“Impact of sustainability reporting initiatives on the financial performance of Philippine listed companies”

Concerns for the environment and sustainability require entities to contribute to societal development toward sustainable advancement. There is also an increasing demand for high-quality and reliable reports on sustainability-related matters. The study aims to highlight the impact of sustainability reporting initiatives on financial performance through the GRI reporting framework and four determinants of financial performance – return on assets (ROA), return on equity (ROE), and basic and diluted earnings per share (EPS). Conducting random effects generalized least square (GLS) regression, this paper examines 127 firm-year observations from 47 Philippine listed entities covering 2019–2021. The results show a significant negative relationship between the total sustainability reporting initiative index score and financial performance, represented by return on equity (coefficient = –0.4690, z -value = –1.68). Moreover, there is a positive significant relationship between economic reporting and financial performance, particularly return on assets, basic earnings per share, and diluted earnings per share (coefficients = 0.1590, 12.6200, 12.6500; z -values = 3.11, 1.72, 1.73). A negative significant relationship exists between social reporting and financial performance, particularly return on equity and basic and diluted earnings per share (coefficients = –0.5530, –14.1600, –14.1400; z -values = –2.04, –2.65, –2.65). This study pioneers an investigation into the nascent implementation of Securities and Exchange Commission (SEC) sustainability reporting and the implications of sustainability initiatives on corporate performance in the Philippines. The results shed light on the dynamics of sustainability initiatives and financial outcomes to encourage firms to harmonize economic success with environmental preservation and societal advancement toward value creation.


INTRODUCTION
The concept of sustainability, originating from the seminal report "Our Common Future" by the World Commission on Environment and Development (1987), underscores the imperative of meeting the present needs while preserving the capacity for future generations to meet their own.Elkington (1998)'s introduction of the triple bottom line paradigm delineates the evaluation of corporate performance across economic, environmental, and social dimensions.In the accountancy profession, the establishment of the International Sustainability Standards Board (ISSB) by the IFRS Foundation in 2021 addresses the escalating demand for transparent sustainability reporting from global investors (IFRS Foundation, n.d.b).Together with these sustainability disclosures, the financial statements of a firm serve as a conduit for communicating an entity's performance and accountability for resources (IFRS Foundation, n.d.a) to cater to societal needs, preserve environmental integrity, and foster value creation (Mohammed, 2013).In the Philippine setting, the mandate by the Securities and Exchange Commission (SEC) for sustainability reporting for listed companies starting in 2019 reflects the pervasive trend of embedding sustainability into operational and financial reporting practices.
Entities engage in sustainability reporting to showcase their contribution to sustainable development (Laskar, 2019), enhance social acceptance (Deegan, 2019), and cultivate social awareness (Hörisch et al., 2014).The phenomenon surrounding sustainability initiatives and a firm's financial performance can be understood through legitimacy and stakeholder theories.Legitimacy theory underscores the imperative for firms to adhere to societal norms to maintain their status as legitimate entities (Deegan, 2019).Meanwhile, under the stakeholder theory, an entity is comprised of a diverse network of relationships between various stakeholders, and managers are expected to create value for these stakeholders, aligned in the pursuit of value creation (Freeman, 1984;Freeman et al., 2010).
In essence, sustainability efforts are perceived as a strategic instrumentalization of corporate operational performance, intertwining financial success with economic, environmental, and social responsibility.The alignment of sustainability practices and reporting enhances corporate accountability and performance, benefitting shareholders and stakeholders.While numerous studies have already analyzed the impact of sustainability initiatives on the financial performance of firms, this study pioneers the investigation of the nascent implementation of the mandated SEC sustainability report within the national landscape of the Philippines, a developing country.Specifically, this study scrutinizes its immediate implications through the lens of short-term profitability concerning listed firms in the Philippines.

