Sustainability and Profitability in Sweden : A Quantitative Study of Swedish Firms

Abstract: The public's interest and awareness in sustainable options is growing, resulting in a higher demand for high levels of sustainability in companies. Therefore, the question whether there is a profit to be made from being sustainable is becoming increasingly more relevant. Earlier research shows ambiguous results, with the majority indicating either positive or no connection between sustainability and profitability. Folksam’s index of responsible enterprise was used to get an assessment of the environmental and social performance of Swedish firms registered on the Swedish stock exchange between the years 2006 and 2013, where 303 individual firms were included in total. In order to measure the profitability of the included firms, two traditional financial ratios, ROA and ROE was used. A third financial ratio, Nissim & Penman’s RNOA was also used to include a more sophisticated and less researched measure. The differences between these measurements was analyzed to see whether they can explain the relationship between sustainability and profitability differently. Firstly, the reasoning behind the chosen topic of study is discussed, and the problems are formulated. Next, a literature review is conducted in order to better understand the state of research related to this study. Key concepts such as sustainability and measurements of profitability is explained in depth, and earlier research on the area is reviewed. The theoretical reference of this study is based on stakeholder and legitimacy theory. This leads up to research hypotheses to help answer whether there is a difference between RNOA and ROA, and if it is profitable to be sustainable. Our practical method discusses the data and leads to the usage of a fixed and random effects model for estimating the relationships previously mentioned. The result indicates that there is no relationship between sustainability and profitability. However, empirical evidence shows a difference in using RNOA instead of ROA, indicating that RNOA could possibly be a more accurate measure of profitability. Furthermore, our results indicate that a company can “greenwash” their organization by investing in sustainable options to legitimize their operations in the eyes of their stakeholders.