Does Sustainability Reporting Enhance Firms Profitability? A Study on Select Companies from India and South Korea

Abstract

This paper examines the relationship between corporate sustainability reporting and firms profitability of Indian and South Korean companies. For calculating the disclosure score of sustainability performance, content analysis technique is employed based on the reporting format of Global Reporting Initiatives. The study sample consists of 28 listed non-financial firms from India and 26 listed non-financial firms from South Korea over a period of 6 years (2010–2015). Using the disclosure scores, regression analysis is used to examine the association between sustainability reporting/performance and firm performance. The regression results indicate that, for South Korean firms, the association is positive and significant. However, in Indian context, the impact of sustainability performance is negative. Further, the relative impact of sustainability reporting is found to be significantly more in South Korea as compared with India.

Keywords

Return on assets sustainability reporting global reporting initiatives content analysis

Introduction

Sustainable development (SD) became a concept of strategic importance after the publication of ‘Our Common Future’ report by the World Commission on Environment and Development (WCED, 1987). This report had defined SD as ‘the development that meets the needs of current generation without compromising the ability of future generation to meet their needs and aspirations’ (WCED, 1987, p. 16). In that, organisation plays a key role in contributing to SD. The publication of this report along with the stakeholders demand has enthused companies to integrate sustainability goals into the management process. Sustainability goal is all about maintaining social solidarity, conserving natural environment and ensuring economic development in a balanced manner. However, in a traditional management process, firms mainly focusses on economic dimension. With the growing social and environmental concern, stakeholders are now interested in understanding firms’ approach in managing sustainability issues along with their potential for value creation (KPMG, 2008). This demand from stakeholders has actually elevated the importance of fulfilling the responsibility of a firm towards triple bottom line (economy, society and environment) and communicating them accordingly in the form of sustainability report. This communication can influence stakeholders’ relationship, which is very critical for firm’s subsistence, growth and viability (KPMG, 2008; Lopez, Garcia, & Rodriguez, 2007).

Corporate sustainability (CS) reporting has become very crucial for a firm to demonstrate its activities towards the triple bottom line. Evidences reveal a significant increase in the number of firms publishing sustainability report based on Global Reporting Initiatives (GRI) framework (Carrot & Sticks, 2013; KPMG, 2008, 2013). However, the reporting rates are found to be very high in developed economies such as the United States, Germany, France, Japan, the United Kingdom, and many other European countries as compared with emerging economies. The changing behaviour of the corporate enterprises towards fulfilment of sustainable goal has attracted the attention of researchers in recent past to examine the association between CS performance (CSP) and firm’s profitability. Consequently, researchers have studied this association mostly in the developed countries like the United States, Germany, France, and the United Kingdom. However, the findings are inconclusive encompassing positive association (Isabel, Castelo, Curto, & Teresa, 2012; Lo & Sheu, 2007; Orlitzky, Schmidt, & Rynes, 2003; Wagner, Phu, Azomahou, & Wehrmeyer, 2002), negative association (Lopez et al., 2007) and neutral association (Dobbs & Staden, 2016; Garcia-Castro, Canela, & Arino, 2010; McWilliams & Siegel, 2000). In spite of the contradictory findings, a general consensus can be drawn that market forces are more likely to reward and not generally penalise companies with higher CSP (Isabel et al., 2012). In case of Asia, only a handful number of studies relating to this association have been undertaken so far (Burhan & Rahmanti, 2012; Cortez & Cudia, 2011; Hidemichi et al., 2012). Except for a few survey reports like KPMG (2008, 2013) and Carrot and Stick (2013), research studies relating to the assessment of sustainability reporting in the context of South Korea and India are very limited to the best of our knowledge (Choi, Kwak & Choe, 2010; Mishra & Suar, 2010). However, according to the survey report of Carrots and Sticks (2013), South Korea is ahead of India in publishing sustainability report. In the context of Indian companies, sustainability reporting is still new, and from 2009 onwards, majority of the companies have started reporting. Against this backdrop, the present study is a modest attempt to examine the association between CSP and firms profitability and also to compare the CSP between India and South Korea.