LITERATURE REVIEW AND HYPOTHESES
Legitimacy theory highlights the significance of entities aligning with societal norms in order to maintain a favorable perception from society.This involves sustainability initiatives and the disclosure of detailed sustainability information to stakeholders to uphold a positive image of the company's conduct.The survival and profitability of entities rely on legitimacy, which drives efforts to convince society of a good impression.Societal expectations constitute a social contract, and failure to meet them leads to a legitimacy gap that prompts entities to endeavor to conform (Bebbington et al., 2008;Lanis & Richardson, 2013;Deegan, 2019).Corporate non-financial disclosures found in integrated annual reports function as a communication tool that enables an entity to display its sustainability efforts (O' Donovan, 2002).Adhering to societal expectations and exhibiting robust sustainability performance are crucial for entities to navigate the legitimacy landscape and garner the trust and support of stakeholders.
The primary theoretical foundation of this study, the stakeholder theory, posits that companies exist within the realm of interconnected networks revolving around various stakeholders -individu-als, collective groups, and firms who can impact or are affected by the actions of the firm.This underscores that managers should strive to create value not only for the company itself but also for the stakeholders, allowing a way to align interests with value creation (Freeman, 1984;Freeman et al., 2010).This theory contends that for sustained survival and continuous prosperity, an organization must secure the support of its diverse stakeholders, transcending mere profit motives.Thus, the management must ensure stakeholders' expectations are addressed accordingly and their interests are balanced (Herold, 2018;Hörisch et al., 2020).As stakeholder theory emphasizes the interconnectedness between the entity and its stakeholders, fostering constructive relationships is deemed essential -sustainability initiatives and company reports and disclosures serve as communication tools to relay information to various stakeholders to share organizational perceptions (Gray et al., 1995;Yoon & Byun, 2023).
The crucial impact of sustainability practices on financial performance highlights the importance of taking a strategic perspective toward sustainability for organizations to anticipate financial gains and profitability.Concerning the Philippine perspective, Ebdane (2016) sought to determine the impact of sustainability reporting under GRI indexes on company performance, covering financial reports for the year 2013 on 13 companies.The results show that overall sustainability disclosure has an effect on the operational performance of an entity, as seen in the return on assets (ROA).This suggests that disclosing and reporting overall sustainability considering all its indicators would have an effect on firm performance.
Sustainability efforts within an entity are often seen as a combined mechanism aimed at addressing sustainability demands while affecting firm performance.However, Cornell and Shapiro (2021) argue that it is crucial to assess the separate dimensions of sustainability and their specific impact on firm performance.While the primary objective of any entity is typically to drive economic progress through profit-making and enhancing financial benefits, this objective may conflict with the environmental and social facets of sustainability.Such conflicting priorities could potentially divert managers' attention from serving shareholder interests and maintaining value.
Given that entities operate within resource constraints, they must make trade-offs when allocating resources among competing demands.argue that the significance of social sustainability in shaping stakeholder perceptions and reducing overall costs positively influences financial performance through increased sales, customer satisfaction, and corporate reputation.The study suggests that the integration of social sustainability initiatives into operations not only enhances stakeholder relationships but also contributes to improved financial performance.
The purpose of this study is to highlight the impact of sustainability reporting initiatives (SRI) of an entity on its financial performance (FP).
The integration of sustainability practices into operational strategies has been shown to have a positive impact on financial performance through various mechanisms, such as stakeholder relationships and operational efficiency.Furthermore, research conducted on different sectors demonstrates the positive association between sustainability initiatives and financial performance, underscoring the importance of aligning economic, environmental, and social considerations in business strategies.While there might be trade-offs and conflicting priorities between the different facets of sustainability, studies suggest that entities can achieve competitive advantage and sustained financial performance by incorporating sustainability initiatives into their operations, fostering stakeholder engagement.In investigating the impact of a company's sustainability initiatives on its financial performance, this paper hypothesizes that the sustainability initiatives of an entity, represented by the overall sustainability index score, have a positive effect on financial performance.This paper also hypothesizes that the individual dimensions of sustainability initiatives of an entity -economic, environmental, and social -have a positive effect on financial performance.

The study hypotheses are as follows:
H1: There is a significant positive relationship between an entity's overall integrated sustainability initiatives and financial performance.
H2a: There is a significant positive relationship between an entity's economic sustainability initiatives and financial performance.
H2b: There is a significant positive relationship between an entity's environmental sustainability initiatives and financial performance.
H2c: There is a significant positive relationship between an entity's social sustainability initiatives and financial performance.

