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Sustainability Reporting by Publicly Listed

Companies in Sri Lanka

Article in Journal of Cleaner Production · April 2016

DOI: 10.1016/j.jclepro.2016.04.086


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3 authors, including:

Dinithi Dissanayake Carol Ann Tilt

University of South Australia University of South Australia


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Sustainability Reporting by Publicly Listed Companies in Sri Lanka

Dinithi Dissanayakea
Carol Tiltb
Maria Xydias-Loboc
aUniversity of South Australia PhD student; bProfessor of Accounting, University of South
Australia; cFlinders University

While many studies have investigated sustainability reporting in developed countries there is
a dearth of research in developing countries. This is of particular concern, as the majority of
the world’s population lives in these countries, which experience their own social, political
and environmental issues. One of these countries, Sri Lanka, has a population of 20.3 million
and is presently experiencing post-conflict economic growth. Sri Lanka faces a number of
environmental problems including land degradation, pollution, poor management of water
resources, loss of bio-diversity, coastal erosion and poor industrial waste management. This
study empirically examines sustainability reporting in publicly listed companies in Sri Lanka,
its extent, nature and possible drivers, specifically considering the use of key performance
indicators. Results indicate that there is a major focus on social indicators, despite the poor
environmental record in the country. The economic context therefore appears to be a
significant factor influencing how sustainability reporting develops in Sri Lanka. The findings
have implications for policy makers in Sri Lanka as the trend towards foreign investment is
likely to increase pressure on firms to comply with global environmental standards and

Keywords: sustainability reporting, Sri Lanka, KPIs

Cite as:

Dissanayake, D., Tilt, C. & Xydias-Lobo M. (2016) 'Sustainability reporting by publicly listed companies
in Sri Lanka', Journal of Cleaner Production v. in press, pp. 1-14.

Sustainability Reporting by Publicly Listed Companies in Sri Lanka

1. Introduction

Debate persists around the negative environmental and social impacts from the
disproportionate and unwise use of resources by business organisations (Dilling 2010, Kolk
2003). As business organisations engage in both intermediate and final assembly of products
and services, it is argued that sustainable manufacturing and utilisation of resources by
companies would result in an improvement in the environment and society (Hubbard 2009,
Dilling 2010, Elijido-Ten 2011). Organisations are also increasingly held accountable for their
effect on society and the environment as reflected by the growing number of laws,
regulations and penalties in this area (Henri and Journeault 2008). Investors look for
evidence of sound business strategy and effective management of risk, some customers are
concerned with product origins and the conditions under which they are manufactured, and
employees want to work for organisations that visibly account for their responsibilities to
society and the environment (Belal and Owen 2007). These have all led to an increased
prevalence in corporate sustainability reporting (Lee 2008).

While many studies have investigated sustainability reporting in developed countries (Patten
2002, Frost et al. 2005, Gray 2006b, Othman and Ameer 2009, Burritt and Schaltegger 2010,
Gurvitsh and Sidorova 2012), there is a dearth of research in developing countries (Sahay
2004, Sumiani et al. 2007, Md. Habib-Uz-Zaman et al. 2011). This is of particular concern, as
the majority of the world’s population lives in developing countries, which experience their
own social, political and environmental issues (United Nations 2013). Many of these
countries are characterised by unstable governments, high levels of unemployment, limited
technological capacity, unequal distribution of income, unreliable water supplies and under-
utilised factors of production. A common strategy in achieving faster economic development
is rapid industrialisation. Industrial development policies are pursued with the aim of
attracting greater foreign investments to these countries. Foreign investors are keen to start
businesses to benefit from fiscal incentives, export processing zones and cheap labour. While
these strategies have economic merit, they can have other, adverse, social and
environmental effects. These include the use of child labour, unpaid wages, inequitable

career opportunities, workplace safely matters, increased waste and environmental

As an emerging economy in the South Asian region, Sri Lanka was selected as the research
focus for this study. Sri Lanka is a country with a population of 20.3 million presently
experiencing post-conflict economic growth. The Sri Lankan economy has been growing
significantly since the end of a thirty-year war (World Bank 2013). As a result, foreign
companies have increased their investments in Sri Lanka with US$ 933 million US dollars in
direct foreign investments in 2013 alone (Board of Investment of Sri Lanka 2013). While Sri
Lanka is classified as a middle income developing country, the challenge for Sri Lanka is to
achieve high economic growth without causing irreversible damage to the environment and
while eliminating social issues such as poverty, malnutrition and poor workplace ethics. At
present, Sri Lanka faces a number of environmental problems including land degradation,
pollution, poor management of water resources, loss of bio-diversity, coastal erosion and
poor industrial waste management (Goger 2013). However, Sri Lanka also has a long history
of corporate philanthropy towards society and the environment, largely led by individual
values and actions and cultivated from religious and cultural views (Beddewela and Herzig
2013). Nevertheless, the topic of sustainability reporting in Sri Lanka receives relatively less
attention in research compared to other parts of the world. Sustainability reporting is not
mandatory in Sri Lanka, as with many other countries in the world, thus it is likely that
voluntary sustainability reporting by Sri Lankan companies may show structural diversity and
disclosures may vary from low to high levels.

