Sustainable Business Practices and Their Relationship with Financial Performance in Competitive Markets

Abstract

Sustainable business practices have emerged as a primary interest of companies in increasingly competitive markets since stakeholders are seeking greater accountability in the environmental, social and governance (ESG) practices of businesses. Although the sustainability initiatives are normally linked to ethical accountability and value creation on the long-term, the fact that sustainability initiatives directly affect financial performance remains a controversial topic of debate. This paper will analyse how sustainable business practices based on ESG and firm financial performance are related in a competitive market context. The research design used is quantitative research design using the secondary data gathered using annual reports and sustainability disclosures of selected companies based on competitive industries. To measure ESG performance, the sample includes firms that are observed within a specific timeframe, and the measurement of ESG performance is based on a composite index, which includes environmental, social, and governance indicators. Key accounting-based metrics, such as Return on Assets (ROA) and Return on Equity (ROE) are used to evaluate the financial performance. The research uses descriptive statistics, correlation as well as the multiple regression to determine the relationship between the variables with control of firm size, leverage as well as the effect of the industry. The results show a positive and statistically significant correlation between ESG practices and financial performance, indicating that companies with sustainable practices in their operations are more likely to enjoy high profitability. The research paper adds to the already existing body of literature by offering empirical data of competitive markets, as well as the strategic significance of incorporating sustainability in the main business operations in order to be financially successful over time.