integrate their reports to the 17
sustainability development goals (SDG) of the United Nations Development Program,
is one of the leading organizations working to fulfill the SDGs by the year 2030
(UNDP, 2015). Ayala Chairman and CEO Jaime Augusto Zobel De Ayala was
chosen as 2017 SDG Pioneer from Southeast Asia, and the first Filipino to be given
this distinction (Ayala Corporation, 2017).

Social Disclosures as Sustainability Reporting

One of the most fundamental levels of a sustainable company is one that

ensures its business activities do not have negative impact on people and society, the
focus is on creating value that is not only good for the business, but also good for the
business but also for the society (UNGC Report, Business Solutions to Sustainable
development, 2017). Based on their report, 49% of the companies prioritize good jobs
and economic growth and good health and well-being as part of the SDG from the
United Nations Development Program. Good business practices in GRI context
standards are where the company generates employment, training and education to its
employees, establishes health and safety, diverse culture and equal opportunity for
everyone and non-discrimination, abolition of child labor and freedom from
collective bargaining agreement.

The Role of the Board of Directors, Independent Directors, And Audit Committee

17
 Three moderating variables are introduced to capture the impact of
sustainability reporting: the board of directors, Independent board of directors, and
audit committee which serves as the top-level management. The board of directors
maintains firms’ relationships with stakeholders, set firms social agenda and
formulates strategies (Jizi, 2017). A successful board will place an emphasis on
business ethics and corporate responsibility (Birindelli, Dell’Atti, Iannuzzi, & Savioli,
2018). The independent board of directors maintains independence of the company to
ensure it compliance and to prevent from bias reporting. Another aspect of board
independence is the separation of the roles of Chair and CEO (Cormier, Ledoux, &
Magnan, 2011). In SEC Memorandum Circular No. 6 series of 2009 states that, “The
Audit Committee shall consist of at least three (3) directors who shall preferably
have accounting and finance backgrounds , one of whom shall be an independent
director and another with audit experience, the audit committee serves as oversight
responsibility for the financial reporting, system of internal control, audit process, and
monitoring of compliance with applicable laws, rules and regulations (SEC, 2009).

Return on Equity as measurement of Financial Performance

Return on Equity (RoE) effectively measures how much profit a company

generate on the equity capital investors have deployed in the business and can be used
overtime to evaluate changes in a company’s financial situation (Calamar, 2016). The
higher the ratio, the more efficient is the financial performance. RoE is often
considered as the most important indicator for shareholders since it measures their
return, RoE capture the financial performance because it is computed from the
financial outputs of the rigorous and auditing process (Ebdane, 2016). Previous
researchers present RoE as dependent variable cited in most literature (Burnham &
Rahmati, 2012); (Aggarwal, Priyanka, 2013); (Ebdane, 2016); (Hafez, 2016);
(Whetman, 2018).

18
 Return on Assets as measurement of Financial Performance

Return on Assets (RoA), measures the effectiveness in generating profits with

its available assets, the higher firm’s return on RoA the better (Gitman & Zutter,
2013). RoA is considered to be the most likely indicators of the firm’s ability to
create value for its investors (Ferrer & Banderlipe, 2012) as cited by (Ebdane, 2016).
RoA capture also the financial performance because it is computed from the financial
outputs of the rigorous and auditing process (Ebdane, 2016). ROA as dependent
variable cited in most literature (Burnham & Rahmati, 2012); (Aggarwal, Priyanka,
2013); (Singh, 2014); (Ebdane, 2016); (Whetman, 2018).

Net Profit Margin as measurement of Financial Performance

Financial ratio is regarded as a better method to obtain the description of a

company’s overall financial condition (Husna & Desiyanti, 2016). The content of the
financial information of the company provides the management timely decision on
the financial statements provided. One of the most important ratios is the Net Profit
Margin (NPM) which refers to ratio of net profit after taxes and sales (Husna &
Desiyanti, 2016). It is the ratio that shareholders look into because it shows how the
company generate the profit out of their revenue, if revenue fluctuates so does the
profit. A well-managed expense resulting to higher profit margin. As executives
attempt to increase profits over a given time, they may cut costs critical to their
operations this behavior has repercussions if it can destroy their firm value which is
difficult for them to recover its reputation (Whetman, 2018).

