Smart and Sustainable Built Environment

The relationship between sustainability practices and financial performance of

construction companies
Renard Y.J. Siew Maria C.A. Balatbat David G. Carmichael

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Renard Y.J. Siew Maria C.A. Balatbat David G. Carmichael, (2013),"The relationship between sustainability
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Vol. 2 Iss 1 pp. 6 - 27
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SASBE
2,1

The relationship between

sustainability practices and
financial performance of
construction companies
Renard Y.J. Siew, Maria C.A. Balatbat and David G. Carmichael
The University of New South Wales, Sydney, Australia

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Abstract
Purpose Over recent years, a number of companies have committed to sharing information relating
to their environmental, social and governance (ESG) activities, in response to a higher demand for
transparency from stakeholders. This paper aims to explore the impact of such reporting on the
financial performance of construction companies.
Design/methodology/approach This paper first examines the state of non-financial reporting of
publicly-listed construction companies on climate change, environmental management, environmental
efficiency, health and safety, human capital, conduct, stakeholder engagement, governance and other
matters deemed to be of concern to institutional investors. It then presents the results of an empirical
study on the impact of issuing non-financial reports and the extent of companies sustainability
practices (represented by ESG scores) on the financial performance of the companies. Financial
performance is measured via a range of financial ratios.
Findings The paper finds that a majority of the publicly-listed construction companies studied have
low levels of reporting, while construction companies issuing non-financial reports largely outperform
those which do not in a number of selected financial ratios, although the correlation between financial
performance and ESG scores is not strong.
Originality/value The originality of this research lies in its use of hard data, and it is supported
by a wide range of financial ratios; this is distinguished from the existing, largely qualitative literature.
Keywords Non-financial reporting, Financial performance, Construction companies, Australia
Paper type Research paper

Smart and Sustainable Built

Environment
Vol. 2 No. 1, 2013
pp. 6-27
r Emerald Group Publishing Limited
2046-6099
DOI 10.1108/20466091311325827

Introduction
The reporting of sustainability matters has progressed beyond a superficial treatment
in company annual reports (Adams and Narayanan, 2007). Stakeholders are
increasingly seeking disclosures, not just on companies financial matters but also
on environmental and social practices (Ernst and Young, 2002; KPMG, 2005; Milne and
Gray, 2007; Farneti and Guthrie, 2009). This is so even though the practice of
sustainability is still in its developmental stages, with no total agreement on its
definition (Bebbington, 2001; Adams and Narayanan, 2007), and alternative reporting
terminology corporate social responsibility (CSR), sustainable development, triple
bottom line, non-financial and environmental, social and governance (ESG)
sometimes being used interchangeably.
A number of national and international bodies now provide guidance on reporting
of non-financial matters, particularly on indicators that should be reported, reporting
processes and principles (Adams and Narayanan, 2007). These include the Global
Reporting Initiative (GRI) (2006), AccountAbility (Adams and Narayanan, 2007) and
the Sustainability Integrated Guidelines for Management (SIGMA) project (SIGMA
Guidelines, 2008) among others.

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The GRI, an independent non-profit organisation was formed through an alliance

between multiple stakeholders including researchers, industry and consultants
(GRI, 2006) to provide a comprehensive sustainability reporting framework intended
to be widely used across the world. The GRI guidelines for reporting are based
on principles of transparency, inclusiveness, auditability, completeness, relevance,
comparability, clarity and timeliness. GRI has its own rating scale to measure the level
of transparency of companies based on disclosures.
AccountAbility developed the AA1000 framework as a response towards the
greater need for clarity on issues pertaining to social and ethical accountability. This
framework links with other specialized standards on sustainability reporting
(GRI guidelines, ISO standards, Social Accountability International) and can act as a
stand-alone framework (Adams and Narayanan, 2007).
The SIGMA project was developed with the intention of assisting businesses to
effectively meet economic, environmental and social challenges, and identify threats
and opportunities in order to become architects of a sustainable future (SIGMA
Guidelines, 2008; Adams and Narayanan, 2007). The guiding principles of SIGMA are
built on the holistic management of five types of capital human, manufactured,
financial, social and natural and the incorporation of accountability into an
organisations strategy.
The suggested benefits of non-financial reporting are that it: allows the tracking
of progress against specific targets; raises awareness about broad environmental
and social matters throughout a company; delivers corporate messages both internally
and externally (Frost and Toh, 1998; Dickinson et al., 2005; Herbohn and Griffiths,
2007); leads to improved credibility from greater transparency; helps companies
obtain reputational benefits (Sciulli, 2009); enhances business development
opportunities; and boosts staff morale (United Nations Environment Programme
(UNEP), 1998).
Much is still unknown about the present state of such reporting with respect to
specific industry sectors. Also, there is a general lack of evidence as to whether the
issuance or disclosure of non-financial reports does lead to better financial
performance. To this end, the paper explores the state of non-financial reporting
of publicly listed Australian construction companies using a checklist of 68 items
in areas including climate change, environmental management, environmental
efficiency, health and safety, human capital, conduct, stakeholder engagement,
governance and other matters deemed to be of concern to institutional investors
according to both the Financial Services Council (FSC) and Australian Council of
Super Investors (ACSI) (2011). It then presents the results of an empirical study
on the impact of issuing non-financial reports and the extent of companies
non-financial practices (as represented by ESG scores) on the financial performance
of construction companies. Financial performance is measured via a range of
financial ratios gathered through authorised access to databases of FinAnalysis and
the Securities Industry Sector Research Centre of Asia-Pacific (SIRCA). ESG data,
available for the years 2008-2010, are from the work conducted by the Ethical
Investment Research Services (EIRIS).
The originality of this research lies in its use of hard data, and it is supported by
a wide range of ratios; this is distinguished from the existing, largely qualitative
literature. The paper will be of interest to construction practitioners, investors,
academics and policy makers looking at the influence of non-financial practices
on company financial performance.