In addition, a key aspect of sustainability reporting – sustainability-related key performance

indicators (KPIs) is significantly under-researched. According to (Adams and Frost 2008), if
sustainability reporting is to lead to improvements in sustainable performance, organisations
must integrate KPIs from the economic, social and environmental dimensions into the
overall management system. If KPIs are not presented in sustainability reports, different
stakeholder groups will have difficulty in analysing and understanding the sustainability
efforts of the company (Perrini and Tencati 2006). Even though organisations have adopted
sustainability practices over the years, outcomes from economic, social and environmental
activities are often viewed in isolation or distinct from each other. By contrast, sustainability
reporting aims to view these facets together in combined sustainability KPIs (Figge et al.

2002). Sustainability KPIs are a framework of performance indicators reflecting the
economic, social and environmental aspects of organisational activity. Sustainability KPIs
allow better connections to be made between sustainability efforts and outcomes. They
identify causal relationships between financial and non-financial performance. Furthermore,
KPIs enhance the transparency of the internal processes that enable the stakeholders to
better understand the sustainability approach and resulting value addition. Therefore,
sustainability KPIs are an inherent component of sustainability reporting. Even so, the extent
and nature of sustainability KPI reporting has not been distinctly addressed by existing
research to a large extent, in either developed or developing economies. Similarly, given the
importance placed on the use of KPIs, their relationship with financial performance has also
not been considered.

This study provides preliminary evidence on sustainability reporting by publicly listed

companies in a developing country, Sri Lanka. Specifically, it examines the extent, nature
and possible drivers of reporting on a sample of larger, listed companies. The nature and
extent of sustainability reporting, and specifically considering the reporting of key
performance indicators (KPIs) for sustainability, are described and measured using a
Sustainability Reporting Scoring Model. Using scores derived from this model, the study also
tests the relationships between the extent and nature of sustainability reporting and certain
company characteristics, including size, age, industry and financial performance.

The next sections present background information on sustainability reporting and a review
of relevant prior research. This is followed by the development of the research questions
and hypotheses, and a discussion of the research method employed, including the sample
selection and the Sustainability Reporting Scoring Model developed. Finally, the results and
conclusions of the study are presented including the study’s limitations and
recommendations for further research.

2. Sustainability

There is no single definition for sustainability, or sustainability reporting, and as a concept it

continues to evolve. It is associated with numerous contemporary business and reporting

practices including corporate social responsibility (CSR), corporate sustainability, corporate
citizenship, integrated reporting, and sustainable entrepreneurship (Reddy and Gordon
2010). The most structured definition of sustainability reporting is derived from the concept
of sustainable development, which is built on the three pillars of economic propensity, social
equity and environmental protection. That is, sustainable development is defined by the
World Commission on Environment and Development as “development which meets the
needs of the present generation without compromising the ability of future generations to
meet their own needs” (Brundtland et al. 1987). Therefore, from a business perspective,
sustainable development can be accordingly defined as an organisation meeting the needs
of a its present direct and indirect stakeholders (shareholders, employees, clients, pressure
groups, regulatory bodies, government, local community) without compromising its ability
to meet the needs of future direct and indirect stakeholders (Dyllick and Hockerts 2002).

2.1 Sustainability Key Performance Indicators (KPIs) and Reporting

The introduction of sustainability reporting has coincided with an increased demand from
stakeholders for non-financial performance measures due to the shortcomings of traditional
control and performance measurement practices (Figge et al. 2002, Elijido-Ten 2011). These
include failure to relate performance measurement to the strategic objectives of
organisations, and highlighting financial measures which are lagging rather than leading
indicators of performance.

KPIs usually provide information about the causes or drivers of business outcomes and are
usually linked to the firm’s competitive strategies. KPIs are typically non-financial in nature
and are said to assist managers in achieving better financial performance, by focusing on
lead indicators rather than lag indicators, where lead indicators guide the organisation on
how to achieve improvements to outcomes (Braam and Nijssen 2004). Leading indicators of
performance, for instance the number of new products introduced by a company (non-
financial), are contrasted against lagging indicators such as profit margin (financial), which
reflect the outcomes of past events (Davis and Albright 2004).

Sustainability KPI reporting involves reporting on specific indicators developed for corporate
information requirements (Perrini and Tencati 2006) and assist business entities to quantify
information which is usually viewed as non-measurable (Roca and Searcy 2012). In other

words, sustainability KPIs represent a ‘control panel’ for sustainability reporting. This helps
to continually monitor an organisation’s sustainability performance trends.

KPIs are an essential component of sustainability reporting as they focus on the financial
stability, eco-efficiency and socio-efficiency of the organisation (Cohen et al. 2012).
Sustainability KPIs can also be used as a fundamental tool to communicate information to
the different direct and indirect stakeholder groups, such as shareholders, employees,
suppliers, community and society in general.

