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Which Sustainability Efforts Are Most Profitable to Prioritize?

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Which Sustainability Efforts Are Most Profitable to Prioritize? Norwegian School of Economics Bergen, Autumn 2020 Which Sustainability Efforts are Most Profitable to Prioritize? A proxy approach to sustainability effort measurement Per Fredrik Hoel Ulsnes Supervisor: Stein Ivar Steinshamn Master thesis, Economics and Business Administration Major: Business analysis and Performance Management (BUS) NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. 2 ABSTRACT In this thesis, we look at annual- and sustainability reports as a proxy to sustainability efforts for companies listed on the OSEAX-index. By using textual analysis on annual and sustainability reports, along with other sustainability measures, we then investigate the link between profitability and various types of sustainability efforts in a Norwegian context. The study utilizes a custom crafted database of 133 companies, 504 annual reports, and 111 sustainability/ESG/CSR-reports, along with accounting data and secondary variables resulting in 639 observations and a wide range of sustainability variables spanning over 5 years. I find a positive link between sustainability efforts and profitability for the sample, and the proxy-approach proves promising. However, I am not able to determine any categorical prioritization of sustainability efforts, which gives support to the existing common practice of contextual assessments and materiality matrices when it comes to sustainability effort prioritization. The thesis struggles with data availability and the methodological question of how to filter and aggregate easily accessible sources of empirical information. It contributes to existing sustainability research by providing an original approach to sustainability efforts measuring. The results are generalisable for companies listed on the OSEAX-index, however the thesis is conditioned on the acceptance of the proxy-solution to measure sustainability efforts. There is also no way of determining causality in the study, but the results are robust with varied robustness-measures in place. Per Fredrik Hoel Ulsnes Bergen, December 2020 3 Table of Content TABLE OF CONTENT ........................................................................................................................ 3 1. INTRODUCTION ...................................................................................................................... 8 1.1 BACKGROUND AND MOTIVATION ............................................................................................ 8 1.2 PURPOSE OF THE THESIS .......................................................................................................... 9 1.3 GENERAL INFORMATION .......................................................................................................... 9 1.4 THESIS QUESTION .................................................................................................................. 10 1.5 LIMITATIONS AND STRUCTURE ............................................................................................... 11 2. LITERATURE REVIEW ........................................................................................................ 13 2.1 CONTENT OF THE LITERATURE REVIEW .................................................................................. 13 2.2 DEFINING SUSTAINABILITY .................................................................................................... 13 2.2.1 Our Common Future ................................................................................................... 14 2.2.2 Oxford English Dictionary .......................................................................................... 15 2.2.3 Three Pillars ............................................................................................................... 15 2.2.4 Trade-offs .................................................................................................................... 18 2.2.5 UN Development Goals .............................................................................................. 19 2.2.6 Sustainability Reporting and communication - Materiality ........................................ 21 2.2.7 Sustainability Indexes ................................................................................................. 23 2.2.8 CSR and Sustainability................................................................................................ 23 2.2.9 Sustainability Defined ................................................................................................. 24 2.3 PROFITABILITY ....................................................................................................................... 25 2.4 ALIGNING PROFITABILITY WITH SUSTAINABILITY ................................................................. 26 2.5 MEASURING SUSTAINABILITY – THESIS APPROACH ............................................................... 27 2.6 DEVELOPING RESEARCH HYPOTHESES .................................................................................. 29 4 2.7 THESIS MODEL ...................................................................................................................... 31 2.8 DEFINITIONS – SUMMARIZED ................................................................................................ 32 3. METHOD ................................................................................................................................. 33 3.1 METHODOLOGY AND RESEARCH DESIGN .............................................................................. 33 3.2 POPULATION AND SAMPLE .................................................................................................... 35 3.3 DATASET ............................................................................................................................... 36 3.3.1 Primary data – Textual analysis ................................................................................ 36 3.3.2 Secondary data ........................................................................................................... 38 3.3.3 Data Preparation ....................................................................................................... 38 3.3.4 Control Variables ....................................................................................................... 39 3.4 VARIABLE GENERATION ....................................................................................................... 39 3.4.1 Return On Assets (ROA) ............................................................................................. 40 3.4.2 Return On Equity (ROE) ............................................................................................ 41 3.4.3 Main Sustainability Pillar .......................................................................................... 41 3.5 ANALYTICAL APPROACH ....................................................................................................... 43 3.5.1 Generally about the analytical approach ................................................................... 44 3.5.2 Tests ........................................................................................................................... 44 3.5.3 Assumption Testing .................................................................................................... 45 3.6 RELIABILITY .......................................................................................................................... 47 3.7 VALIDITY .............................................................................................................................. 49 3.8 ETHICS .................................................................................................................................. 52 3.9 METHODOLOGICAL LIMITATIONS .......................................................................................... 52 4. ANALYSES .............................................................................................................................. 54 4.1 DATAPREPARATION – SAMPLE REDUCTION .......................................................................... 54 5 4.2 DESCRIPTIVE ANALYSIS ......................................................................................................... 55 4.2.1 Primary Data .............................................................................................................. 55 4.2.2 Secondary data............................................................................................................ 58 4.2.3 Accounting Data ......................................................................................................... 59 4.3 MAIN ANALYSIS .................................................................................................................... 60 4.3.1 Proxy-validation (Q1) ................................................................................................. 60 4.3.2 Main Regression (Q2) ................................................................................................. 64 4.3.3 OLS Assumption Tests ................................................................................................. 67 4.3.4 One-way-ANOVA (Q3) ..............................................................................................
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