Sustainability
and financial
performance
7

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SASBE
2,1

Outline
The paper first outlines existing trends in the adoption of non-financial reports and
different views on socially responsible practices. It then presents the methodology
used in this study and highlights key results on reporting and performance. The
conclusions and a discussion for future research follow.

Background trends in reporting

There are numerous reports and papers covering the adoption trends in non-financial
reporting. Glass (2012) observes that the origins of environmental and social reporting
can be traced back to Europe from the 1960s (Glass, 2012, p. 89). Ioannou and Serafeim
(2011, p. 8) claim that negative screening by ethical investment funds had already set
the scene for increased participation in this type of reporting since the 1980s. Kolk
(2003) studied the extent of non-financial reporting of the Global 250 (G250 companies)
between 1998 and 2001 and found that half of the multinationals showed continued
and significant increase in such reporting. According to KPMG (2008), the percentage
of companies publishing/releasing non-financial reports, categorised by country,
increased steadily between 2005 and 2008; USA (41 per cent), Spain (34 per cent),
the Netherlands (31 per cent), Sweden (39 per cent), Italy (28 per cent) and Canada
(19 per cent) (KPMG, 2008, p. 16). A more recent study by KPMG (2011) found that
95 per cent of the G250 are now engaged in the reporting of corporate responsibility
activities. In total, 69 per cent of the largest companies in 34 countries (N100) are found
to conduct non-financial reporting, and participation from the consumer markets,
pharmaceuticals and construction industries have more than doubled (KPMG, 2011).
Within Australia, several attempts have been made to explore this further.
Frost et al. (2005) claimed that the overall level of disclosures was generally low for
25 sample Australian companies when compared against the key indicators outlined
in the GRI. Gibson and ODonovan (2007) conducted a review of 752 environmental and
social reports of 41 Australian companies from 1983 to 2003 and found that there
appears to be a trend towards increased environmental disclosure in annual reports.
Construction industry
In Australia, the construction industry provides employment for many (in 2009/2010,
approximately 938,000 people, representing about 9 per cent of the total workforce
Safe Work Australia, 2009). The number of compensated fatalities in this industry
between 2000/2001 and 2008/2009 ranged from 39 to 55 (Safe Work Australia, 2009). In
2009/2010 alone, the number of fatalities recorded was 41, being the highest number of
fatalities of all industries. On environmental matters, according to the Centre for
International Economics (2007), 23 per cent of Australias total greenhouse gas
(GHG) emissions come from energy use in the building sector. The major contributors
to emissions within construction are the cement (20 per cent), chemicals and
petrochemicals (17 per cent), iron and steel (16 per cent) and aluminium/non-ferrous
metals (5 per cent). The CRC for Construction Innovation has also highlighted common
barriers within the construction industry in Australia such as poor industry image,
low levels of education in information and communication of technologies and
management, poor employer-employee relations, procurement structures that promote
adversarial site relationships and disparate occupational health and safety legislation
and guidelines across different states (CRC Construction Innovation, 2004).
Because the construction industry has a large impact on the environment and
community, it is worthwhile to observe the state of reporting in this industry. It might

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be anticipated that the construction industry would face close scrutiny from various
stakeholders and therefore a higher commitment towards non-financial reporting
could be expected from construction companies. This notion is further reinforced
by the findings of Petrovic-Lazarevic (2008) where 17 selected, but unspecified,
Australian construction companies were said to be committed to non-financial
reporting. This study aims, amongst other things, to find evidence to validate or not
whether the claimed commitment towards reporting is true.
Studies examining the trends in non-financial reporting in the construction industry
generally have sample sizes that are too small to draw any meaningful conclusions.
For example, Lamprinidi and Ringland (2008) 16 global construction and real estate
companies; KPMG (2008) three to eight companies; and Brown et al. (2009) 12
companies. This paper argues for a more thorough and meaningful analysis on the
extent and quality of disclosures in the construction industry.
Background socially responsible practices
The general company literature examining the impact of socially responsible practices on a
companys bottom line is quite extensive. Three different schools of thought have emerged:
(1)

Some authors argue that ethical portfolios tend to underperform over the long
term due to lack of diversification (Markowitz, 1952) and that the extra cost, that
is involved in screening, negatively impacts the net return (Bauer et al., 2007;
Hamilton et al., 1993; Angel and Rivoli, 1997). Angel and Rivoli (1997) argue that
the exclusion of companies is considered a form of market segmentation; based
on finance theory the effect of this is an eventual rise in the cost of equity capital
due to a lack of demand from socially responsible investors, and this in turn
decreases the profit associated with the companys activities. Empirical studies
such as that conducted by Poelloe (2010) found social responsibility to be
negatively correlated with financial performance. Evans and Peiris (2010) also
found that a companys involvement in more general social issues contributed
negatively to both operating performance and stock return. Manescu (2011),
based on US data from July 1992 till June 2008, suggests that the only positive
effect found between one ESG criterion (community relations) on risk-adjusted
stock returns could have most likely been attributed to mispricing rather than a
compensation for risk, further arguing against the existence of any positive
correlation between sustainability practices and market performance. Lopez
et al. (2007) examines the influence of economic, environmental and social
indicators of 55 companies on the Dow Jones Sustainability Index (DJSI), and 55
companies on the Dow Jones Global Index, and found a negative relationship
between sustainability and corporate performance for the period 1998-2004.