South Korea and India have been the fourth and third largest economies in Asia. Although the Asian economic growth was mainly contributed by India and China, South Korea has remained a significant player for these countries as one of their major investment and trading partners. South Korea and India have maintained a close relationship ever since the establishment of formal diplomatic ties in 1973. The past few decades have witnessed high-level exchanges and the signing of several crucial agreements that have led to strengthening of bilateral economic relationships. Moreover, the volumes and share in exports and imports between the two countries have also increased during the past few decades. In this prospective, sustainability reporting is an added advantage, which will further strengthen the economic relationship between South Korea and India. Although the concept of sustainability reporting being voluntary in nature in both South Korea and India, it is highly developed in South Korea, whereas, in India, this concept is very new. Sustainability reporting is all about maintaining healthy relationship with stakeholders that will not only bring continuous flow of socially responsible investments into the economy but will also help in developing and maintaining competitive advantage in the market. Thus, comparison between South Korea and India in terms of sustainability reporting is of utmost important. Comparative analysis between the two countries in terms of CS reporting practices may provide a valuable input not only to the companies in terms of making investment towards SD but also to the policymakers in terms of formulating polices relating to SD of the economy. Moreover, the findings of this study will also help the academicians and practitioners in understanding the strategic importance of sustainability issues. At present, the demand for corporate managers to develop effective sustainability strategy is growing significantly. This study will help firms to realise that CSP is a very important source of competitive advantage, and that a firm’s sustainability initiatives when properly integrated into the business strategy and implemented efficiently tend to improve firms’ overall performance.

The second section in this study presents a review of literature followed by data and methodology adopted in the third section. The fourth section includes results, and the fifth section is devoted for concluding remarks.

Review of Literature

CSP is a broad concept that encompasses the three broad dimensions, namely economy, society and environment. However, except for few studies, in most of the study, researchers have undertaken either one or two dimension(s) to investigate the association between CSP and firm performance.

A number of researchers have analysed the association between CSP and market value in case of US firms and found positive and significant association (Isabel et al., 2012; Lo & Sheu, 2007). By considering all the three components of CSP such as economy, society and environment, Burhan and Rahmanti (2012) for 32 listed Indonesian companies. The study indicates significant positive influence of sustainability reporting on firm performance. In another study, Tracy et al. (2010) observe that high levels of investment towards sustainability in the United States are positively associated with size, profitability and potential for growth. The study thus indicates that firms can develop competitive advantage by investing in CS programmes. Hussain (2015) investigated the influence of CSP on firm performance in the context of Global Fortune (N100) firms. Employing the methodology of content analysis based on GRI reporting guidelines, the study indicated that there is a significant positive influence of CSP on firm performance, which is consistent with the study of Rashid and Othman (2012) in the context of top 100 global corporations. On the contrary, Lopez et al. (2007) found negative association between SD and corporate performance in the case of 110 US firms during 1998–2004. On the other hand, Dobbs and Staden (2016) in the context of New Zealand Stock Exchange found insignificant influence of CS reporting on firm value.

Regarding the association between corporate social responsibility (CSR) and firm performance, a number of studies have employed the Kinder, Lydenberg, Domini index to measure social performance (SoP) and empirically found positive association with firm performance (Waddock & Graves, 1997). Likewise, Orlitzky et al. (2003) conducted meta-analysis relating to corporate SoP and financial performance. The study found positive correlation between them and proposes this relationship to be bidirectional and simultaneous. On the other hand, there are number of studies where researchers have encountered insignificant association between SoP and firm performances (Garcia-Castro et al., 2010; McWilliams & Siegel, 2000). Again, Choi et al. (2010) examined the association between CSR and financial performance in the case of South Korea. Employing equal-weighted CSR index and stakeholder-weighted CSR index as the measure of SoP, the study indicated positive and significant association between financial performances. The findings of Mishra and Suar (2010) in case of Indian manufacturing firm were similar.

The impact of environmental performance (EnP) on economic performance (EcP) is also a debatable issue in the extant literature. Michael and Paul (1997) have investigated this association by analysing 243 firms of the United States. The outcome of the study indicated that the returns to EnP is higher in high-growth industries. In case of European paper manufacturing industry, Wagner et al. (2002) concludes that the environmental index has a positive and significant effect on financial performance. Similar was the outcome of Hidemichi et al. (2012) for the manufacturing firms of Japan. Again, in the context of the manufacturing and automotive firms of Japan, Cortez and Cudia (2011) have investigated the effect of environmental innovation on firm’s performance and found that environmental innovation have positive impact on sales, income and assets only in the context of automotive firms of Japan.

