The relationship between sustainability and firm profitability: evidence from some selected

companies in the UK manufacturing sector.

1. Introduction
It has become important for modern-day firms to adopt green practices (Shu et al., 2016), owing
to the pressure being mounted by society, the sophisticated nature of a modern-day consumer,
governmental policies, as well as the increasing limitation of resources that are all driving forces
for a balance between economic growth and environmental sustainability. Consequently,
companies are now moving in a green direction (Shu et al., 2016). Indeed, in the last few
decades, there has been a growing interest in management literature in green innovation as well
as other aspects of sustainability such as environmental innovation, and general sustainability
(Schiederig et al., 2011).

The term "green" appears to be a complex one. Many studies have shown that it comprises
general product design improvement, producing in a manner that conserves energy, minimum
pollution, minimization of waste as well as a reduction on the environmental impact (Woo et al.,
2014; Chen et al., 2006; Chen, 2008; Dangelico and Pujari, 2010; Chang, 2011). However,
Przychodzen et al., (2016) pointed out that the degree to which a company translate green
innovation to profitability is largely a function of the management of such a company.

A firm's performance could be measured in different ways. Ittner (2008), broadly categorized
performance into two distinct types namely; financial and non-financial (Ittner, 2008). In this
study, our focus will be on the firm's profitability, thus, financial performance. The widely
documented measures of financial performance are sales growth, return on equity (ROE), return
on investment (ROI), earnings before interest and taxes (EBIT) (Eldenburg et al., 2010; Orlitzky,
2011; Zahra, 1995) just to mention but a few that measures firm's profitability. However, is
equally to point out that innovation performance, and market share, are other operational key
indicators (Hyvonen, 2007).
Although the literature on the relationship between sustainability and a firm's performance has
increased over time (Hall and Wagner, 2012), the findings appear rather inconclusive (Lee et al.,
2016; Lee and Min, 2015; Trumpp and Guenther, 2017).
There are quite a lot of challenges that modern-day firm is confronted with such as improving
their image, gaining competitive advantage, and access to new market among others (Weng et
al., 2015; Chen, 2008). This is even compounded by the need to go green. Indeed, it remains
unknown the likely outcome of a firm that decides to go green. Thus, the relationship that exists
between sustainability and profit will be advanced using an evidence-based method by this study
for its investigation of selected firms in the UK manufacturing sector.

1.2 Research Significance

By providing empirical evidence on the impact of sustainability on a firm's performance this
study will be contributing to the body of knowledge. Also, the findings from this study will be
beneficial to manufacturing firms in the UK as they will help in guiding their production
decision-making concerning keeping green. Lastly, this work can be built upon by scholars for
future research purposes.

1.3 Research Objective

This work has one main objective, which is to empirically investigate the relationship between
sustainability and firms’ profitability in the manufacturing sector of the UK economy.

1.4 Research Questions

To achieve the set-out objective of the study listed above, the following three (3) research
questions are posed;
i) What is the nature of the relationship that exists between sustainability and a firm's
profitability in the UK manufacturing sector?
ii) To what extent does sustainability (either positively or negatively) affect a firm's
profitability in the UK manufacturing sector?
iii) Is there a relationship between sustainable practices and a firm's performance in the
UK manufacturing sector?
Literature Review
Theoretical Framework
This work is anchored on the sustainability framework. The framework assumes that
sustainability should meet the needs of three (3) domains namely; the economy, the environment
and the society (James and Magee, 2016). This is diagrammatically represented in the figure
below.

Figure 1: Pillars of Sustainability

The social pillar assumes that society should be well-cared for and healthy. The Environment
pillar argues that the environment is part of life as such it should be preserved (James and
Magee, 2016). Thus, firms should strive to minimise harmful effects on the environment while
conducting their business operations. Finally, the economic pillar is the belief that firms should
not profit at the expense of workers and environmental exploitation (James and Magee, 2016).
Using these pillars, one can identify how close or far a firm is from being sustainable.