Sustainability-related KPIs can be used to reflect organisations’ overall sustainability

performance, across economic, social and environmental aspects, and assist in creating
efficient and useful strategies in linking environmental and social activities with the
organisation’s strategic planning and management (Adams and Frost 2008). For instance,
indicators classified under the economic criterion are designed to supplement financial
information contained in conventional financial accounting reports. In particular, they
provide information on significant financial assistance received from government, financial
implications due to climate change, employee compensation, donations and other
community investments (GRI 2011). These sustainability indicators are used to estimate
variables that cannot be measured exactly and this approach is considered appropriate
where variables are essentially qualitative (Henri and Journeault 2008, Roca and Searcy
2012, Lamberton 2005). Hence, sustainability KPIs provide information to attain
sustainability objectives (Henri and Journeault 2008). Non-financial information allows
investors to better assess key areas of economic, social and environmental performance and
support a broader view of performance (Adams and Frost 2008, Bouten et al. 2011, Dawkins
and Fraas 2011, Roca and Searcy 2012). This allows top management to improve their
sustainability practices and boost the company image (Elijido-Ten 2011). Also, managers can
have more control over social and environmental performance measures, just as they have
over financial measures of performance. Finally, KPIs enhance the transparency of the
internal processes that enable the stakeholders to better understand the sustainability
approach and benefits resulting in added value. As such, sustainability KPIs have to be given
significant consideration when embracing sustainability reporting.

Research carried out on the extent of sustainability KPI reporting suggests that sustainability
KPI reporting has value relevance to investors, and this information acts as a signalling
device to potential investors (Schaltegger and Wagner 2006, Kolk 2004, Bassen and Kovács
2008, Aras and Crowther 2009). Adams and Frost (2008) identify that non-financial
measures are considered in isolation, and management tends to focus on meeting
predetermined values. Consequently, the broader implications for the company, society and
the environment are often not considered. Hence, the use of sustainability KPIs is one of the
approaches to measure, monitor and assess an organisation’s improvement in sustainability

While the number of studies that have explicitly focused on sustainability KPIs is limited,
some studies have explored the types of KPIs used in sustainability or social and
environmental reports. Most of this research has investigated environmental performance
indicators in the areas of energy efficiency, material efficiency, waste, water, emissions and
biodiversity (Mazzi et al. 2012, Azzone et al. 1996, Dragomir 2012, Graham et al. 2005,
Mikkilä and Toppinen 2008, Veleva et al. 2003). Some of these studies are confined to
certain industries, such as the pharmaceutical industry (Veleva et al. 2003), airline sector
(Graham et al. 2005) and oil and gas companies (Dragomir 2012). These studies suggest that
environmental performance indicators assist business entities to reduce their environmental
impacts, and support decision making and communicating to stakeholders. Yet, Murguía and
Böhling (2013) argue that although a large number of indicators are reported in quantitative
terms, the quality of the reported information varies due to estimation of data, interrupted
time series and varying descriptions of indicators. Roca and Searcy (2012) examined social
indicators reported in the areas of health and safety, learning and training, compensation
and benefits, employee recognition, diversity, human rights, community engagement and
suppliers. They suggest that the coverage of areas in the social aspect have increased and
consistency in reporting KPIs could be achieved through complying with reporting guidelines
such as the GRI. Also, there are studies which have investigated KPIs reported on economic,
social and environmental aspects (Gallego 2006, Mikkilä and Toppinen 2008) and specifically
explored how companies report on KPIs laid out in the GRI framework (Roca and Searcy
2012, Lozano 2011, Romolini et al. 2014). These studies establish the GRI guidelines as a

systematic framework for sustainability reporting that helps companies to move from either
a social or environmental based view of sustainability to a more integrated view.

The use of KPIs as part of sustainability reporting is embedded within most existing
reporting frameworks and several frameworks are available. As well as the GRI guidelines,
other frameworks include the International Organisation for Standardisation (ISO) 14001 for
Environmental Management Systems, and the Coalition for Environmentally Responsible
Economics (CERES) principles. As discussed above, however, companies most commonly use
the GRI guidelines for their disclosures (Baughn and McIntosh 2007) as they promote clarity,
accuracy, usefulness and comparability in reporting, therefore, this framework is reviewed

3. The Global Reporting Initiative (GRI)

Despite its numerous purported benefits, sustainability reporting is not mandatory in many
countries (Gray 2006a). Similarly, the GRI guidelines are not mandatory reporting
requirements, but are proposed to be used voluntarily by organisations (Willis 2003) and a
large number of companies choose to do so. According to Sherman and DiGuilio (2010),
over three quarters of the G250 companies, drawn from Fortune Magazine’s Global 500
companies, make use of the GRI guidelines to report on sustainability.

The GRI guidelines have referenced dozens of protocols that have been in existence before
including, the Kyoto Protocol, Montreal Protocol, International Organization for
Standardization’s (ISO) Energy efficiency standards and testing procedures and World
Resources Institute/World Business Council on Sustainable Development Greenhouse Gas
Protocol (WRI/WBCSD GHG Protocol) (2004 edition), among many others (Hedberg and von
Malmborg 2003).