METHODOLOGY
The basic model to analyze the impact of sustainability reporting initiatives on financial performance for company i at year t is as follows: ( ) This study utilized data from 47 listed companies in the Philippines, starting with the calendar year these listed companies were mandated by the Philippine Securities and Exchange Commission to submit sustainability reports as part of their annual submissions, which was 2019, up to all available documents for the year 2021, with a total of 127 firm-year observations (Table 1).Banks and other financial institutions were excluded due to their distinct industry characteristics.The data were hand-collected from the sustainability reports of companies available on their respective websites, submitted sustainability reports to the Philippine Securities and Exchange Commission (SEC) available in the Philippine Stock Exchange (PSE) database, financial statements of companies published on their respective websites, and available financial statements of companies uploaded in the Philippine Stock Exchange database.Should it also be available, integrated annual and sustainability reports published by listed companies in the Philippines were also used for this study.
The aim of the GRI sustainability reporting standards is to provide transparency through sustainability reporting on the actions of a firm toward sustainable development.These standards help a company publicly report and disclose its activities that have a significant impact on the economy, the environment, and society, including the impact of an organization's activities on human rights and how organizations handle these impacts collectively, contributing to organizational accountability (GRI, 2022).While there is an argument that the triple bottom line dimensions of sustainability should be considered aggregately to achieve sound strategic decisions (Alshehhi et  "1" is assigned when an entity discloses an item in the sustainability report, while "0" is assigned if an entity does not disclose an item in the sustainability report.
To calculate the index score for each dimension, the following formulas were used: ( ) where n refers to the number of sub-indexes properly disclosed and reported by the entity in each of the dimensions.On the other hand, k refers to the total number of sub-indexes that should be disclosed and reported by the entity in each of the dimensions.Meanwhile, the overall sustainability reporting initiative index score, treated in totality, would then be: In order to test the hypotheses, the study conducted random effects generalized least squares (GLS) regression analysis.The fixed effects model was not considered as no coefficients were yield for all industry dummies, as they are not changed over time.