(2)

An opposing view is that ethical investing has a positive impact on the bottom
line of an organisation and market performance. Support for this view comes
from Abramson and Chung (2000), Derwall et al. (2004), Gompers et al. (2003),
Opler and Sokobin (1995) and Orlitzky et al. (2003). Abramson and Chung
(2000) argue that it is possible to create a consistently diversified subset of
value stocks, and that socially responsible investors may not necessarily just
pick stocks limited to socially responsible indices but may select other
attractive value stocks, outside of these indices, which may qualify as being
socially responsible depending on each investors own parameters.
Abramson and Chung found that risk-adjusted returns might actually be

Sustainability
and financial
performance
9

SASBE
2,1

improved by having more stringent stock selection and applying active

industry sector weightings. Derwall et al. (2004) maintain that high-ranked
portfolios (based on eco-efficiency scores) have higher average returns
compared to lower ranked counterparts, for the period 1995-2003. Gompers
et al. (2003) find that companies with stronger shareholders rights had higher
value, higher profits, higher growth and lower capital expenditure. The metaanalysis of Orlitzky et al. (2003), across 52 studies using data for the period
1972-1997, found that there is a positive association between corporate social
practices and financial performance. More recently, Bnouni (2010)
demonstrates a positive relationship between CSR and financial performance
does not just take place in large organisations, but also across 80 French smalland medium-sized enterprises (SMEs). Some research investment reports
(Briand et al., 2011; Responsible Investment Association in Australasia (RIAA),
2010) support this view. Briand et al. (2011) reason that one of the common
motivations for integrating ESG into the investment process is to actively
manage key drivers of risk and returns. For example, climate change is
expected to cause volatility in commodity prices stemming from drastic
changes in weather patterns, and hence companies that are able to demonstrate
forward-looking strategies are more likely to have a competitive advantage
over laggards who may suffer unanticipated costs. Thus, including ESG in
investment decisions is considered a form of good risk management.

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10

(3)

A third neutral school perceives that ethical and non-ethical investing yield
similar results and that there is no real differentiation between them. Kreander
et al. (2005) claim that returns on socially responsible investment (SRI) funds, on
average, have similar performance to regular funds. Scholtens (2005) finds that
the performance differential between Dutch socially responsible mutual funds
and regular investments, for the period 2001-2003, is not significant. Hoepner
et al. (2011) did not find any evidence that aggregating or disaggregating
corporate environmental ratings into pension funds has a detrimental financial
effect, while Gregory and Whitaker (2007) show that neither SRI nor non-SRI UK
funds exhibit significant under performance on a risk/style adjusted basis.

A summary of findings up until 2009 is contained in a joint report published by Mercer

and the Asset Management Working Group of the United Nations Environment
Programme Finance Initiative (2007). The report examines a total of 36 studies,
selected on the basis that they were either published in peer-reviewed journals,
provided a variety of different ESG factors under review, or were considered influential
in widening the application of traditional finance theory to non-financial factors. While
a majority (55.5 per cent) of these studies exhibit a positive relationship between
financial performance and ESG factors, it is interesting to note that only a small
proportion (22.2 per cent) have an equal focus in all three areas of ESG.
Much of the existing literature targets the analysis of the effects of CSR on portfolio
performance (Abramson and Chung, 2000; Brammer et al., 2006; Gompers et al., 2003;
Statman, 2000; Cortez et al., 2009; Edmans, 2007; Oehri and Faush, 2008; Olsson, 2007).
These studies are largely based on empirical data from the USA and Europe and are
incomplete in distinguishing between different industry sectors. Wanderley et al. (2008)
find that the country of origin has a stronger influence than industry sector, suggesting
that CSR activities could be influenced by political culture, socioeconomic situations
and legislation. The data used in this paper are for Australian companies.

Within the construction industry, it would be interesting to examine if companies,

that claim to be more sustainable, do yield better returns. Anecdotal evidence so far
seems to suggest that the construction industry has a tendency of viewing engagement
in sustainability practices as an extra financial burden (Carmichael and Balatbat,
2009). If evidence can be found that demonstrates a strong link between better
ESG performance and higher financial performance, then this may lead to a change in
the afore-mentioned industry perception. Little research has rigorously examined the
impact of non-financial practices on the financial performance of publicly listed
construction companies. This paper accordingly fills a void.