. CHAPTER III
THEORITICAL FRAMEWORK

19
3.1 CONCEPTUAL FRAMEWORK

Corporate sustainability follows three theoretical frameworks that are

comprised of Legitimacy theory, Stakeholder theory and Agency Theory. These
theoretical frameworks states that companies should include sustainability in their core
strategic goals and disclose such performance through sustainability reports. (Ebdane,
2016) These theories also suggest positive relationship between corporate
sustainability and financial performance (Aggarwal, Priyanka, 2013) as cited (Ebdane,
2016).

Legitimacy Theory is a mechanism that supports organizations in implementing and

voluntary social and environmental disclosures in order to fulfill their social contract
that enables the recognition of their objectives and the survival in a jumpy and
turbulent environment (Burlea-Schiopoiu, 2013). The existence of social contract
between the companies and society is fundamental to the purpose of legitimation
(Matthews, 1993) as cited by (Vitolla, 2017). Such contract is based on mutually
beneficial exchanges between the company and the community (Vitolla, 2017).
Legitimacy Theory operate within the bounds and norms of the society where they
operate to ensure that their activities are perceived by outside parties are legitimate
(Burnham & Rahmati, 2012). It also explains that a social contract exists between an
organization and social system and asserts organizational compliance with societal
norms and expectations (Burnham & Rahmati, 2012) as cited (Ebdane, 2016);
(Aggarwal, Priyanka, 2013). Legitimacy theory had become one of the most cited
theories when it comes to social and environmental accounting. (Ortas, Gallego-
Alvarez, & Alvarez, 2015). It mitigates the company from future lawsuits and
environmental compliance. This can be connected to the whole organization’s
compliance of sustainability reporting.

Management scholars describe stakeholder theory as “those groups and

individuals who can affect or be affected by actions connected to value creation and
trade”. This theory contributes to the understanding that stakeholders’ influences on
organizations decisions and actions, stakeholders influence also organizations to
practice sustainability reporting (Wang, 2017). Sustainability practices can therefore

20
be motivated by self-interest and a means to increase profit and shareholder value
(Haroto & Lee, 2014) as cited by (Bäckström & Karlsson, 2015). Stakeholder Theory
is one of the major, if not the most frequently used, approach in social,
environmental, and sustainability management research (Montiel & Delgado-
Ceballos, 2014) as cited by (Hörisch, Freeman, & Schaltegger, 2014); (Wang, 2017).
Stakeholders theory stresses that managers must keep stakeholders’ interests in mind
when implementing business strategies (Wang, 2017), managing stakeholder relations
may result in competitive advantage (Bäckström & Karlsson, 2015). Stakeholder
Theory asserts that organizations have accountability towards a broad range of
stakeholders and that all stakeholders have the right to be treated fairly by
organizations (Freeman, 1984) as cited (Ebdane, 2016) if properly managed can
improved financial performance over time (Bäckström & Karlsson, 2015), Some
researchers investigated descriptive and empirical aspects of stakeholder theory,
which helps describe how companies are actually managed, or more specifically to
identify relevant stakeholders and their expectations related to sustainability reporting
(Hörisch, Freeman, & Schaltegger, 2014); (Montiel & Delgado-Ceballos, 2014) as
cited (Wang, 2017), Companies are accountable of various stakeholders for the
economic, social, and environmental performance, (World Economic and Social
Survey , 2013)