In 1997, the GRI was initiated as a project funded and administered through the Coalition for
Environmentally Responsible Economics (CERES), endorsed by United Nation’s
Environmental Programme (UNEP) (Brown et al. 2009). The GRI’s mission was to raise
sustainability reporting to a level equivalent to financial reporting in terms of rigor,
comparability and general acceptance (Dilling 2010). The GRI primarily requires companies

to report on vision and strategy, profile, governance, management approach as well as
sustainability KPIs (Turner et al. 2006). It serves as one of the most prominent sets of
guidelines that provide a viable way of reporting on the Triple Bottom Line (TBL)
(Painter‐Morland 2006).

The G3 guidelines issued in October 2006 address the matter of key performance indicators,
which the other generations of GRI do not address them substantially (Sherman and DiGuilio
2010). These guidelines consist of seventy-nine performance indicators, of which fifty of
them are regarded as core indicators. The core indicators are considered material and
relevant to most stakeholders. Indicators are both quantitative and qualitative and help
stakeholders understand and evaluate sustainability performance across a number of
reporting periods. This information enables analysis with financial performance information
so as to determine and evaluate relationships between profitability and sustainability
performance (Willis 2003).

The G4 guidelines were issued in May 2013. The GRI has set a two-year timeline for
transition from G3 to G4 guidelines. Reports issued after 31 December 2015 must follow the
G4 guidelines, but during the transition period companies could continue to follow the G3
guidelines. One of the aims of the G4 guidelines is to provide guidance on how to link the
process of sustainability reporting to the preparation of an integrated report. The main
change to the guidelines is the discontinuation of application levels A, B or C that were
included in the previous versions of the GRI guidelines (GRI 2013).

For these reasons, the GRI reporting framework was a critical element in the development of
the Sustainability Reporting Scoring Model and the sustainability KPI framework used in this

4. Sustainability Reporting in Developing Countries

Although increasing, relatively few studies have explored sustainability reporting or CSR in
developing countries (Sahay 2004, Sumiani et al. 2007, Md. Habib-Uz-Zaman et al. 2011).
Fifka (2012) reviewed the existing literature on social and environmental reporting in
different countries, and notes that the number of studies on social and environmental

reporting has increased during the last decade, which is attributed to the public awareness
of CSR and sustainability. Further, Fifka (2012) states the existing literature is mostly confined
to a few developing countries like Malaysia, Bangladesh, India and China. Studies indicate
that, in most Asian countries, sustainability reporting is not widely practiced and is generally
confined to specific industries such as oil, chemicals and steel. Baughn and McIntosh (2007)
investigated sustainability reporting in different regions of the world and examined the
social and environmental aspects of sustainability performance of companies in fifteen Asian
countries. They concluded that Asian companies appeared to be doing less than European

Similar conclusions are made by other studies that have been undertaken in the South Asian
region. In India, only small numbers prepare fully fledged sustainability reports and these
are mainly produced by companies in the oil, minerals, cement, automotive and
pharmaceutical industries (Sen and Das 2013). However, Sen and Das (2013) assert that
sustainability reporting has gained momentum over the last few years. Likewise,
sustainability reporting in Malaysia, in both corporate annual reports and stand-alone
sustainability reports, is still at a developing stage, and most companies report disclosures
only in the annual report (Sawani et al. 2010). The reason that few companies produce
stand alone reports is likely to include the cost of resources needed to compile and
comprehend the additional information. Md. Habib-Uz-Zaman et al. (2011) investigated
sustainability reporting by banks listed in the Dhaka Stock Exchange (DSE). Their sample of
twelve banks represented almost sixty-five percent of the total assets base and deposits of
the entire banking sector in Bangladesh. They concluded that even though banks have
reported heavily on the social dimension of sustainability, aspects of human rights and
product responsibility are only addressed briefly.

In particular, these studies have aimed at evaluating the level of sustainability reporting
development, analysing the approach used in reporting and the presence of control
procedures. The results show a prevalence of qualitative approaches in reports produced
and less attention has been paid to the credibility of the information provided (Momin and
Parker 2013, Ratanajongkol et al. 2006, Sen and Das 2013, Senaratne and Liyanagedara
2012). Concerning the credibility of information, it has been found that sustainability
reporting can distort behaviour as much as it can enhance it (Perez-Batres et al. 2012). Like

other continents, Asia as a region has also been part of larger transcontinental studies or
studies that have exclusively focused on several countries from different Asian regions. This
research indicates that sustainability reporting differs substantially across these countries,
which is attributed to their national business systems. The degree of globalisation also
appears to have an impact on reporting since multinational companies are more likely to
adopt sustainability reporting than those operating solely in their home country.

Very few studies have been undertaken on sustainability reporting in Sri Lanka. One such
study was conducted by Senaratne and Liyanagedara (2012) who examined the level of
compliance with GRI guidelines in the sustainability disclosures of publicly listed companies,
selected from seven business sectors. They conclude that the level of compliance with GRI
guidelines is low and that disclosures vary significantly amongst the companies. Similarly, a
longitudinal study across five years (2005-2010) was carried out by Wijesinghe (2012) to
identify trends in CSR reporting in Sri Lanka. The researcher predicted an increasingly
positive trend towards CSR reporting, similar to the level of disclosures provided by
companies in the developed countries. The few studies that have been conducted examining
the predominance of reporting in Sri Lanka, mostly considering multinational companies,
conclude that sustainability disclosures are gaining momentum in Sri Lanka but are still
emerging (Beddewela and Herzig 2013, Hunter and Van Wassenhove 2011).