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Propositions
Based on the above background, the following propositions are explored in this paper:
P1. Publicly listed construction companies have high levels of non-financial
disclosure/reporting.
P2. Construction companies, which release/publish non-financial reports, have
better financial performance than those companies, which do not.
P3. There is strong positive correlation between the extent of non-financial
practices and financial performance of construction companies.
References to Parts I, II and III below refer to P1, P2 and P3, respectively.
Data and research methods
This section discusses the sample selection of companies and the sample composition.
It also details the measures used to represent profitability ratios and equity valuation,
as well as the methods used in the analysis.
Sample selection
The sample of 44 companies used in Parts I and II was selected from the Australian
Stock Exchange (ASX, 2012) listings, based on a companys primary business focus
being construction, and falling within the Global Industry Classification Standards
of Capital Goods and Real Estate. The sample of 44 constitutes the total number of
construction companies listed on the ASX. The characteristics of the companies
are summarised in Table I. In Part II of the analysis, the sample is further divided
into two groups, namely companies which released/published non-financial reports (R),
and those which did not (NR).
Part III focuses only on construction companies (17 in total) that are part of the
Top 300 listed on the ASX; hence not all of the 44 listed construction companies in
Parts I and II are examined in Part III.
Method
Part I. To obtain insights into the level of consistency in non-financial reporting,
a cross-sectional study was conducted by examining a range of available documents
such as sustainability reports, annual reports, media/press releases, corporate web
sites, codes of conduct and company policies. Based on the non-financial reporting
guidelines published by FSC and ACSI (2011), 68 items within nine domains deemed to
be most important to institutional investors such as climate change, environmental
management, environmental efficiency, other environmental matters, health and safety,

Sustainability
and financial
performance
11

SASBE
2,1

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12

Table I.
Description of sample of
construction companies

Company

Average size from 2008 to

2010 (log total assets, $)

Average leverage from

2008 to 2010 (%)

Released non-financial
reports

8.63
9.13
8.60
7.27
8.92
9.33
9.74
8.69
8.31
9.56
8.74
9.11
8.10
8.28
9.52
8.82
8.03
9.59
7.59
9.93
8.90
8.91
9.40
9.88
9.97
8.79
9.88
8.60
8.53
8.92
8.48
8.97
8.36
10.16
7.41
8.58
8.34
8.14
8.02
7.72
9.39
8.50
8.34
8.83

197.2
162.4
281.5
109.8
3593.5
156.0
200.1
187.1
489.6
211.1
239.2
207.7
1118.2
225.4
266.2
240.7
191.1
302.1
153.3
198.2
190.5
181.0
1556.9
368.5
319.3
208.3
155.3
333.6
237.5
155.2
3106.2
225.1
227.6
167.6
152.1
179.6
249.4
242.2
426.7
138.8
222.7
212.4
179.2
283.4

No
Yes
Yes
No
No
Yes
Yes
No
No
No
No
Yes
No
Yes
Yes
No
No
No
No
No
No
No
No
Yes
Yes
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
No
No
No
No
Yes
No

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
Source: ASX (2012)

human capital, conduct, stakeholder engagement and governance (FSC and ACSI, 2011)
is cross-checked against the disclosures done by the construction companies (see Table II
for the items checklist). A rating value of 0 or 1 was adopted; 0 to mean absence while 1
to mean presence of information provided by the construction companies.

No.

Climate change

1
2
3
4
5
6
7

Direct (scope 1) emissions by facility or process, including those occurring in equity stakes
Indirect (scope 2) emissions associated with purchased electricity
Supply-chain carbon emissions (scope 3)
Opportunities to pass carbon costs on to customers
Opportunities to reduce carbon emissions and energy use
Targets for reducing carbon emissions and improving energy efficiency
Effective carbon liability management, including ways to reduce emissions or meet carbon
liabilities at low cost
An assessment of the physical risks from climate change
Business opportunities that climate change regulation presents
Environmental management systems
Monetary values of fines and number of non-monetary sanctions for noncompliance with
environmental laws and regulations
Environmental provisions as reported on the balance sheet
Number and severity of transgressions of environmental license conditions
Losses of containment (number and severity)
Proportion of operations that are certified under the ISO 14001 Environmental Management
Systems Standard
Total count of process safety incidents
Process safety total incident rate
Process safety incident severity rate
Environmental efficiency waste, water, energy
Type of waste produced by product and volume
Targets for the reduction of waste
% of waste re-used in the manufacturing process
Water consumed (by quality/source) and targets for reduction
% water recycled compared with base year
Breakdown of energy used by source and comparison with base year
Efforts to introduce energy efficient or renewable energy resources
Energy saved due to conservation and initiatives to reduce energy consumption
Environment other issues
Hazardous waste emissions and reduction
NO x, SO x and particulate emissions
Emissions of ozone depleting substances by weight
Total water discharge by quality and destination
Details of toxic materials used in the manufacturing process
Strategies for managing impacts on biodiversity
Location and size of land use in or adjacent to areas of high biodiversity
Description of significant impacts of activities, products and services on biodiversity in
protected areas
Habitats protected or restored
Workplace health and safety
Training courses offered or held
Audits actually conducted by independent parties
Monitoring conducted/initiatives
Incidents analysed breakdown
Number of near misses reported
% of hazards rectified
Human capital management (HCM)
Board oversight of HCM
Integration of HCM and people risks into risk management processes

8
9

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1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
1
2
3
4
5
6
7
8
9
1
2
3
4
5
6
1
2

(continued)

Sustainability
and financial
performance
13

Table II.
Summary of items
checklist

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SASBE
2,1

No.