RESULTS
Table 2 presents the summary statistics for the dependent, independent, and control variables.Employing winsorization on both the upper and lower 1% tails of the continuous and financial variables in this study was instrumental in mitigating the potential distortionary impact of outliers.Turning to the various proxies of financial performance, the mean values of ROA, ROE, BEPS, and DEPS are delineated as 0.0213, 0.3433, 10.7102, and 10.6874, respectively.These figures indicate that, on average, firms manifest a 2.13% return on assets and a 34.33% return on equity.Furthermore, each ordinary shareholder is attributed to approximately Php 11 (USD 0.20) earnings per share held by outstanding shareholders.
Meanwhile, for the independent variables, the mean value of the total sustainability reporting index score stands at 0.3843, indicative of an average disclosure of approximately 32 sustainability indexes by firms within their sustainability reports out of a total of 84 possible indices.Moreover, the mean values of the individual dimensions, ECO, ENV, and SOC show 0.3224, 0.3726, and 0.4237, respectively.This suggests that, on average, firms in the sample exhibit disclosure of about five economic indices out of 17, 12 environmental indices out of 31, and 15 social indices out of 36 within their sustainability reports.Additionally, the observed range of disclosed indices within the sample, spanning from 0.05 to 0.94, shows considerable diversity in the extent to which Philippine firms engage in sustainability disclosure practices.This variance underscores the multifaceted approaches adopted by entities in presenting their sustainability reports.Nonetheless, it is imperative to acknowledge that the Philippines is still in its nascent stages toward comprehensive sustainability reporting practices.
Figure 1 depicts the average annual sustainability index scores of Philippine listed firms.In the first three years of the implementation of the mandated sustainability report, there exists an upward trend in the total sustainability index score of these entities, as well as in the individual dimensions concerning economic, environmental, and social sustainability initiatives.This highlights the increasing efforts of Philippine firms in their sustainability initiatives, which indicates the commitment of these entities to sustainable operations as demonstrated by their rising adherence with mandated sustainability reporting requirements.Table 3 delineates the Pearson correlation coefficients that examine the interrelationships among the variables used in the study.Notably, it reveals a significant negative correlation between environmental disclosure indices and a firm's financial performance, as denoted by earnings per share.This finding suggests a potential inverse association between environmental sustainability endeavors and the profitability level of firms.However, it is important to underscore that these correlation coefficients, while informative, are not fully conclusive.This initial scrutiny does not ascertain causative linkages and fails to fully encapsulate the intricate dynamics and interplay between the sustainability reporting initiatives of Philippine firms and their financial performance.Consequently, the study further presents the regression findings, incorporating the entirety of the analytical model.This helps usher in a deeper understanding of the intricate interrelations between an entity's sustainability reporting initiatives and its financial performance.
To assess H1, H2a, H2b, and H2c, the regression analyses are instrumental in elucidating the impact of the total sustainability index score, SRI, as well as each distinct sustainability dimension, ECO, ENV, and SOC on the various proxies of financial performance -ROA, ROE, BEPS, and DEPS.Tables 4 and 5 provide regression analyses focusing on the association between the sustainability dimensions and ROA and ROE.A noteworthy outcome is a coefficient linked to the SRI variable, standing at -0.4690, attaining statistical significance at the 10% level and demonstrating a negative direction concerning ROE.This observed negative coefficient suggests that entities exhibiting heightened involvement in their sustainabil-  ity endeavors tend to prioritize social and environmental objectives over maximizing the firm's short-term profitability.Therefore, this result does not correspond with H1.This study confirms that there is a significant negative relationship between an entity's overall integrated sustainability initiatives and financial performance for Philippine listed entities.
In addition, the findings reveal that ECO exhibits a statistically significant positive relationship with ROA at the 5% level.This highlights the notion that companies prioritizing economic sustainability endeavors tend to realize enhanced returns on assets.Conversely, SOC demonstrates a statistically significant negative correlation with ROE at the 5% level.This intriguing phenomenon suggests that entities placing emphasis on social sustainability initiatives may encounter downward pressure on immediate metrics.
Tables 6, 7, and 8 depict the results of the regression analyses examining the relationship between the firm's sustainability initiatives, its earnings per share, and the full model regressions on all proxies of financial performance.Together with basic earnings per share, diluted earnings per share was included in the analysis to accommodate the potential impact of dilutive securities on the firm's earnings per share.Consistent with the findings from the regression on ROA and ROE, the regressions conducted on both BEPS and DEPS reveal a statistically significant positive relationship between a firm's economic sustainability initiatives and earnings per share at the 10% level in the full model regression.This indicates that ECO has indeed a significant positive relationship with financial performance, highlighting the potential for increased returns associated with firms emphasizing economic sustainability endeavors.Moreover, regressions indicate a statistically significant negative relationship between SOC and earnings per share at the 1% level, displaying the opposite directions on the effect on profitability contingent upon the emphasis placed by a firm on particular sustainability initiatives, suggesting a trade-off between investments in social sustainability and profitability focus within firms.
Intercept -0.8140 -0.7200 -0.7970 -0.7080 (-0.34) (-0.30) (-0.34) (-0.30)Notably, no significant relationship was found between environmental sustainability initiatives and financial performance across all regression models.This implies that the environmental efforts undertaken by firms may not have immediate or direct impacts on financial performance within the studied samples, potentially overshadowed by other contextual factors, such as industry dynamics or market conditions.Lastly, it is noteworthy to underscore that the control variable LEV consistently demonstrates a significant positive association with financial performance in all regression analyses, indicating the influence between the relationship of debt and equity on the profitability of Philippine listed firms.
Therefore, the results indicate a significant positive relationship between an entity's economic sustainability initiatives and financial performance, corresponding to H2a.Meanwhile, there is no significant relationship between an entity's environmental sustainability initiatives and financial performance, which opposes H2b.Lastly, results confirm a significant negative relationship between a firm's social sustainability initiatives and financial performance, which does not correspond with H2c.

DISCUSSION
The findings of this study reveal a contrasting relationship between the totality of the integrated dimensions of sustainability initiatives and financial performance, shedding light on the complex dynamics at play within firms.First, contrary to the results of Cantele and Zardini (2018) There is an increasing expectation for initiatives for environmental and social responsibility among Philippine entities, which urges these firms to report their sustainability endeavors and their resultant impacts through communication channels.It is also imperative to recognize that the obligation of Philippine firms to prioritize public interest is not simply a discretionary action but a legal mandate.The allocation of resources toward sustainability initiatives may exert pressure on the profitability efforts of firms in the short run.Given the combined influence of the aforementioned factors, highlighting sustainability goals can affect shortterm profitability.Thus, the negative association between sustainability initiatives and financial Lastly, the study shows no significant association between environmental sustainability initiatives and financial performance across all regression models.This implies that the environmental efforts undertaken by firms may not have an immediate or direct impact on financial performance within the studied samples.The Environmental Performance Index (EPI), conducted by the Yale University Center for Environmental Law and Policy, assesses nations worldwide on their sustainability efforts in terms of climate change performance, environmental health, and ecosystem vitality (EPI, 2022).According to the latest evaluation, the Philippines ranked low in terms of environmental sustainability, placing 158th out of 180 countries assessed.Poor waste management, deforestation, and air pollution are the significant factors contributing to environmental issues of the country.This suggests that the financial benefits of environmental sustainability efforts may be more nuanced in Philippine firms and may require a longer timeframe or broader contextual analysis to fully elucidate their impact on financial performance.

