The impact of COVID-19 on the relationship between sustainability and financial performance: A multi-theoretical interpretation

Abstract

Most research papers do not emphasise the importance of theoretical frameworks enough – theories are often only included for publication purposes, or briefly mentioned and never revisited, or even omitted. The focus of this study was to consider how theoretical frameworks impact the interpretation of results. The primary objective of the study was to consider the interpretation of multiple theories (six selected theories) on a specific scenario, i.e., the relationship between JSE listed companies’ financial performance (in terms of financial ratios) and sustainability performance (in terms of ESG) before and after the COVID-19 pandemic. Literature revealed that there are inconclusive results regarding the relationship between financial and sustainability performance. Furthermore, there were limited cases where this relationship was examined within a crisis-period. The most recent crisis, the COVID-19 pandemic, had an immense impact on companies’ performance; subsequently this study investigated the relationship between companies’ financial and sustainability performance before and after COVID-19. This relationship was used as a scenario where the results obtained were interpreted within the context of multiple theoretical frameworks. A sample of 104 JSE listed companies from the sectors that were probably most severely affected by COVID-19 was selected. Data was extracted for 2017 to 2022 to analyse the association between financial performance and sustainability performance. A mixed effect regression model was developed to test the association and to provide a basis to interpret the results within the context of multiple theories. ROE, an accounting-based measure of financial performance, was the main indicator of financial performance. However, after correlations were conducted, Tobin’s Q, a market-based measure of financial performance, and ESG, a measure of sustainability performance, revealed the most significant relationship – therefore, the relationship between these two variables, before and after COVID-19, was considered when the results were interpreted within multiple theories. It was concluded that sustainability performance had a negative impact on financial performance, both before and after COVID-19. In contrast, financial performance had a negative impact on sustainability performance before COVID-19, but a positive impact after COVID-19. These results were interpreted within the context of stakeholder-, stewardship-, signalling-, shareholder-, resource-based- and legitimacy theory. It was concluded that the theoretical framework from which a specific scenario is considered, impacts the interpretation of results, i.e., the same results can be seen as positive or negative, depending on the applicable theory. This illustrated the importance of theoretical frameworks.