The view of the aforementioned relevant literature relating to the association between firm performance and CSP along with its respective components reveals inconsistent outcomes. Although some studies indicate positive and significance association between the two construct, the majority of the studies has indicated insignificant association. Theoretically, there is positive relationship between CS reporting/performance and firm performance (KPMG, 2008). According to KPMG (2008, 2013), sustainability reporting is now considered to be an indispensable tool to maintain sustainable relationship with the wider groups of stakeholder, reduce social and environmental risk and attract ethical investment that consequently improves firm performance. Therefore, based on this theoretical relationship, following hypotheses have been developed for testing:

H₁: The association between CSP and firm performance is positive.

H₂: The association between corporate economic performance and firm performance is positive.

H₃: The association between corporate environmental performance and firm performance is positive.

H₄: The association between corporate social performance and firm performance is positive.

Moreover, the present study, based on the existing literature, proposes that since the developed nations disclose sustainability information more rigorously, disclosure of CS is expected to have a better association with firm performance than the developing nation. Therefore, the following hypotheses are developed for testing:

H₅: The association between CSP and firm performance is significantly different between South Korea and India.

Data and Methodology

Source of Data, Study Period and Sample

The present study is based on the secondary data collected from the annual reports and sustainability reports published by Indian and South Korean non-financial companies from 2009–2010 to 2014–2015. In the context of Asia, sustainability reporting is highly developed in South Korea, whereas majority of Indian firms have started reporting their sustainability performance from 2009–2010 onwards¹

KPMG, Unit for Corporate Governance in Africa, UNEP and GRI jointly published an update on trends in voluntary and mandatory approaches to sustainability reporting in 2013 entitled ‘Carrots and Stick—Promoting Transparency and Sustainability’.

(KPMG, 2008, 2013). Therefore, the base period of the study is 2009–2010.

To select the sample companies from these Asian countries, the following criteria are developed which were neglected in the previous studies related to sustainability reporting (Burhan & Rahmanti, 2012; Ho & Taylor, 2007):

The company must be a listed non-financial company

The company must be publishing its sustainability reports on its respective website in the English language

The company must be publishing its respective sustainability report continuously during the study period

Initially, we had collected all the relevant reports available in the companies’ website from the select countries. However, we found that there was no continuity in publishing reports over the years for some firms, whereas some companies had not published reports in English. After excluding these firms from the sample, finally, we found that 28 from India and 26 from South Korea had published sustainability and annual reports continuously over a period of 6 years from 2009–2010 to 2014–2015 in English. Although, the survey report of Carrot and Sticks (2013) reveals that South Korea is ahead of India in case of publishing sustainability report; due to language constraints, our sample firms for South Korea is slightly smaller than India. The present study, however, excludes the financial firms, as they are not directly associated with various environmental-related activities and thus may not comply with sustainability reporting framework of GRI (3 and 3.1) that is applied in this study for calculating the disclosure score of CSP and its components. Moreover, it is important to note that we have relied only on the company’s website because it provides easy accessibility.

Measurement of Variables

The dependent variable of the study is firm performance measured by return on assets (ROA), the most extensively used measure of firm performance (Choi et al., 2010). ROA is calculated by dividing profit before tax by total asset. CSP and its components calculated both in terms of level and quality of information disclosed are considered as independent variables in this study. The notations used for the explanatory variables are shown are CSP, SoP, EnP and EcP.

Content Analysis Technique

At present, the information disclosed in the firms’ responsibility/sustainability/CSR report has become crucial research domain. To study the content of disclosure systematically, reliably and objectively, researchers use the technique of content analysis (Guthrie, Petty, & Yongvanich, 2004; Krippendorff, 1980). Krippendorff (1980, p. 21) had defined content analysis as ‘a research technique for making replicable and valid inferences from data according to their context’. For carrying out the task of content analysis, it is vital to select the unit of analysis (i.e., basis of coding). Earlier, researchers used words (ZeAghal & Ahmed, 1990), paragraphs (Guthrie et al., 2004), portions of pages (Unerman, 2000) and sentences (Deegan & Gordon, 1996) as the basis for coding. However, GRI reporting framework provides a list of items, which are used as a unit of analysis in the present context to measure the disclosure of CSP (Burhan & Rahmanti, 2012; Hussain, 2015).

