has recently been demonstrated that more eco-efficientfirms have significantly better operational performanceas measured by return on assets (ROA). 126 It is furtherargued that corporate environmental performance is thedriving force behind the positive relationship betweenstakeholder welfare and corporate financial performance(measured by Tobin’s Q). 127With regard to poor environmental policies, boththe release of toxic chemicals and the number ofenvironmental lawsuits have been found to have asignificant and negative correlation to performance. 128Additionally, carbon emissions have been found to affectfirm value in a significant and negative manner. 129Hence, evidence related to the ‘E’ dimension shows that amore environmentally friendly corporate policy translatesinto better operational performance.4.4 OperationalPerformanceand the ‘S’ DimensionStudies validate a correlation between the ‘S’ (social)dimension of sustainability and operational performance.Good corporate relations with three major stakeholdergroups – employees, customers and the community –significantly improve operational performance. 130 It isalso clear that proper stakeholder management practicestranslate into higher firm value. 131 More broadly, a diverseworkforce has a positive effect on firm performance, 132and the evidence points to the importance of employeerelations for operational performance. The conclusion isevident: good workforce practices pay off financially interms of better operating performance. 133For other, more specific social dimensions, there is alsoevidence of significant and positive effects on corporateperformance. For example, banks that have better scoresfor ’Community Reinvestment Act Ratings’ exhibit betterfinancial performance. 134Given the evidence, it is clear that the social dimensionof sustainability, if well managed, generally has a positiveinfluence on corporate financial performance. Whatis missing in this strand of research is direct evidence ofother types of corporate social behaviour, for example,corporations’ worker-safety standards in emergingmarkets, respect for human rights, or socially responsibleadvertising campaigns.‘A 10% reduction in emissions of toxic chemicals results in a $34million increase in market value’Konar and Cohen, 2001126 Guenster, Derwall, Bauer, and Koedijk (2011).127 Jiao (2010).128 Konar and Cohen (2001).129 See, for example, Matsumura, Prakash, and Vera-Munoz (2011).130 Preston and O’Bannon (1997).131 See, for example, Benson and Davidson (2010), Hillman and Keim (2001), and Borgers, Derwall, Koedijk, and ter Horst (2013). Borgers et al. (2013) find a significantpositive relation between a stakeholder index and subsequent operational performance of corporations measured by operating income scaled by assets and netincome scaled by total assets.132 Richard, Murthi, and Ismail (2007) investigate the effect of racial diversity on productivity and firm performance and find a positive relationship between the levelof racial diversity and performance.133 See, for example, Huselid (1995), Smithey Fulmer, Gerhart, and Scott (2003), and Faleye and Trahan (2010). Huselid (1995) provides evidence that good workforcepractices translate into better operating performance. Similar findings are shown by Smithley et al. (2003), and Faleye and Trahan (2010).134 Simpson and Kohers (2002).28
SummaryIn this section, we have analysed the academic literature on the relationshipbetween sustainability and operational performance and conclude thefollowing:• Meta-studies generally show a positive correlation between sustainabilityand operational performance.• Research on the impact of ESG issues on operational performance showsa positive relationship:--With regard to governance, issues such as board structure, executivecompensation, anti-takeover mechanisms, and incentives are viewed asmost important.--Environmental topics such as corporate environmental managementpractices, pollution abatement and resource efficiency are mentioned asthe most relevant to operational performance.--Social factors such as employee relationships and good workforce practiceshave a large impact on operational performance.Table 6 summarizes all reviewed empirical studies on the topic of sustainabilityin relation to operational performance.In total we reviewed 49 studies, of which 43 (88%) show a positive correlationbetween sustainability and operational performance.29
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