In terms of motivations for reporting, there is some evidence that firms in which senior
management had a positive outlook towards social and environmental practices disclosed
more on these aspects, as compared to other firms (Fernando and Pandey 2012).

No prior studies explicitly deal with sustainability KPI reporting in Sri Lanka although
Senaratne and Liyanagedara (2012) explored companies’ compliance with GRI guidelines
and the total number of KPIs reported by companies.

5. Determinants of Sustainability Reporting

A number of theoretical frameworks have been used to explain the motivations, trends and
nature of sustainability reporting in both developed and developing countries. Most
consider mainly external pressures and examine reporting as a response stakeholder or

societal pressures, noting that firms try to legitimise their actions in the eyes of society as a
whole, or in an attempt to manage stakeholder perceptions (Magness 2006, Campbell 2003,
Freeman 1984 , Tilling and Tilt 2010, Tilt 2007). Similarly, firms engage in impression
management through reporting where they attempt to portray themselves in a favourable
light to attract financial stakeholders and deflect criticism (Jones 2011). One criticism of
studies done in developing countries, is that the applicability of these theories is not always
valid in the specific context. That is, both legitimacy and stakeholder theories were
developed using evidence from companies in developed countries. Many studies in
developing countries simply apply these theories without considering the nuances of the
particular context under consideration (Belal and Momin 2009). In developing countries, this
can include: different political and regulatory constraints; different cultures, values and
attitudes; and different political circumstances (Tilt 2016, forthcoming).

Most studies using legitimacy arguments for, or stakeholder pressure on, reporting
operationalise the nature of the influence through consideration of a series of determinants
which proxy for that influence. These are most commonly size and industry sector, but also
include other variables which may represent vulnerability to such influence. As this study
undertakes an exploratory investigation of determinants in Sri Lanka, a series of hypotheses
are developed which draw on these theoretical understandings.

5.1 Hypothesis Development

Previous studies in sustainability reporting have revealed that certain organisational
characteristics have an effect on the extent and nature of sustainability reporting. Various
studies have concluded that factors such as company size, industry, age and financial returns
are major determinants (Kolk 2003, Jenkins and Yakovleva 2006, Sumiani et al. 2007, Dilling
2010). Notably, a review of previous research by Hahn and Kühnen (2013) on determinants
of sustainability reporting reveals that among a multitude of factors, a few particular
variables (size, visibility and industry sector) have produced the most consistent associations
in reaching conclusions about what drives sustainability reporting. These three factors proxy
for potential legitimacy threats, and increased stakeholder pressure, as discussed below.

Size is a significant factor influencing the extent of sustainability reporting because larger
companies cause greater impacts, are more visible to stakeholders and, hence, face greater
stakeholder scrutiny, such as more media attention, and more potential regulation. Research
by Sumiani et al. (2007) explored sustainability reporting in large companies in Malaysia and
they concludes that company size is a factor that influences sustainability reporting due to
rising stakeholder demands for information on larger companies and through the greater
external pressures they face. This is similar to many earlier studies that note increased
environmental disclosure by larger firms (Tilt 2001, Hackston and Milne 1996, Guthrie and
Parker 1990, Cowen et al. 1987). Many of these studies have considered the issue of size
and how it should be measured, and there has been ongoing discussion of the different
elements of the construct, which may be proxies for different types of influence. For
example, financial measures of size, such as total assets or market capitalisation, proxy for
the political visibility of a company and therefore potential regulatory pressure (Deegan
2002), whereas employee numbers or the extent of operations may proxy for stakeholder

The industry sector to which a firm belongs has also been shown to influence sustainability
reporting in developed countries, with the energy, pharmaceutical, utility and mining
industry sectors all being particularly prominent due to high environmental and social
impacts prevalent in these industries (Dilling 2010, Kolk 2003, Jenkins and Yakovleva 2006).
Similar to larger companies, these industries are also more likely to be regulated and often
receive more media attention. Hence, the companies in these industries tend to engage in
sustainability reporting to respond to sector specific stakeholder and legitimacy pressures.
Most of the companies belonging to these industries are also some of the largest.

Previous studies have revealed that company age may affect the extent and nature of
sustainability reporting, but the studies have produced inconclusive results overall (Delaney
and Huselid 1996, Liu and Anbumozhi 2009, Rettab et al. 2009). While some studies
conclude that older or stabilised companies have a tendency to provide more sustainability
information (Delaney and Huselid 1996), other studies indicate a negative association
between sustainability reporting and company age signifying that more established
companies see less need to satisfy changing societal demands (Liu and Anbumozhi 2009,
Rettab et al. 2009). This suggests that older companies face a lower level of legitimacy

threat as they have already established their legitimacy, or have learned to manage their
legitimacy to stakeholders. For this reason, it would be expected that older companies
would produce more sustainability reporting.