For measuring the disclosure score of CSP, GRI framework is found to be the most appropriate framework, as most of the sample firms have used GRI framework (3 or 3.1) to report their respective CS report. Moreover, according to Marimon et al. (2012), GRI framework provides the most reliable framework for analysing the sustainability performance of the firm. Most of the earlier studies have used the binary coding system of content analysis (i.e., ‘0’ and ‘1’) to measure CSP (Burhan & Rahmanti, 2012; Hussain, 2015). This system of content analysis identifies the presence (‘1’) or absence (‘0’) of pre-specified items in the published report. Following these researchers, the binary coding system of content analysis is employed in the present context for calculating the disclosure score of overall CSP along with its three components (i.e., economy, society and environment). A score of ‘0’ denotes a non-disclosure and ‘1’ for the disclosure of item. Accordingly, the disclosure index is derived by computing the proportion of the total scores to the maximum score attainable using the following formula:

D i s c l o s u r e S c o r e_{j} = \frac{\sum_{i = 1}^{n} X_{i j}}{N_{j}} \dots

(1)

Here,

N_j = the total number of items estimated for the jth firm, with the maximum score assigned.

X_ij = assumes the value 1 if the item is revealed in the report and 0 otherwise.

i = is the item specified in GRI framework.

In the present study, the coding is done by the researcher himself. The coding was analysed by senior researchers who have been working in this field for several years. No noticeable inconsistency was found in the code by supervisors.

Control Variables

Firm Size

In this knowledge-based economy, large firms usually dominate the market because they have a bigger market share that provides them better opportunities to not only diversify their product to earn higher benefit but also raise capital from the market. In case of firms operating in Istanbul Stock Exchange, Ozgulbas, Koyuncugil, and Yilmaz (2006) also reported that big-size firms have higher performance than the small-size firms. Thus, firm size is used as a control variable in many studies relating to CSP and firm performance (Choi et al., 2010; Hussain, 2015; Lo & Sheu, 2007). Following these researchers, firm size (SIZE) is used as a control variable to control the influence of size computed by the natural log of total sales.

Leverage

Many literature have indicated that the firm’s value is influenced by its capital structure (i.e., debt capital) (Hussain, 2015; Lo & Sheu, 2007; Ross, 1977). For instance, according to Grossman and Hart (1982), financial leverage provides better incentives for corporate managers to perform well, as they tend to avoid the cost of bankruptcy. Thus, there is a positive association between financial leverage and firm performance. Moreover, debt capital provides signals to the market regarding the credibility of firms, and credible firms are profitable firms who are more inclined towards debt capital (Ross, 1977). Thus, to control the effect of capital structure (leverage), debt to equity ratio (DE) is used as a control variable (Hussain, 2015; Lo & Sheu, 2007).

R&D Expenditure

Future investment opportunities also influence firm’s value (Smith & Watts, 1992). R&D expenditure is one of the variables that has been used mostly as a proxy for investment opportunity (Choi et al., 2010; Lo & Sheu, 2007;). Hence, the study considers investment in R&D as a control variable, which is calculated by the natural log of R&D expenditure.

Empirical Models

Existing literature indicates that researchers have employed panel data regression model to examine the association between CSP and firm performance (Ho & Taylor, 2007; Hussain, 2015). Hence, the appropriate panel data regression model is employed in this study to investigate the influence of CSP and its components along with other explanatory variables on ROA of select Indian and South Korean firms. The study has undertaken two most widely used tests, Breusch–Pagan test and Hausman test, to find out the appropriate panel data regression model. The outcomes of the test statistics (results are shown in Table 3) indicate that random generalised least square (GLS) model is appropriate for the present data set. The general form of the random effect model is as follows:

Y_{i t} = β_{0} + X_{i t}^{'} β_{k} + ω_{i t} \dots

(1)

R O A_{i t} = β_{0} + β_{1} C S P_{i t} + β_{2} S I Z E_{i t} + β_{3} D E_{i t} + β_{4} R & D_{i t} + ω_{i t} \dots \dots \dots .

(Model 1)

where X' is the number of covariates and ω_it is the composite error term.

The following regression model is used to study the influence of CSP:

Table 1.

Correlation Matrix (India)

	CSP	EcP	EnP	SoP	DE	SIZE	R&D
CSP	1
EcP	0.728***	1
EnP	0.877***	0.570**	1
SoP	0.815***	0.401**	0.652**	1
DE	−0.006	−0.097	0.071	0.040	1
SIZE	0.085	−0.070	0.071	0.159**	0.330***	1
R&D	0.077	−0.093	0.043	0.150	0.009	0.354**	1

Source: The author.

