The three critical sustainability factors of performance, disclosure, and risk were introduced and synthesized in Chapter 1. This chapter addresses sustainability performance that can be classified into two broad categories of financial and nonfinancial dimensions. The financial sustainability performance is referred to as economic sustainability performance (ESP) and consists of long-term earnings and related cash flows and growth and innovation. The nonfinancial sustainability performance consists of environmental, ethical social, governance, and ethical (EESG) components in generating ethical, accountable, social, and environmental impacts. The achievements of both financial ESP and nonfinancial EESG sustainability performance has contributed to the creation of shared value for all stakeholders including shareholders, employees, creditors, suppliers, customers, society, government, and the environment.
Business sustainability is a relatively broad concept that is related to the benefits of both internal and external stakeholders. These stakeholders are those who have vested interests in a firm through their investments in the form of financial capital (shareholders), human capital (employees), physical capital (customers and suppliers), social capital (the society), environmental capital (ecological), and regulatory capital (government). Stakeholders have a reciprocal relation and interaction with a firm in the sense that they contribute to the firm’s value creation and in return their well-being is also affected by the firm. Three factors of business sustainability that can affect stakeholders’ well-being are sustainability performance, sustainability disclosures/reporting, and sustainability risks all of which are important to stakeholder’s knowledge. This chapter examines sustainability performance.
The sustainability performance factor underscores that firms that focus on their nonfinancial performance including social and environmental performance, conduct their business ethically, and manage their activities more effectively with good corporate governance are more financially sustainable. The voluntary disclosure factor of sustainability performance posits that “sustainability-centric” firms that focus on achieving financial economic sustainability performance (ESP) and nonfinancial environmental, ethical, social, governance (EESG) sustainability performance have more incentives to disclose information that will differentiate themselves from “non-sustainability-centric” firms that often do not focus on financial ESP and nonfinancial EESG in order to avoid a bad reputation. Therefore, disclosure of voluntary nonfinancial EESG sustainability performance may signal management’s commitment to transparency of both financial and nonfinancial performance and thus can affect information asymmetry and firm value. The sustainability risk factor determines stakeholder exposure to risks associated with failure to achieve sustainability performance.
Sustainability performance is typically classified into financial economic sustainability performance (ESP) and nonfinancial EESG sustainability performance with ethical performance often integrated into both financial and nonfinancial dimensions of sustainability performance. Although business sustainability continues to evolve, several dimensions of sustainability performance pertaining to social and environmental initiatives have gained widespread global acceptance. These initiatives include important matters such as ethical workspace, customer satisfaction, just and safe working conditions, nondiscriminatory fair wages, workplace diversity and inclusion, environmental preservation, clear air and water, minimum age for child labor, safe and quality products, concern for the environment, and fair and transparent business practices. It is, however, important to realize that each industry has its own applicable set of sustainability financial and nonfinancial key performance indicators (KPIs) relevant to both financial ESP and nonfinancial EESG sustainability performance.