CONCLUSION
In the pursuit of understanding the intricate relationship surrounding sustainability initiatives and financial performance, this study has uncovered numerous insights that helped one understand the complexities and dynamics of Philippine listed firms.Contrary to prevailing outcomes, this study reveals a contrasting relationship between the totality of the sustainability initiatives and the financial performance of firms.Meanwhile, there exists a positive relationship between economic sustainability and financial performance, alongside a negative association between social sustainability initiatives and financial performance.This study found no significant association with environmental sustainability, which calls for further research in exploring the long-term financial benefits of environmental sustainability efforts and their broader contextual implications.
By uncovering the different aspects of sustainability initiatives and the financial performance of Philippine firms, this study equips industry practitioners with valuable insights into the synergies inherent in balancing sustainability objectives and financial goals.Additionally, by underscoring the complex interplay between sustainability and corporate performance, regulators and standard-setting bodies can design more effective frameworks in assessing an entity's sustainability efforts and to better address stakeholder needs.Furthermore, this study raises awareness among investors, consumers, and the general community about the significance of sustainability initiatives of firms, fostering transparency and accountability in business practices for a more sustainable future.
While this study pioneers an investigation into the nascent stages of sustainability reporting in the Philippines, several limitations warrant consideration.First, the utilization of the new sustainability guidelines inherently confines the depth of analysis.Additionally, the three-year period covered in this study that focused on the short-term profitability of firms may not sufficiently capture the longer-term effects of sustainability initiatives.Furthermore, relying on a limited sample size due to data availability may limit the applicability of the findings to a wider range of Philippine listed entities.Moving forward, it is recommended that future research endeavors in the Philippines extend beyond the confines of short-term profitability, expand the duration of the study, and broaden the sample size, embracing a more expansive scope to unravel the intricate dynamics of sustainability in the Philippine context.
In conclusion, this study provides informative insights into the interplay between sustainability and corporate performance, laying the groundwork for future research and the evolution of comprehensive sustainability disclosure standards.By shedding light on the dynamics between sustainability initiatives and financial outcomes, the findings of this study empower firms to balance economic success with environmental preservation and societal well-being, fostering sustainable value creation for all stakeholders.

Figure 1 .
Figure 1.Average annual Sustainability Index scores of Philippine listed firms Cho et al. (2019)21)illustrate this phenomenon in the technology sector, where increased spending on social sustainability initiatives results in a positive effect on revenue growth and profitability.Such expenditures are considered essential for guaranteed long-term financial performance, thus positioning the organization toward sustainable growth.Cho et al. (2019)highlight the importance of strategic selection of social sustainability activities, underscoring that while these initiatives generally have a positive impact on financial performance through mitigating stakeholder conflicts and enhancing reputation, not all activities can exhibit significant effects.
Ali et al. (2020)reimikiene, 2021)ers, and the community(Barauskaite & Streimikiene, 2021).This alignment of interests not only fosters goodwill but also contributes to enhanced financial performance.Thus, entities are encouraged to focus on initiatives that yield measurable results.Similarly, Feng et al. (2022) stress the role of effective implementation of social sustainability practices in enhancing business processes, production quality, and stakeholder support, ultimately contributing to sustainable operational performance.Ali et al. (2020)

Table 2 .
Descriptive statistics All continuous variables are winsorized at 1% and 99% levels.Variable definitions are presented in Appendix A.

Table 4 .
Panel regression results on ROA

Table 5 .
Panel regression results on ROE VariableDependent Variable: Return on Equity (ROE)

Table 6 .
Panel regression results on BEPS

Table 7 .
Panel regression results on DEPS VariableDependent Variable: Diluted Earnings Per Share (DEPS) Numbers in parentheses represent z-values.***, **, and * represent significance at the 1, 5, and 10% levels, respectively.All continuous variables are winsorized at 1% and 99% levels.Variable definitions are presented in Appendix A.

Table 8 .
Full model regression on all proxies of financial performance Note: Numbers in parentheses represent z-values.***, **, and * represent significance at the 1, 5, and 10% levels, respectively.All continuous variables are winsorized at 1% and 99% levels.Variable definitions are presented in Appendix A.