Note: *** and ** indicate levels of significance at 1% and 5%, respectively, by two-tailed test.

Table 2.

Correlation Matrix (South Korea)

	CSP	EcP	EnP	SoP	DE	SIZE	R&D
CSP	1
EcP	0.840***	1
EnP	0.906***	0.559***	1
SoP	0.925***	0.607***	0.911***	1
DE	−0.347***	−0.262***	−0.306***	−0.368***	1
SIZE	0.167**	0.190**	0.103	0.141	0.162**	1
R&D	0.002	0.004	−0.012	0.013	−0.075	0.215***	1

Source: The author.

Note: *** and ** indicate levels of significance at 1% and 5%, respectively, by two-tailed test.

Table 3.

Impact of CSP on ROA

Country	Model	Variables	UnstandardCoeffecient	Standard Coeffecient	T-ratio	R ²
South Korea	Random-effects (GLS)	ConstantCSPSIZEDER&D	−0.2110.1450.005−0.0270.005	–0.1700.097−0.1550.112	−1.9262.4720.728−2.123*0.837	0.144
India	Random-effects (GLS)	Constant CSPSIZEDER&D	1.006−0.7390.009−0.4300.002	–−0.2050.049−0.4860.021	6.010*−5.3700.690−6.520**0.290	0.303

Source: The author.

Notes: Dependent variable – ROA; South Korea: Breusch-Pagan test–Chi-square = 124.631***, Hausman test–Chi-square = 1.33329; India:Breusch-Pagan test–Chi-square = 297.709***, Hausman test–Chi-square = 0.455597]; ***, ** and * indicate levels of significance at 1%, 5% and 10%, respectively.

Since the random GLS model is employed, the study uses the structural form of random GLS model in these specific regression equations.

Normally, the components of CS (economic, social and environmental) are highly correlated. In the event of high collinearity among the regressors, the estimation of the classical linear regression may be unbiased but precise estimation is difficult (Gujarati, Porter, & Gunasekar, 2012). To know the extent of collinearity between the components of CS, correlation coefficients are estimated. The results (shown in Tables 1 and 2) indicate the existence of high degree of correlation between the components of CS for both the countries. In the presence of high degree of correlation among the components of CSP, single equation considering all the components may give rise to a problem of multicollinearity. To avoid the problem of multicollinearity, the study estimates the influence of each component of CS on firm performance separately. The models (2a, 2b and 2c) are shown in the following equations. Moreover, for each of the equation, only DE is considered among the three control variables, since DE is the only control variable found to have a significant influence on firm performance in most of the cases while assessing the overall CSP. The following is the component-wise regression equation both for India and South Korea:

R O A_{i t} = β_{0} + β_{1} E c P_{i t} + β_{2} D E_{i t} + ω_{i t} \dots

(Model 2a);

R O A_{i t} = β_{0} + β_{1} E n P_{i t} + β_{2} D E_{i t} + ω_{i t} \dots

(Model 2b);

R O A_{i t} = β_{0} + β_{1} S o P_{i t} + β_{2} D E_{i t} + ω_{i t} \dots

(Model 2c);

For testing the relative influence of CSP on firm performance (FP) between India and South Korea, the following regression model is used for combined data set:

F P_{i t} = α_{0} + α_{1} D \times C S P_{i t} + ε_{i t} \dots \dots \dots

(Model 3);

In the aforementioned equation, D is a dummy variable that represents 1 for South Korea and 0 for India. The sign and significant level of interaction effect of dummy variable and CSP (D × CSP) indicate whether there is any difference in the influence of CSP on firm performance between Indian and South Korea.

Results and Discussion

Disclosure Pattern of CSP in India and South Korea

The disclosure score of CSP for Indian and South Korean firms are shown in Figure 1. The figure depicts an increasing trend in the disclosure of CSP for both the nations. For instance, the Indian firms disclosed nearly 82% of the GRI specified items in 2009. After 2009, these firms have made a significant improvement in the level of disclosure. The level of disclosure increased gradually from 82% in 2009 to 93.4% in 2014. In case of South Korea, the average disclosure level of CSP has increased from 79.6% in 2009 to 89% in the year 2014.

Figure 1.

Source: The author.

Table 4.