Climate change

14

3
4
5
6
7
8
9
10
11
12

Executive remuneration linked to achievement of HCM objectives

Employee diversity/anti-discrimination policies
Processes to monitor and address discrimination
Voluntary turnover rates
Employee engagement/satisfaction
External measurements/assurance with standardised framework
Rate of return from maternity/parental leave
Professional development training hours/employee
Percentage of women at board and senior management levels
Remuneration levels for male and female employees
Corporate conduct
Corporate codes of conduct, the extent of their application and associated training
Responsibility within the organisation for the code of conduct
Linkages between remuneration policies and code of conduct
Commitments to external initiatives, how they compare with industry standards and
whether these are voluntary or obligatory
Whistleblower policies
Stakeholder engagement
Basis for identifying the key stakeholders with which to engage
Frequency of key stakeholder engagement
Engagement mechanisms (e.g. meetings, surveys, briefings, use of on-line media)
Main issues arising from stakeholder engagement
Steps taken to respond to stakeholder feedback
Governance
Risk management policies and implementation
The boards assessment of related party issues
Director selection and board succession planning process
Information on board evaluation practices and director independence
The link between remuneration structures and company strategy
The link between remuneration structures and shareholder returns

1
2
3
4
5
1
2
3
4
5
1
2
3
4
5
6
Table II.

Source: After FSC and ASCI (2011)

Euclidean distances, as used in distance mapping picture processing (Danielson, 1980;

Kolounzakis and Kutulakos, 1992) and shortest path problems in operations research
(Golden and Ball, 1978), are used to show the magnitude of differences in the level of
disclosures. Essentially, the problem can be viewed as having two vectors (a vector
representing what is expected of institutional investors and the other representing
actual items disclosed) with nine elements representing the scores of each domain.
Euclidean distances cover any shortfall associated with using any simple checklist
summation, and account for levels of consistency achieved in reporting across all areas.
The representative score (here, distance measured) is hence an accurate reflection of
the level of consistency in reporting achieved throughout all domains. Because there
are nine domains involved, Euclidean distance is measured by:
q
1
Dp; q p1  q1 2 p2  q2 2 :::: pn  qn 2
where D is the Euclidean distance, p is the maximum number of items in each
respective domain, q is the number of disclosures by companies and n 9 represents

the total number of domains. The scale used for measuring levels of reporting is as
follows: excellent (0-5), good (5-15), average (15-20) and poor (4 20).
Part II. A comparative analysis of financial performance was done based on the
average values of groups R and NR. Financial performance indicators include
profitability financial ratios and equity valuation (Barnes, 1987). A total of ten financial
performance indicators are used.

15

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Profitability (five measures):

.

return on assets (ROA);

return on equity (ROE);

return on invested capital (ROIC);

earnings before interest tax depreciation and amortisation (EBITDA)

margin; and

net operating profit less adjusted taxes (NOPLAT).

Equity valuation (five measures):

.

earnings per share (EPS);

dividend per share (DPS);

dividend yield (DY);

price to earnings ratio (PE); and

enterprise value (EV).

Appendix lists the formulae used for these indicators.

Two portfolios, R and NR, are created where portfolio return is computed using
daily stock returns given by the following equation:

log e

pricet
pricet1


2

where t is the daily closing price of a stock. The annual stock return is obtained by
adding the daily stock returns for all trading days in a particular year. Data for these
calculations were obtained from the SIRCA.
The variance of each portfolio is also calculated. Portfolio variance is given as a
function of the correlations, rij, of the individual stock, for all of the stock pairs (i,j) as
shown in Equation (3), and may be taken as an indication of the return variability or
return risk of a portfolio:
2

Variance w1 s1

:::

Sustainability
and financial
performance

1
6 r21
6
wn sn  6 .
4 ..

r12
1
..
.



..
.

rn1





3
3
r1n 2
w1 s 1
r2n 7
76 . 7
.. 7 4 .. 5
. 5
wn s n
1

Part III. The strength of the relationship between company financial performance and
the extent of non-financial practices (represented by ESG scores) is tested for
construction companies in the Top 300. ESG scores for the three-year period 2008-2010

SASBE
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16

are obtained from the EIRIS database through corporate analysis enhanced
responsibility, a global provider of independent research into ESG performance of
companies. There are a few reasons for using the EIRIS database. First, it has an
advantage over other institutions providing ESG assessments (such as KLD) because it
operates as an independent, non-profit organisation, which does not provide financial
or legal advice to clients (Hoepner et al., 2011). Second, the KLD now part of MSCI
database is not used because of the limited amount of ESG data for the Top 300.

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Results
Part I level of reporting
Using Euclidean distances given by Equation (1), the level of reporting across publicly
listed Australian construction companies can be measured. The breakdown of the scale
used to categorise the level of reporting is given in Table III. The lower the score, the
closer it is to the ideal situation; that is to say that the discrepancy between what is
expected of institutional investors and actual disclosures is smaller. Based on the
analysis, 66, 25 and 9 per cent of publicly listed construction companies fall within
the poor, average and good categories, respectively. No companies were found to have
excellent disclosure levels. The findings here may be consistent with the conclusion
in Carmichael and Balatbat (2009) that a majority of contractors have yet to make a
serious move to embrace sustainability practices and therefore are unable to
sufficiently disclose information that addresses stakeholders concerns. This result
might also be attributed to: low sustainability awareness; companies not seeing a
commercial benefit; or the absence of mandatory reporting. UNEP (1998) speculates
that reasons for not engaging in non-financial reporting are: doubts about its
advantages; competitors not publishing such reports; clients and the public not
possibly interested; the existence of other means of communicating environmental
issues; the difficulty in obtaining consistent data from operations and in selecting
meaningful reporting criteria; and the possibility of it damaging the reputation of
companies, especially those which have not been doing well.
Conclusion on P1: a majority of publicly listed construction companies have
levels of reporting that are poor and fall short of the expectations of institutional
investors.
Part II comparative analysis
The results of the comparative analysis are summarised in Table IV. This is followed
by relevant commentary.
ROE. One of the most widely used measures for profitability is ROE, which gives
the real return on shareholders invested capital. ROE values are higher in both 2008
and 2009 for the group of companies that releases non-financial reports (R) compared
to the group that does not (NR), except for 2010 where NR exceeded R by 2.7 per cent.

