Impact of Sustainability Practices on the Financial Performance of the Firms: Evidence from the Pakistan’s Firms

Abstract

This study is intended to explore the impact of sustainability practices (social, environmental, and governance) on the financial performance of the firms in Pakistan. The data set used for this study ranges from 2016 to 2021 for 85 different firms verified by the Pakistan Stock Exchange. This study argues that a higher score on sustainability (environmental, social, and governance) shows a better performance of the financial firms that those whose firm has a low score on sustainability. The financial performance of the firm is measured by the accounting-based variables and market-based variables. For this study, panel regression is applied and the Hausman test analyzes whether a fixed-effect model or random-effect model is appropriate. The value of the Hausman test analyzes that the fixed-effect model is more appropriate for this study. The findings show both the positive and negative impact of sustainability practices on the financial firms of Pakistan. The results show a negative relationship between sustainability practices and financial performance but there is a positive relationship between one of the sustainability factors (governance) and the dependent variable (ROA). The accounting literature finds that there is a risk for financial firms to adopt sustainability practices. It is also studied that the positive relationship between financial performance and governance also helps the regulators and researchers other than the companies. The researcher understands the positive impact of governance practices on the performance of the firms. A firm’s growth decreases the chances of risk and there is a direct relation between leverage and chances of risk. An increase in leverage means there are more chances of risk in the firm.