Components of CSPL and Firm Performance

Country	Model	Independent Variable	Unstandard Coeffecient	Standard Coeffecient	T-ratio	R ²
South Korea	Random-effects(GLS)	Constant EcP DE	−0.01280.0741−0.0349	–0.1142–0.2021	−0.36472.0376−2.8500*	0.067
		Constant EnP DE	−0.14040.2250−0.0246	–0.2809-0.1426	−2.7030*3.8437−2.0201*	0.129
		Constant SoP DE	−0.08810.1721−0.0279	–0.2056-0.1616	−1.59712.6514*−2.1808	0.101
India	Random-effects(GLS)	Constant EcP DE	0.7787−0.3597−0.4058	–-0.1053-0.4582	5.5600*−2.6600−5.9100**	0.1953
		Constant EnP DE	0.8867−0.5219−0.3634	–-0.1897-0.4103	8.9000*−5.4900−5.6300**	0.3041
		Constant SoP DE	0.9384048−0.5703−0.4275	–−0.2018−0.4827	8.5200*−5.3300−6.5600**	0.3045

Source: The author.

Notes: Dependent variable – ROA; ***, ** and * indicate levels of significance at 1%, 5% and 10%, respectively.

Correlation Matrix

The correlation matrix relating to CSP and the components of CSP along with other control variables are shown in Tables 3 and 4, respectively, for India and South Korea. Regarding the components of CSP, significant positive correlation is found for both India and South Korea. For instance, the degree of association between EnP and SoP (0.652) in case of Indian firms is quite high. For South Korea also, high degree of association is found between the components of CSP. For instance, the correlation coefficient between EnP and SoP is found to be 0.911. The observed degree of association between the components of CSP for both India and South Korea clearly demonstrates that the severity of multicollinearity is very high. Among the control variables, significant and positive correlation coefficient is found between firm size and R&D expenditure. This implies that large firms spend more on R&D.

Regression Results

CSP and Firm Performance

Table 5 represents the regression outcomes of model 1. Model 1 is basically employed to examine the influence of CSP on firm performance (ROA). The results reveal that the estimated coefficient of CSP in case of South Korea firms is positive and significant at 5% level. This implies that disclosure of CSP enhances the profit-earning capacity of the South Korean firms. However, in case of India, the influence of both CSPL on ROA is found to be negative and significant, which is contrary to the theoretical expectation. Among the control variables, the estimated coefficient of DE is found to be negative and significant at 5% level in case of South Korea and at 1% level in case of India. Since, the select firms are the profitable firms in their respective stock exchange, the negative impact of DE on ROA indicates that these firms follow packing order hypothesis of capital structure, where profitable firms’ rely more on their internal funds than debt funds. However, the influence of SIZE and R&D on ROA is found to be positive but not statistically significant.

Table 5.

Relative Impact of CSP on ROA

Variable	Coefficient	T-value	R ²
Constant	4.994	4.540***	0.079
DxCSP	3.483	2.100**	0.079

Notes: Dependent variable – ROA; ***, ** and * indicate levels of significance at 1%, 5% and 10%, respectively

Sources: The author.

The positive impact of CSP on ROA in case of South Korea indicates that the sustainable practices have a favourable impact on firms’ profitability because sustainability practices are much advanced in South Korea (Carrot & Stick, 2013), and as such, the benefit derived from such practice is more than the cost incurred from it. According to Sharma (2013), the South Korean companies had suffered a huge loss in terms of reputational damage and loss of credibility after the financial crises between October 1997 and March 1998, which became a detrimental barrier to the success of South Korean business. This had led them to undertake the CS initiatives very extensively and then to communicate them accordingly to rebuilt the stakeholders trust (Sharma, 2013). The regression results of South Korea also reveal the same. In contrary, the negative influence of CSP on ROA in case of Indian firms indicates that the sustainability practice negatively affects firms’ profitability. One plausible reason for the negative association may be due to the fact that the sustainability practice in India is new (Carrot & Stick, 2013) and such practice initially increases cost, which negatively affects firms’ profitability. When a concept of sustainability is introduced into the management process, initially, it involves high costs or reallocation of resources that affects firm’s profitability negatively (Lopez et al., 2007). Sustainability practices involve some costs in the form of training and development, product quality and safety and investment in technologies that reduces negative impact on environment and society. Initially, these expenses are higher than the revenue generated by the firm from these costs. However, such expenses reduce the overall cost in the long run and may affect firms’ profitability positively. The results regarding the influence of CSP on ROA in case of South Korea is consistent with the findings of Choi et al. (2010) and Rashid and Othman (2012). Thus, the hypothesis H₁ is accepted for South Korean firms and is rejected for Indian firms. The outcomes of the regression results for Indian firms are consistent with the study of Lopez et al. (2007).