Level of reporting

Table III.
Level of reporting

Excellent
Good
Average
Poor

Range of scale

% of companies

0-5
5-15
15-20
420

0
9
25
66

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Ratio

2008

Year
2009

2010

ROE (R)
ROE (NR)

15.1%
13.6%

15.3%
5.6%

5%
7.7%

ROA (R)
ROA (NR)

7.6%
7.5%

8.2%
5.6%

3.5%
5.4%

ROIC (R)
ROIC (NR)

32.5%
30%

40%
24.4%

23.7%
48.4%

EBITDA margin (R)

EBITDA margin (NR)

22.67%
16.1%

21.4%
32.5%

16.5%
7.8%

NOPLAT margin (R)

NOPLAT margin (NR)

12.9%
8.7%

13.2%
9.3%

8.7%
4.9%

EPS (R)
EPS (NR)

58.6
24.4

33.4
1.8

38.2
13.8

DPS (R)
DPS (NR)

40.5
16.8

30.7
10.3

29.4
11.1

DY (R)
DY (NR)
PE ratio (R)
PE ratio (NR)
EV (R)
EV (NR)

5.1%
6.3%
13.4
16.8
4.1 E 9
1.0 E 9

5%
5.2%
9.8
6.2
3.03 E 9
6.85 E 8

Sustainability
and financial
performance
17

4%
3.7%
18.6
3.7
3.64 E 9
8.08 E 8

ROA. ROA measures profitability and the effectiveness of companies in utilising their
assets to generate profit. In contrast with ROE, ROA uses total assets as a denominator.
ROA values are hence lower than ROE because total assets include liabilities and owner
equity. Average ROA was found to be higher for R compared to NR in both 2008 and
2009, but not in 2010.
ROIC. ROIC reflects the effectiveness of a company in allocating its money and
investing in its operations. R outperformed NR by 2.5 and 15.6 per cent in 2008
and 2009, respectively, but underperformed in 2010, in a similar fashion to that for
ROE and ROA.
EBITDA margin. The EBITDA margin provides an indication of cash flows in a
company and is normally used by analysts to assess corporate performance. It is
calculated from a companys earning power divided by its operating revenue. Average
EBITDA margin is comparatively higher in 2008 and 2010 for R. The difference in
EBITDA margin (between R and NR) in 2008 and 2010 is 6.57 and 8.7 per cent,
respectively.
NOPLAT. For NOPLAT, profit is generated specifically from sales, while removing
the effects of capital structure. NOPLAT provides an indication of how healthy
a business is in generating profit without too much reliance on borrowing to fund its

Table IV.
Summary of comparative
analysis

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18

profit generating activities. It can be observed that R consistently outperformed NR in

all three years (2008-2010).
EPS. EPS is perceived to be an important indicator in determining the share price
of a company. Based on the analysis shown in Table IV, average EPS values for R
are found to be much higher than NR by 34.2, 31.6 and 24.4 for 2008, 2009 and
2010, respectively.
DPS. As profit is generated by companies, they can either make the choice of
retaining them in pursuit of future profitable opportunities or choose to distribute them
to their shareholders. Effectively, DPS is the total sum of dividends paid annually
for every ordinary share issued. Average DPS for R appears to be higher than NR,
suggesting that there is a tendency for companies issuing non-financial reports to have
higher dividend payouts, for the three years observed (2008-2010).
DY. DY is given as dividend per share over market price per share. By contrast to the
other indicators, average DY values are marginally higher for NR than R in both 2008
and 2009, but not in 2010.
PE ratio. PE ratio is used to depict whether the share price of a company is
overvalued as given by a higher PE ratio, or undervalued as given by a lower PE ratio.
On average, the market price for R is consistently overvalued between nine and 19
times more than average companies earnings per share. The average PE ratio for NR
appeared to be less consistent given the fact that they were undervalued by
approximately 17 times in 2008, overvalued by approximately six times in 2009 and
four times in 2010.
EV. EV represents the total value of a business debt free. This measure is used
by analysts in evaluating the worth of a company typically in mergers and
acquisitions. From the analysis, average EV was found to be much higher for R
compared to NR between 2008 and 2010.
Stock return and variance. The stock return analysis is shown in Table V. R
outperforms NR in terms of expected stock return, and has a lower variance.
Conclusion on P2: R outperforms NR in terms of stock return and largely
has superior performance in terms of financial ratios. Accordingly, construction
companies issuing non-financial reports largely outperform, in financial terms, those
which do not.
Part III relationship
Using data for the period 2008-2010, the correlation coefficients relating financial
performance and ESG scores are shown in Table VI. In Table VI, negative values are
given inside parentheses; negative values indicate that as the ESG score decreases,
financial performance increases and vice versa. (The p-value is an indicator of the
decreasing reliability of the result. That is, the higher the p-value, the less can it
be believed that the observed relation from the sample between the variables is a
reliable indicator of the relation between the respective variables in the population
(Hill and Lewicki, 2006). Typically, a p-value of either 0.05 or 0.1 is treated as an

