The relationship between supply chain sustainability practices and financial performance: evidence from the GRI-G4 Reports of OECD manufacturing firms
Creators: name: JADHAV, Akshay
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350903
subject: Logistics

description: The manufacturing sector is challenged by increasing demands from various stakeholders, such as governments, customers and NGOs, to implement sustainability practices in their supply chain activities, given their significantly negative impacts on the natural environment and on society. This has led to the development of the supply chain sustainability (SCS) concept in the manufacturing industry. Extant literature has focused on justifying the benefits of SCS, as manufacturing firms require a significant number of resources to adopt SCS practices. However, the relationship between SCS and financial performance (FP) remains unclear and inconclusive, as the literature identifies either positive, negative or no effects from SCS on financial performance. The reasons for such inconclusiveness are threefold. The first reason relates to the different perspectives of SCS, the second reason relates to financial performance measurement issues, and the third is from the low level of research novelty.

Therefore, this study further investigates the effect of SCS on financial performance by addressing these limitations. This study addresses three research questions. The first research question investigated the relationship between SCS practices and the financial performance of the Organisation for Economic Co-Operation and Development's (OECD) manufacturing firms. More specifically, underpinned by the stakeholder theory and using 200 large OECD manufacturing firms from the European, North American, South American and Asian regions as a sample frame, this study investigated whether the following SCS practices affect financial performance: i) environmental practices, ii) sustainable sourcing, iii) sustainable product differentiation, iv) ethical labour practices, v) ethical investment, vi) grievance management and vii) regulatory compliance management. The second research question assessed the effect of supply chain orientation (SCO) and corporate governance (CG) on the relationship between these SCS practices and financial performance. Finally, the third question differentiated the effect of these SCS practices on the financial performance of OECD manufacturing firms based on their innovation capabilities (high-technology vs low-technology) and location (North American vs European).

This study developed a theoretical model investigating the relationships between the seven SCS practices and SCO, CG and financial performance. Then, the study tested a developed theoretical model using data from the Global Reporting Initiative's (GRI-G4) reports from 200 large OECD manufacturing firms. The study then performed a content analysis on the GRI-G4 reports to measure the SCS practices on the Likert scale of 1-5. The financial parameters used in this study were return on assets (ROA), return on equity (ROE), return on capital employed (ROCE), Tobin's Q ratio and the price-to-book (PB) ratio and measured using the MarketLine and Bloomberg databases.

Employing structural equation modelling, this study found that (a) environmental practices negatively affect ROA, ROE, ROCE, Tobin's Q ratio and the PB ratio; (b) effective sustainable sourcing positively affects ROCE; (c) effective ethical labour practices positively affect ROE; (d) poor grievance management negatively affects ROE and ROCE; and (e) regulatory compliance management positively affects ROA. However, the analysis indicated insignificant relationships between sustainable product differentiation, ethical investment and financial performance measures. This study found that SCO partially mediated the relationship between environmental practices and ROA and ROE in the mediation analysis. Next, the moderation analysis indicated that CG fully moderates the relationship between (a) environmental practices and ROCE; (b) sustainable sourcing and ROA and ROCE; and (c) sustainable product differentiation and ROCE. 

The multigroup regression analysis indicated that environmental practices and ethical investment negatively affect the financial performance of high-technology firms. Sustainable sourcing, ethical labour practices and regulatory compliance management positively affect the financial performance of high-technology firms. In comparison, only environmental practices strongly but negatively affect the financial performance of low-technology firms. The analysis also indicated that environmental practices and ethical investment have strong but negative effects on the financial performance of North American firms. Ethical labour practices positively affect the financial performance of North American firms. In comparison, only environmental practices have a strong but negative effect on the financial performance of European firms. Furthermore, sustainable sourcing and ethical investment have positive effects on the financial performance of European firms.

This study makes several valuable contributions to previous SCS literature. First, the data analysis indicated that different SCS practices have different effects on the accounting- and market-based financial measures. This is one of the most important contributions to the SCS literature that broadly assumes the positive effect of SCS on financial performance. Second, this study has also introduced two innovative mechanisms (SCO and CG), which affect the relationship between SCS practices and financial performance. More specifically, the findings indicated that SCO reduces the negative effects of environmental practices on the financial performance of OECD manufacturing firms. CG facilitates the effect of environmental practices, sustainable sourcing and sustainable product differentiation on the financial performance of manufacturing firms.  

In terms of practical implications, the data analysis indicated that SCS managers might require a different level of resource allocation to implement different SCS practices, given the different effects of different SCS practices on financial performance. In particular, effective ethical labour practices and sustainable sourcing directly and positively affect financial performance, as they require a relatively low level of resource allocation compared to the investments required for environmental practices. The results also indicated that, manufacturing firms should focus on improving their grievance management practices, as poor grievance management can negatively affect firm productivity, reputation and financial performance. Finally, the results also indicated that manufacturing firms should involve their stakeholders in their SCS decisions. This engagement allows firms to share their SCS, attract resources, enhance transparency and build legitimacy, resulting in improved financial performance.

Despite its significant contributions, this study found several key issues to be explored further. First, the context of this study mainly focused on the OECD manufacturing firms. Therefore, future research should validate the developed framework using a survey study in the non-OECD manufacturing, mining and energy sectors. Second, the literature may benefit from research beyond SCO and CG that investigates the effect of other mechanisms such as capability development and sustainability governance on the relationships between SCS practices and financial performance.