Therefore, the first series of hypotheses tested in this study, address whether these
company characteristics affect the extent of sustainability reporting in Sri Lanka.

H1A There is a significant relationship between the extent of sustainability

reporting and company size.
H1B There is a significant relationship between the extent of sustainability
reporting and industry group.
H1C There is a significant relationship between the extent of sustainability
reporting and company age.

Due to the costs involved in undertaking sustainability activities, financial performance is an

important factor in determining the extent and nature of sustainability reporting
(Prado‐Lorenzo et al. 2009). Nevertheless, Gray (2006a) is sceptical about whether there is
any relationship between social and environmental disclosures and financial performance.
This view is shared by Murray et al. (2006), Magness (2006), and Horváthová (2010) who
find no relationship between sustainability reporting and financial performance. On the
other hand, Dilling (2010) found that there is an association between a higher profit margin
and sustainability reporting. The argument for there being a relationship stems from
stakeholder theory, which suggests that primary stakeholders (shareholders) take
precedence over secondary stakeholders, and therefore secondary stakeholder needs are
only considered when there are surplus resources available. As for size, there are different
measures of performance, therefore different aspects of the construct may result in
different levels of influence on reporting. Total revenue or turnover are broad measures of
performance thus good results allow firms to satisfy shareholders and leave room to
consider other stakeholders. Measures based on returns or cash flows may support the
argument for resource availability being the most important factor.

This study also explores the relationship between sustainability reporting and the financial
performance of publicly listed companies. This gives rise to the second series of hypotheses
tested in this study:

H2A There is a significant relationship between the level of sustainability reporting
and annual revenue.
H2B There is a significant relationship between the level of sustainability reporting
and ROE.

As discussed in the introduction, the key questions investigated in this study are:

1) What is the extent and nature of sustainability reporting by Sri Lankan publicly listed
2) What is the extent and nature of sustainability KPI reporting inherent in the
sustainability reporting of these companies?
3) What are the relationships between firm characteristics and the extent of
sustainability reporting by these companies?

The research approach used to address the hypotheses and research questions is discussed

6. Research Method

Content analysis is employed in this study to examine the annual reports, separate
sustainability reports and websites of 60 of the top 100 Sri Lankan publicly listed companies,
for the 2011 to 2012 financial reporting period.

The target population for this study consists of 288 firms listed on the Colombo Stock
Exchange (CSE) as at 5 August 2013. The companies are categorised under twenty industry
categories. Even though all types of enterprises may engage in sustainability and KPI
reporting, only individual public companies are considered in this study. Previous studies
(Kolk 2003, Reddy and Gordon 2010, Dilling 2010, Elijido-Ten 2011) state that by virtue of
their market position, large publicly listed companies are more likely to be under public
scrutiny, and hence disclose on sustainability and related KPIs. These studies identify size as
a significant profile characteristic that is associated with the extent of sustainability
reporting and KPI reporting.

A sample of 60 companies, the top 30 companies (those with the highest market
capitalisation) and bottom 30 companies (those with the lowest market capitalisation) were
selected as the sample. Although the sample size is limited, it provides enough data for
meaningful analysis when the investigation aims at providing preliminary evidence to inform

future research. In addition, the sample size is similar to other studies of reporting that
investigate relationships between the extent of sustainability reporting and various factors
(see, for example, Yang and Yaacob 2012, Castelo Branco et al. 2014, Patten and Zhao 2014,
Sharif and Rashid 2014). Patten and Zhao (2014) examined stand-alone CSR reports in the
US retail industry. Their sample consisted of 76 publicly traded companies and regression
analysis was carried out to identify the impact of CSR reporting on the companies’
reputation. Similarly, a study which explored CSR reporting by the banking industry in
Pakistan, analysed the annual reports of 22 commercial banks using multiple regression to
determine relationships between CSR reporting and the other dependent variables (Sharif
and Rashid 2014).

The companies in the sample in this study belong to seven industry categories: ‘diversified
holdings’, ‘beverage, food and tobacco’; ‘banks, finance and insurance’; ‘manufacturing and
telecommunications’; ‘plantations and oil palms’; ‘chemicals and pharmaceuticals’ and
‘travel’. Due to the small sample size, some of the original industry categories were merged
to create four combined categories (diversified & food; banking & finance; manufacturing &
telecommunications; chemicals & oils) large enough to enable relevant statistical analysis.
Details can be seen in Tables 1a and 1b.