Grouping
Table V.
Construction companies (R)
Stock return and variance Construction companies (NR)

Expected return

Variance

0.06
0.36

0.10
0.77

Correlation coefficient

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Profitability ratios
ROE
ROA
ROIC
EBITDA
NOPLAT
Equity valuation
EPS
DPS
DY
PE
EV

(0.05)
(0.11)
0.08
(0.21)**
(0.23)*
0.54*
0.29*
(0.27)*
0.02
0.27**

Notes: *p-value o 0.1; **p-value o 0.05

acceptable level of error. For a p-value found to be o0.05 or 0.1, the result observed is
said to be statistically significant.
Generally, Table VI indicates no strong correlation between financial performance
and ESG scores. It can be observed that there is weak negative correlation (r o0. 5)
with the profitability ratios except for ROIC where r 0.08. The coefficient of
determination (r2) is o0.5 for all the measures of financial performance; that is o50
per cent of the variation in a companys bottom line can be explained by variation in its
ESG scores. Hence, there is not enough evidence to justify the claim that there is strong
positive correlation between profitability and ESG scores. Under equity valuation, the
analysis shows that EPS has a strong correlation with ESG scores where r 0.54 and
is statistically significant at p-value o0.1, while all the remaining four measures
exhibit a weak correlation with ESG scores, although three (PE, r 0.02; EV, r 0.27;
DPS, r 0.29) of these suggest an increasing trend line (the correlation coefficient, r,
provides an indication of the direction and magnitude of correlation; the coefficient of
determination, r2, provides an indication as to how much variation in one variable can
be accounted for by variation in the other variable). Note that correlation, rather than
causality, is being explored here; correlation only comments on the observable trend
between the two variables examined, namely ESG and financial performance.
Looking at financial performance measures one at a time; a majority of the
regression coefficients fall below the 0.5 threshold, suggesting weak correlation.
Conclusion on P3: while construction companies issuing non-financial reports
largely outperform those which do not in a number of selected financial ratios (P2), the
correlation between financial performance and extent of non-financial practices
(as measured by ESG scores) of construction companies is not strong.
Discussion
Regarding P1, it is seen that the state of reporting for the majority of publicly
listed Australian construction companies is poor. There appears to be a discrepancy in
terms of construction companies claimed commitment to non-financial reporting
(Petrovic-Lazarevic, 2008) vs what is actually being reported. The study could not find
sufficient evidence to demonstrate that Australian construction companies are
committed to non-financial reporting, at least in the areas which are deemed to be of

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and financial
performance
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Table VI.
Correlation coefficients

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importance to institutional investors, such as climate change and human capital

management. Considering the increasing global trend in such reporting, as discussed
in Background, this result may suggest that a majority of Australian construction
companies are slow adopters of sustainability practices; this could be attributed to
a number of reasons such as not seeing any commercial benefit, lack of awareness
or the non-existence of mandatory reporting. It could also be that the emphasis of
construction companies on immediate project demands, such as budgets, schedules
and quality issues, has resulted in the neglect of long-term goals, with corporate
sustainability issues receiving low attention.
As mentioned above, non-financial reporting: allows the tracking of progress
against specific targets; raises awareness about broad environmental and social
matters throughout a company; and delivers corporate messages both internally and
externally (Frost and Toh, 1998; Dickinson et al., 2005; Herbohn and Griffiths, 2007).
The lack of engagement in non-financial reporting means that construction companies
may lose out on such benefits. As well, with the Clean Energy Legislative Package
(Department of Climate Change and Energy Efficiency (DCEE), 2011) and the National
Greenhouse Energy and Reporting Act (2007) in place, there is a possibility that
construction companies that do not have an adequate system to account for
greenhouse emissions and energy consumption may face future legal issues and
financial penalties.
According to the European Union on Sustainable Investment Forum (European
Sustainable Investment Forum (Eurosif), 2010), the SRI market has grown to 4,986 billion
euros as of 31 December 2009, up 338 per cent between 2005 and 2009 (Dorfleitner and
Utz, 2012). This has resulted in an increase in the number of sustainability indexes such
as the DJSI and FTSE4 Good Australia. The rating of companies under these
sustainability indexes depends, in part, on levels of reporting. Given the poor state of
reporting identified in this study, there is the possibility that the Australian construction
industry may not be rated favourably, thereby losing out to other industry sectors that
have already achieved a mature level of non-financial reporting. Perhaps, in future,
governments may consider enforcing mandatory reporting schemes in order to ensure a
level playing field across all industries. Doing so not only promotes better comparability
but may also help prevent some companies from greenwashing or deliberately
manipulating stakeholders perceptions through discretionary reporting.
The results from P2 (controlled for, by country and industry sector) support the
positive view that there are advantages to construction companies that engage in
non-financial reporting. Further validation is required to strengthen this result given
the short-time frame of the present study (the period 2008-2010). Extending the
time frame backwards would have added more strength, but considering that only
a handful of publicly listed Australian construction companies had engaged in
non-financial reporting prior to 2008, the distinction between the two groups (R and
NR) would not be well-established for these earlier years.
P3 examines the degree of correlation between ESG scores and financial
performance. There are a number of possible flow-on considerations from the weak
correlation identified, and these would be worthy of investigation:
.

