The impact of sustainability performance on financial performance: An application on emerging markets

Sustainable performance focuses mainly on the environmental, social and economic performance of sustainable development. Accordingly, businesses aim to create long-term value by placing their sustainability activities at the center of their corporate strategies. With enterprises developing successful and long-term corporate sustainability strategies, corporate financial performance measurement has been an issue that attracted the attention of researchers for the last two decades. Therefore, investors who invest in the financial assets of businesses closely follow sustainability-related activities. With the increase in sustainable investment funds in recent years, a series of sustainability indices operating at national and international level have been created. These indices evaluate companies from an environmental, social and economic perspective to provide a benchmark for financial products. Sustainable performance indicators provided by these indices play an important role in the decision-making process of managers and investors who attach importance to corporate sustainability. Sustainability indices serve as informative intermediaries between businesses and various stakeholders by evaluating the sustainability information reported by businesses. Institutional investors have increasingly started to consider these indices when creating their portfolios because these indices are seen as objective and professional criteria evaluated by impartial actors. In this study, the impact of sustainable performance on financial performance of businesses listed in the Dow Jones sustainability emerging markets (DJSI) index between 2013-2018 was analyzed. Analyzes in the study were carried out in two stages. In the first stage, the reaction of the investors to the stocks of the companies that were included, deleted and continued in the DJSI emerging markets index between 2013-2018 with the "event study" method was examined. In the second stage, the financial performance of the businesses that are continued in the DJSI emerging markets index between 2013 and 2018 was performed using panel data analysis method. Accordingly, both market and accounting based measurement methods were used. Event study analysis results show that investors have mixed (positive, negative and neutral) reactions to the stocks of businesses that are included, excluded, and non-excluded from DJSI emerging markets index. In general, it was observed that investors did not react strongly to businesses that were included and non-excluded from DJSI emerging markets index. However, investors generally reacted negatively to being excluded from the index. Panel data analysis results show that environmental sustainable performance has a positive and a statistically significant relationship with accounting (RAO and ROE) and market (Tobin Q) based financial performance indicators. While there is a positive relationship between social sustainable performance and the market-based financial performance indicator (Tobin Q), there is a negative relationship between accounting-based financial performance indicators (ROA and ROE). Although there is a positive relationship between economic (or governance) sustainable performance and financial performance indicators (ROA, ROE and Tobin Q), there is only a statistically significant relationship with return on equity (ROE). Keywords: Sustainability, Sustainable Investment, Sustainable Performance, Financial Performance, Emerging Markets