Table 1a: Description of Data (n = 60)

Variable Total Sample Top 30 Bottom 30
Market cap at Mean 27,666,299,136 55,106,952,766 225,645,506
5 Aug 2013 Minimum 43,762,500 16,850,002,944 43,762,500
Maximum 290,798,166,52 290,798,166,528 423,766,720
Return on equity Mean 16.55 24.91 81.98
Minimum 0.1 0.89 0.1
Maximum 99.9 99.9 64.9
Total employees Mean 3110 5665.67 555.2
Minimum 4 87 4
Maximum 25,771 25,771 4000
Revenue Mean 42,207 1,600 581.61
(LKR Millions) Minimum 0.2 83,833.87 0.2
Maximum 891,499 891,499 3,419
Company age Mean 38 41.63 34.43
in years Minimum 2 2 4
Maximum 99 99 63

Table 1b: Description of Data - Industry

Industry No. % Total % Top 30 % Bottom 30

Diversified holdings 8 13 23 3
Beverage, food, tobacco 6 10 17 3
Banks, finance, insurance 11 18 33 3
Travel 11 18 10 27
Manufacturing, 9 15 7 24
Telecommunication 3 5 7 3
Plantations, oil palms 9 15 3 27
Chemicals and pharmaceuticals 3 5 0 10
Total 60 100 100 100

Secondary data were gathered from the sample companies’ annual reports, sustainability
reports and websites. Annual reports were used to enhance the quality of data used in this
study, as public companies are required to comply with certain accounting standards and
other regulations in compiling their annual reports. Nevertheless, annual reports and web
sites are mediums that companies use to communicate with the external parties, and may
therefore be biased towards presenting a favourable picture to the shareholders and other
users. Data were analysed through content analysis to determine the level and nature of
sustainability and sustainability-related KPI reporting, and regression analysis was carried
out to determine the relationships between the extent of sustainability reporting,
organisational profile characteristics and financial performance. The extent and nature of
sustainability reporting was measured using a Sustainability Reporting Scoring Model
providing a detailed framework for assessing the quality as well as the quantity of
sustainability reporting.

6.1 The Sustainability Reporting Scoring Model

The model developed differentiates between a separate sustainability report and

sustainability disclosures. A separate report is a dedicated report presented in an organised
manner and includes information relevant to all three dimensions of sustainability. In the
absence of a dedicated sustainability report, key phrases and themes such as ‘corporate
social responsibility’, ‘planet, people, profit’, ‘corporate sustainability’, ‘corporate citizenship’,
‘business ethics’ and ‘sustainable entrepreneurship’ were used to identify sustainability

disclosures within the annual report. Sustainability disclosures in the websites were also
analysed in the same manner.

Clarkson et al. (2008) used a content analysis index constructed based on the GRI
sustainability reporting guidelines to measure the environmental disclosures in
environmental and social responsibility reports. While this is one of the most commonly
used indexes, it could not be adopted in this study as their index focuses only on the
environmental disclosures. In addition, this study aimed to capture the use of multiple
guidelines that may be used in a country relatively new to sustainability reporting.
Therefore, an alternative disclosure index was constructed, which is similarly based on the
GRI guidelines but also contains some broader criteria.

To measure the extent and nature of sustainability reporting, a Sustainability Reporting

Scoring Model was developed and used to calculate a score for each sample company based
on their sustainability reporting practices. The model, outlined in Table 2, is based on ten
numerical scales, each with bipolar adjectives at each end and intervals measured by
numbers (Cavana et al. 2001: p. 172). Each scale relates to a sustainability reporting
criterion identified or derived through the literature, including the disclosure of
sustainability goals and strategies and discussion of sustainability initiatives in the CEO
statement of the annual report. For each criterion, values between 0 (Lowest) and 4
(Highest) are assigned, with an ultimate total ‘Score’ calculated for each company out of a
maximum of forty points. The range of scores available varies for each item on the scale so,
in Table 2, the term NA is indicated when a particular value is not valid or relevant for a given
criterion. A degree of judgement was necessarily applied in assigning particular values to the

The ‘Experience’ criterion distinguishes companies publishing sustainability disclosures for

the first time in the current year (2011-2012), from those that have a history of publishing
sustainability disclosures. For this purpose, annual reports and web sites were also examined
for disclosures relating to the period 2008 through to 2011. Presence of sustainability
disclosures in the annual report for the current year (2011-2012) as well as for the previous
four years awards a company four points.

The ‘Format’ criterion is used in recognition of the fact that a broad range of structures are
used by companies to report on economic, social and environmental activities (Reddy and
Gordon 2010). As mentioned, the model distinguishes between a sustainability report and
sustainability disclosures. In this model, sustainability disclosures were deemed to be two or
fewer pages of sustainability-related references in the annual report, usually outlining the
sustainability projects or CSR projects carried out by the company involving one or more
stakeholder groups. Sustainability reports are defined as five or more pages of structured,
collated and cohesive sustainability-related information, including items such as
sustainability vision, mission, goals attained, future goals, awards and graphical
representations. Therefore, the two sub-categories, ‘Report’ and ‘Disclosures’ were
developed and assigned values of four and two respectively reflecting the fact that the
preparation of a sustainability report required additional expertise, time and resources.

According to (Waldman et al. 2006) and (Manner 2010), CEO support plays a significant role
in how environmental and social activities are carried out and how they are interpreted by
external and internal stakeholders. Therefore, the model differentiates between companies
where the CEO message (in the main body of the annual report or within sustainability
measures) is included from those where it is not. If sustainability initiatives are mentioned in
the CEO statement in the body of the annual report itself, or separately within the
sustainability disclosures, the company is assigned four points.