Agency Theory is based on Principal (shareholders) – Scholars use agency theory as a

contract for the unit of analysis between principals’ and agents will complete these
demands in the principals’ best interest (Bendickson, Muldoon, Liguori, & Davis,
2015). Agency Theory is one of the dominant theories in strategy and especially in
corporate governance (Bendickson, Muldoon, Liguori, & Davis, 2015), is a theory
devised to explain and conceptualize the role and behavior of agents, including
managers and directors of companies (Keay, 2016). Companies are usually requested
to disseminate to their stakeholder’s information about environment and social
activities to mitigate the conflicts derived from the information asymmetry (Lopes,
2012). Corporate sustainability reports reduce information asymmetry, risks, and
uncertainties perceived by investors, and improve decision-making They also increase

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market efficiency and enhance financial performance (Aggarwal, 2017) as cited
(Ebdane, 2016).

3.2 OPERATIONAL FRAMEWORK

Based on the above conceptual framework, Operational framework was

conceptualized below which follow the study of (Burnham & Rahmati, 2012) as cited
by (Ebdane, 2016); this is also related the study of (Bäckström & Karlsson, 2015)
which frameworks to be used, this framework was proposed by (Alshehhie,
Nobanee, & Khare, 2017) based on the result of their findings for future studies. The
First framework relates that the dependent variable the has the influenced of the
overall financial performance of the company presented in figure 1 model 1, the
dependent variables can be retrieved from the Global Reporting Initiative,
considering size of the board of directors, ratio of independent directors and audit
committee.

Figure 2 Model 2 breaks down Overall Sustainability Disclosure into the three aspects
of sustainability reporting i.e. economic, social, and environment that influence of
financial performance, from this model each dependent variable shall be tested to the
financial performance of the company i.e. Return on Equity, Return on Assets and
Net Profit Margin, the results are expected to have significant influence of the
company.

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 Figure 1

Model 1

INDEPENDENT VARIABLE

Overall Sustainability Company Performance

Disclosures (ROE, ROA, Net Profit
Margin)

fit

Company Profile
Figure 2

(Size of board of directors, Ratio of

independent directors, Audit
Committee)

c
MODERATING VARIABLE

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INDEPENDENT VARIABLE

Economic Disclosures

Company Performance (Return

Environmental
on Equity, Return on Assets
Disclosures
and Net Profit Margin)

Social Disclosures

MODERATING VARIABLE

Company Profile

(Size of board of directors, Ratio of

independent directors, Audit
Committee

3.3 ASSUMPTIONS

This research study is anchored on the assumption that sustainability

reporting will demonstrate better financial reporting. Data provided from Global
Reporting Standards from 2012 to 20017.

3.4 HYPOTHESES/PROPOSITIONS

SUSTAINABILITY REPORTING AND FINANCIAL PERFORMANCE

Corporate sustainability and its impact of financial performance have
emerged as important area for research in recent years (Aggarwal, Priyanka, 2013) as