Components of CSP and Firm Performance

Although Table 3 provides evidence regarding the association of CSP on firm performance, the results are based on total disclosures by combining economic, social and environmental dimensions. Since, these three dimensions reflect the different aspects of organisational activities, it would be interesting to examine the influence of the three components of sustainability on firm performance. Since the correlation matrix (Tables 1 and 2) reveals high degree of positive correlation between the components of CSP, regression model for each component has been separately employed in order to avoid the severity of multicollinearity. The regression results relating to the components of CSP and firm performance for both South Korea and India are shown in Table 4. The results show positive and significant impact of all the components of CSP on firm performance (ROA) in case of South Korea. The observed results, thus, indicate that all the components of CSP enhance the firm value. A cursory look into the results reveals that the influence of EnP on ROA is more in South Korea followed by the influence of SoP as measured by standardised coefficient. Hence, H₂, H₃ and H₄ are accepted for South Korean firms. It is important to note here that among the components of CS, the impact is more in case of environmental disclosure. This may be due to the CSP initiatives undertaken by the South Korean government by the end of 2008, that is, ‘low carbon, green growth’ policy in response to the stakeholders’ demand. Thus, it is expected that such disclosure will have a satisfactory impact on the firm performance. The results are consistent with the previous studies relating to SoP (Choi et al., 2010; Orlitzky et al., 2003), EnP (Hidemichi et al., 2012; Wagner et al., 2002) and EcP (Sitepu, 2009).

Further, in Indian context, the influence of all the components of CSP on ROA is found to be negative and significant. This implies that the disclosure of sustainability fails to increase the profitability. We found similar results for the impact of overall CSP on ROA in India. Therefore, for the Indian firms, the alternate hypotheses (H₁, H₂, H₃ and H₄) are rejected. The influence of DE on ROA is also found to be negative and significant for all the cases.

The results also demonstrate that not only the overall CSP influences firm performance positively (or negatively), but components-wise disclosure of CSP also plays a very important role in influencing firm performance positively (or negatively). A firm’s overall performance is influenced by its healthy relationship with its stakeholders in the market. The ability of the firm to communicate its sustainability activities on three dimensions equally and effectively with its stakeholders can be very critical for long-term survival and growth (Elkington, 1994; KPMG, 2008, 2013). The regression results also depict the same. It is, therefore, important for every company to give equal importance to the three dimensions of CSP in order to gain sustainable competitive advantage.

According to the Pollution Index 2014, India ranks 17th and South Korea 20th among the 37 Asian countries.²

https://www.numbeo.com/pollution/rankings_by_country.jsp?title=2014&region=142

This clearly shows that India is more polluted than South Korea. This also indicates that the disclosure of GRI items may not be enough for Indian firms. Thus, apart from GRI-specified items, some additional disclosures are expected from Indian firms. On the other hand, the Centre for Science and Environment in India is continuously making an effort in holding the Indian companies accountable for the negative impact they exert on the environment. In response to this, the government of India has adopted Companies Bill 2011. According to this bill, companies must make an effort to spend 2% of the preceding 3 years’ average net profits on various corporate responsibility initiatives. On failure to comply with this policy, it is compulsory for the company to explain the reasons in the board of director’s report. Further, the Security and Exchange Board of India (SEBI) in August 2012 had also mandated top 100 companies (based on market capitalisation) to publish business responsibility report as a part of their annual report. Some more policies on the broad aspect must be adopted by the policymakers of India. Apart from framing policies, it is also utmost important for the policymakers to undertake a strict scrutiny of all the activities undertaken by the Indian companies on a continuous basis.

Relative Impact of CSP on Firm Performance in South Korea and India

The outcomes of regression model 1 and 2 reveal that for South Korean firm, the influence of CSP on profitability (ROA) is positive and significant. In contrary, the impact of CSP on ROA is negative in case of India. The results indicate that sustainability practice followed by South Korean firms brings more benefit than the cost actually incurred on it. However, in case of Indian firms, the benefits derived from such practice are unable to compensate for expenses incurred on it and thus negatively affects firms’ profitability. The results, thus, clearly demonstrate that there is significant difference between India and South Korea in respect of the influence of CSP on ROA. This difference is further analysed using Model 3 for the combined data. The results show that the coefficient estimate of the interaction effect of dummy variable and CSP (D × CSP) is positive and significant at 5% level. The significant interaction effect indicates that there is significant difference relating to the influence of CSP on ROA between South Korea and India. Since the dummy variable 1 is used for South Korea and 0 for India, the results advocate that the impact of CSP on ROA is significantly higher for South Korean firms than for Indian firms. The observed results, thus, support the hypothesis H₅.