There could possibly be a blurring between certain non-financial practices. That

is, while some practices may be positively impacting a companys bottom line,
other practices may not necessarily be value adding but rather only burdening
the company with additional cost.

The ESG scores may not reflect the true non-financial practices of companies.
Although the EIRIS work covers 88 areas and is arguably one of the most
comprehensive measurements available, the scoring mechanism in itself is
subjective, and hence may not be representative of the true non-financial
practices of companies.

The non-financial reporting of companies may not allow the reader to fully
comprehend those practices in order to score them objectively.

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The ESG scores may not have been done by people familiar with and within the
construction industry, thereby introducing scoring bias.

Conclusions
The paper concludes the following on the three propositions examined.
P1: publicly listed construction companies might be expected to achieve excellent
levels of disclosure in non-financial reporting. However, a majority of the construction
companies in the studied sample (44 construction companies listed on the ASX)
were found to have poor levels of reporting and failed to meet the level of demand for
transparency set by institutional investors.
P2: construction companies that give non-financial reports were found to have
better financial performance than those that do not. The comparative analysis on
44 construction companies listed on the ASX, shows that the group of companies
issuing non-financial reports (R) appear to outperform the group which does not (NR)
in a number of selected financial ratios as well as stock return.
P3: a qualification to the conclusion for P2 is that there is no strong positive
correlation between the extent of non-financial practices and financial performance
within the construction industry. This conclusion is derived based on sample
Australian construction companies that form part of the Top 300.
Future research
While the focus of this paper is on examining the impact of issuing non-financial
reports and the extent of non-financial practices on the financial performance
of publicly-listed construction companies, there are other factors that might
help better explain the relationships identified in the paper. Future research
may wish to explore these factors, factors which directly contribute to performance,
such as company size or debt levels of company. It is anticipated that larger
companies may have more resources for producing high-quality reporting compared
to SMEs, while companies that have higher debts might show less effort in their
reporting.
In 2011, the G3.1 version of the GRI framework, which includes expanded
guidance on local community impacts, human rights and gender, was released. A more
comprehensive fourth generation guideline (G4), which includes proposed changes
to themes such as anti-corruption and GHG emissions, is anticipated to be
launched in May 2013. This is anticipated to have consequences for the
construction industry, considering that the industry is a heavy emitter (In Australia,
23 per cent of total emissions come from the building sector). With such changes to
GRIs framework, it would be interesting to investigate if there is any connection
between a higher GRI application level of construction companies and financial
performance.

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Sustainability
and financial
performance
25

SASBE
2,1

Appendix

Measure
Return on equity (ROE)
Return on assets (ROA)

Net profit after tax

Total assets  Outside equityinterests

26

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Return on invested capital

(ROIC)
Earnings before interest tax
depreciation and
amortisation (EBITDA)
margin
Net operating profit less
adjusted taxes (NOPLAT)

Table AI.
Financial performance
formulae

Formula
Net profit after tax
Shareholders equity  Outside equityinterest

Net operating profit less adjusted taxes

Operating invested capital before good will
EBITDA
Operating revenue

NOPLAT
Operating revenue

Earnings per share (EPS)

Net profit after tax  Preference dividends

Average number of ordinary shares

Dividend per share (DPS)

Ordinary dividends
Number of ordinary shares

Dividend yield (DY)

Dividend per share

Market price per share

Price to earnings ratio (PE)

Market price per share

Earnings per share

Enterprise value (EV)

Common equity Debt Minority interest Preferred equity  Cash

About the authors
Renard Y.J. Siew is a PhD candidate at the University of New South Wales, where he also
graduated with a Bachelor of Civil Engineering (First Class Honours). He also holds a Certificate
in International Auditing (CertIA) issued by the ACCA. As an undergraduate, he was the
recipient of the Yayasan Sime Darby Scholarship, the Brookfield Multiplex Engineering
Construction Management Prize, the Australian Conferences Management Education for
Engineers (ACMEE) Award, on the Deans Honours List and a member of the Golden Key
International Honours Society. Passionate about volunteerism, Renard is an active member of
Engineers Without Borders (EWB).
Maria C.A. Balatbat is a Senior Lecturer at the Australian School of Business, University of
New South Wales (UNSW) and a Fellow of CPA Australia. Maria is also a research coordinator at
the Centre for Energy and Environmental Markets at UNSW. She teaches advanced financial
accounting in the undergraduate and postgraduate programs. Recently, she has developed a
postgraduate course on reporting for climate change and sustainability and teaches this to
business and environmental management students.

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David G. Carmichael is Professor of Civil Engineering and former Head of the Department of
Engineering Construction and Management at the University of New South Wales. He is a
graduate of the Universities of Sydney and Canterbury; a Fellow of the Institution of Engineers,
Australia; a Member of the American Society of Civil Engineers; and a former graded arbitrator
and mediator. He publishes, teaches, and consults widely in most aspects of project management,
construction management, systems engineering, and problem solving. He is known for his
leftfield thinking on project and risk management (Project Management Framework, A.A.
Balkema, Rotterdam, 2004), and project planning (Project Planning, and Control, Taylor and
Francis, London, 2006). David G. Carmichael is the corresponding author and can be contacted
at: D.Carmichael@unsw.edu.au

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Sustainability
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performance
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