24
cited by (Ebdane, 2016). Several studies that linked sustainability reporting to
financial performance (Carp, Păvăloaia, Afrăsinei, & Georgescu, 2019); (Whetman,
2018); (Wang, 2017); (Nnamani, Onyekwelu, & Ugwu, 2017); (Zyadat, 2016);
(Ebdane, 2016); (Bäckström & Karlsson, 2015); (Singh, 2014); (Aggarwal, Priyanka,
2013); (Burnham & Rahmati, 2012); (Ameer & Othman, 2012); (Cormier, Ledoux, &
Magnan, 2011). Many articles that sustainability has a capacity for long term
financial performance, investment return, and also value creation which refers to
achieving sufficient profits (Burnham & Rahmati, 2012). A growing number of
companies do understand the of corporate reporting includes competitive advantage,
enhancement of company brands, and reputation; and greater ability to attract and
retain customers and talent (Young & Dhanda, 2013). In this dynamic business
environment and advance technology where most of the people has the access on how
the company operates their business it is widely believed that sustainability reporting
has the influence of company’s performance, it requires to establish the linkage
between the two; sustainability and financial performance (Burnham & Rahmati,
2012) as cited (Ebdane, 2016). Previous studies proven the relationship between
sustainability and profitability (Whetman, 2018); (Bäckström & Karlsson, 2015);
(Burnham & Rahmati, 2012); (Ameer & Othman, 2012), however other studies with
positive results but on specific aspect, (Nobanee & Ellili, 2017); (Wang, 2017);
(Zyadat, 2016); (Ebdane, 2016); (Aggarwal, Priyanka, 2013), according to
(Bäckström & Karlsson, 2015) “without relationships can be explained by
inconsistencies or vagueness in the construct of the measurements aimed at capturing
sustainability and financial performance” which in these case can be explained by
these researchers, (Carp, Păvăloaia, Afrăsinei, & Georgescu, 2019); ( Ching, Gerab,
& Toste, 2017); (Nnamani, Onyekwelu, & Ugwu, 2017); (Singh, 2014); (Cormier,
Ledoux, & Magnan, 2011). Although most of the study’s results to positive
relationships. Two related literature regarding sustainability reporting for Philippine
companies as posted online (Ebdane, 2016) (Jimenez, 2017), previous research has
focused on U. S. companies (Bäckström & Karlsson, 2015), thus more studies should
be done for the Philippines for comparative from other countries where society and
cultural values may differ. Previous researcher (Ebdane, 2016) recommended a

25
larger sample size in order to capture the effect of sustainability performance, other
company specific variables like board structure and even the financial performance of
the firm may consider in the future studies, which in turn I included in the variables
as discuss above.

Thus, from the above review of related literature the following hypotheses are drawn
out:

Hypothesis 1: The overall sustainability disclosures will demonstrate better financial

performance.

Hypothesis 2: The overall sustainability disclosures have no effect on financial

performance.

Hypothesis 3: The overall sustainability disclosures have negative effect on financial

performance.

The rate of return on equity design to measure their profit shareholders earned
of their capital employed in the firm (Zyadat, 2016). Generally, the owners are better
off the higher the better (Gitman & Zutter, 2013). RoE is expressed mathematically as
follows (Gitman & Zutter, 2013); ROE = Earnings available for common
stockholders/Common stock equity, many studies have examined the impact of
sustainability reporting to Roe, (Whetman, 2018); (Zyadat, 2016); (Aggarwal,
Priyanka, 2013); which consistently the same results. Therefore, following
hypothesized below:

Hypothesis 4: The overall sustainability disclosures will demonstrate better RoE.

Hypothesis 5: The overall sustainability disclosures have no effect on RoE.

Hypothesis 6: The overall sustainability disclosures have negative effect on RoE.

The rate of return on assets (RoA) design to measure the efficiency of the
firm to use its assets to generate profits (Zyadat, 2016), the higher the rate the better
(Gitman & Zutter, 2013). RoA can be mathematically calculated as follows (Gitman

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& Zutter, 2013) ROE = Earnings available for common stockholders / Common stock
equity. RoA is not only a standard of corporate performance within the sustainability
literature, it is commonly used in the majority of strategy researched (Bäckström &
Karlsson, 2015), previous researchers examined the impact of sustainability reporting
to RoA, (Whetman, 2018); ( Ching, Gerab, & Toste, 2017); (Nnamani, Onyekwelu, &
Ugwu, 2017); (Zyadat, 2016); (Ebdane, 2016); (Bäckström & Karlsson, 2015);
(Singh, 2014); (Aggarwal, Priyanka, 2013); (Ameer & Othman, 2012); (Cormier,
Ledoux, & Magnan, 2011) which produced mixed results, therefore the following
hypothesized below:

Hypothesis 7: The overall sustainability disclosures will demonstrate better RoA.

Hypothesis 8: The overall sustainability disclosures have no effect on RoA.

Hypothesis 9: The overall sustainability disclosures have negative effect on RoA.

Net Profit Margin (NPM) measures the percentage net income after tax to
sales, the higher the firm net profit margin the better (Gitman & Zutter, 2013).

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