Policy Implication

The findings of the study indicate that not only the economic indicators of CS but also the environmental and social components help in improving firm’s performance. In case of South Korean firms, social and environmental components are found to be dominating the firm performance positively. However, in the context of Indian firms, it is still the economic factors, which are influencing the firm’s performance. Thus, it is not only important for the Indian firms to give due importance to non-EcPs but also important for the policymakers to develop policies relating to corporate social and EnPs. Despite debates on the worthiness of firms’ investment towards sustainability in order to be more responsible in the eyes of the stakeholders’, the outcomes of this study indicate that this strategy has been proven in the interest of both the firm and stakeholder. The findings of this study will help the academicians as well as practitioners in developing a broad understanding of the strategic importance of issues relating to sustainability in many ways. At present, the demand for corporate managers to develop effective sustainability strategy is growing significantly. This study helps firm to realise that CSP is a very important source of competitive advantage and that a firm’s sustainability initiatives, when properly integrated into the business strategy and implemented efficiently, tend to improve firms’ overall performance.

Conclusion

The present study is a modest attempt to assess the influence of CSP on ROA in the context of India and South Korea. This study is based on a total sample of 54 listed non-financial firms, that is, 26 from South Korea and 28 from India. The study period is 6 years, that is, 2009–2010 to 2014–2015. The present study contributes in two different ways. First, our study is an improvement upon many existing studies in two ways by considering the overall CSP as well as its three major dimensions, that is, economy, society and environment. Second, our study provides the first comparative evidence from India and South Korea on the assessment of CSP and firm performance.

By employing content analysis using GRI sustainability reporting guideline, it is found that the average level of disclosure is 88% in case of Indian firms, whereas for South Korean firms, it is 85%, which is quite satisfactory. Both nations are found to be disclosing a significant number of information in their respective sustainability report. This clearly indicates that firms’ from both the nation irrespective of their level of development are becoming more conscious in communicating their responsibility towards the triple bottom line (i.e., economy, society and environment). Further, the calculated scores of CSP and financial data are used in regression method in order to assess the association between CSP and firm performance. The outcome of the study indicates that the influence of CSP from all respect is negative and significant for Indian firms, whereas in case of South Korean firms, it is positive and significant on the firms’ profitability. Moreover, the relative impact of CSP on ROA is found to be more in South Korea as compared with India.

The main limitation of this study is small sample, that is, total 54 listed non-financial firms from South Korea and India. However, large sample size consisting of both financial and non-financial firm combining with different reporting frameworks may provide more reliable results. The present study is based on two Asian countries, with GRI reporting framework, Indian and South Korea. The outcomes of the study cannot be generalised for all the Asian countries; therefore, the study suggests for comparative analysis by considering other developed and developing countries to find clearer picture of the relationship between firm performance and CSP.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The authors received no financial support for the research, authorship and/or publication of this article.

Appendix.

List of Non-financial Companies Names

South Korea (South Korean Stock Exchange)
Amorepacific	Kt&G	Posco
Daelim Industrial Co., Ltd,	LG Electronics	Samsung Electro Mechanics
Doosan Heavy Industries & Construction	Lotte Chemical Corporation	Samsung Electronics
Hankook Tire	Lotte Shopping	Samsung Heavy Industries Ltd.
Kepco	Mobis	SK Hynix
Kepco Kps	LG Chemical	SK Innovation
Kia Motors	LG Corporation	SK Telecom
Kogas	Naver	S-Oil
Kt	OCI
INDIA (Bombay Stock Exchange)
Acc Ltd	Mahindra & Mahindra Ltd	Cairn
Ambuja Cements Ltd	Tata Steel	Colgate
BPCL	Dr. Reddy’s Lab	Titan
ITC	Nestle	Bharti Art
L&T	NTPC	Cipla
Maruti Suzuki India Ltd	Sail	Coal India
Tata Motors Ltd	Tata Power	Dabur
TCS	Ultra	Hindlco
Shree	Wipro	Hindustan Unilever
		Infosys

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