Defining ‘Green’
Green product innovation is another term for sustainable product innovation. It refers to the
manufacturing of goods or services with little or no negative effect on the environment (Wong,
2012). According to Wong (2012), it extends to the enhancement or upgrading of the already
existing production process in place through the usage of technologies that are environmentally
friendly in producing goods and services which has little or no harmful impact on the
environment (Wong, 2012).

The manufacturing process should therefore give adequate attention to the green process,
especially regarding the emission of hazardous substances, energy use, as well as the entailed
production processes to reduce waste (Chiou et al., 2011; Chen, 2008; Chen et al. 2006; Wong et
al., 2012). Similarly, clean transportation methods and cleaner technology should be employed
through the production and distribution value chain of the production process as they are an
integral part of the green process (Wong, 2012).

2.1 Evidence of Positive Impact

Chen et al (2006) study found that producing green gives firms a competitive advantage. Charlo
et al. (2015) investigated the Spanish FTSE4 Good IBEX Index. Their findings show that firms
gained a higher level of profit from the same level of risk when being sustainable. This aligns
with the extensive study conducted by Callen and Thomas which find a positive relationship
between social performance and financial performance. Equally consistent with this line of
argument is the work of Fujii et al (2013) for Japanese manufacturing firms that find a positive
relationship between decreasing CO2 emissions and financial performance.

Dangelico and Pujari (2010) find a lot of benefits arising from the use of environmentally
sustainable practices in product development as well as the overall business operations of a firm.
The authors find that efficiency is enhanced, there is a return on investment, sales increase, new
market opportunities, improvement in corporate image, as well as the gaining of competitive
advantage (Dangelico and Pujari, 2010 p.480). Along this same line, a review of 63 studies
published between 1991 and 2013 concludes that green product innovation improves firm
performance (Dangelico, 2016). These findings are consistent with that of Dangelico and
Pontrandolfo (2015) who investigated product and process-related environmental practices and
find a positive relationship between the practices and firm performance.

2.2 Evidence of Marginal Impact

There is also mixed result or at the best marginal impact on the relationship between
environmental performance and firms' performance (Lee and Min, 2015). For example, the study
of Horvathova (2010) which made use of a meta-analysis approach to investigate 64 published
works from 1978 to 2008 period found that 15 per cent of studies found a negative outcome, 30
per cent has no effect at all, while 55 per cent had a positive outcome (Horvathova, 2010).
Similarly, Doran and Ryan's (2016) study which is even closer to complex reality
comprehensively examined a sample of 2181 firms with nine (9) green process innovations,
interestingly, only just two showed a positive relationship with a firm's performance (Doran and
Ryan (2016).

2.3 Evidence of Negative Impact

So far, we have seen that there is a positive relationship between sustainability (green) and firm
performance (profitability). Similarly, we have equally seen evidence of marginal impact.
However, literature still exists that shows a negative relationship between sustainability (green)
and firm performance (profitability). For example, Aguilera and Ortiz's (2013) study found that
there is no difference between green and non-green firms in terms of financial performance
arising from the pursuit of the green process. Liu et al (2011) study showed that green innovation
results in added costs implication for firms. Similarly, Driessen et al (2013) study reveal a
deterioration in financial performance as a result of using the green process. These findings find
support with the classical economic perspective that asserts that green is costly, and thus, does
harm firms (Lee et al, 2016; Palmer, 1995).

2.4 Summary of Review/Gap(s) Identified

From the review of the literature above, it is apparent that numerous existing studies have
discussed some aspects of green and the profitability of firms (see, Wong et al., 2012; Chen et al.
2006; Chen, 2008; Chiou et al., 2011). However, there is a dearth of literature on the UK
manufacturing sector. This is a gap that this study will attempt to fill. This study adopts the
definition of Chen et al (2008) which defined green innovation to include technology innovations
linked to green product design, energy-saving and pollution prevention. The debate on whether
or not the pursuit of green processes will translate to profitability persists. This is another gap
that this study hopes to fill. Consequently, this study is considered significant and justified.