Stakeholders are individuals or groups of people who have direct or indirect interest in
companies’ activities and companies’ long term sustainable existence is dependent upon
addressing these needs (Cooper and Owen 2007). For the purposes of this research, five
primary stakeholder groups are considered. They are the shareholders, local community,
customers, employees and suppliers. If four or more stakeholder groups have been
considered in the reports or disclosures, the maximum score (4) is awarded.

Sustainability reporting comprises economic, environmental and social aspects (Dyllick and
Hockerts 2002). With regards to the ‘Sustainability’ dimension of the model, the greater the
number of disclosures provided, the higher the score.

The ‘Sustainability goals’ criterion aims to identify the long term or short term sustainability
goals or objectives that the companies have established. It is important to set clear goals as

it is a key factor to achieving long term success (Jensen 2010). Presence of any sustainability
goals for the year under consideration or future years earns four points, with zero otherwise.
Similarly, the ‘Sustainability goal achievement strategy’s criterion relates to whether
companies have identified strategies or methods to achieve sustainability goals.

The GRI guidelines are the most commonly used guidelines for sustainability reporting
among a variety of frameworks and guidelines (Hedberg and von Malmborg 2003). The ‘GRI
guidance’ criterion relates to whether companies have made use of the GRI guidelines or
other principles in making sustainability disclosures. Companies following the GRI guidelines
gain four points, while companies complying with other guidelines gain two points.

Following from the above, ‘GRI application level’ differentiates among the application levels
of GRI guidelines. The GRI, G3 guidelines consist of three levels of application - A, B and C,
ranging from the highest to the lowest level of disclosure. GRI application of level A gains
four points, while application level of B gains three and C gains two points.

Finally, disclosing credible information is a key element in sustainability reporting (Park and
Brorson 2005). External assurance adds credibility, integrity and value to these disclosures.
This criterion differentiates between companies who have sought external assurance from
those who have not. If the sustainability report has been verified by a third party, the
maximum score is given, and zero otherwise.

Table 2: Sustainability reporting scoring model
Criteria Score

0 (Lowest) 1 2 3 4 (Highest)
Experience Do not include any disclosures NA Report or disclosures in the Report or Report or disclosures in prior years and
or report in any year current year disclosures in prior current year
three or more years
Format Do not have any format NA Sustainability disclosures of one NA Sustainability report must contain more
or less pages containing details of than five continuous pages and title
sustainability/CSR activities ”sustainability report” is not adequate
carried out by the company
CEO statement Do not include sustainability NA NA NA Declaration of sustainability initiatives in
initiatives in the CEO the CEO statement in the annual report
statement itself or within the sustainability
Stakeholder focus Do not include any Include one Include two stakeholder groups Include three Include four or more stakeholder groups
stakeholder group stakeholder group stakeholder groups
Sustainability Do not include any NA Mention only one dimension of Mention two Mention all dimensions of sustainability
aspect dimensions of sustainability sustainability dimensions of
Sustainability Do not include sustainability NA NA NA Presence of sustainability goals for the
goals goals for the current year or current year or future years
future years
Sustainability goal Do not include of any method NA NA NA Inclusion of any method or any means of
achievement or any means of achieving the achieving the listed goals
strategy listed goals
GRI guidance Do not follow GRI guidelines NA NA Follow other Follow GRI guidelines
or other guidelines guidelines
GRI application Do not have an application NA GRI application level of C GRI application level GRI application level of A
level level of B
External assurance Do not seek external NA NA NA External verification of the sustainability
verification report by a third party

6.2 Measurement of Sustainability KPI Reporting

In addition to the overall scoring model, an analysis was conducted on the reports to
specifically analyse the extent of sustainability KPI reporting.

The GRI guidelines outline a standardized format for the reporting of economic, social and
environmental performance indicators suitable for all entities (Brown et al. 2009). The G3
guidelines issued in 2006 are used for the purposes of this study as they were the relevant
guidelines at the time that this study was conducted (G4 guidelines were released in 2013). The
indicators are grouped within the economic, environmental and social dimensions and further
categorised into sub-groups. Table 3 outlines the sub-groups under which the indicators are
categorised. These categories include core indicators and additional indicators. The extent and
nature of performance indicator reporting by sample companies in this study are evaluated
against this framework. Frequency counts are calculated for each indicator reported.

Table 3: Categories and aspects of Key Performance Indicators from the GRI
Dimension Category Aspect No. of indicators
Economic Economic performance indicators Economic performance 9
(EC) Market presence
Indirect economic impacts
Environmental Environmental performance Materials 28
indicators (EN) Energy
Emissions, effluents and waste
Products and services
Social Labour practices and decent work Employment 15
performance indicators (LA) Labour/management relations
Occupational health and safety
Training and education
Diversity and equal opportunity
Equal remuneration for women
and men
Human rights performance Investment and procurement 11
indicators (HR) practices
Freedom of association and
collective bargaining
Child labour
Forced and compulsory labour
Security practices
Indigenous rights
Society performance indicators Local communities 10
(SO) Corruption
Public policy
Anti-competitive behaviour
Product responsibility Customer health and safety 9
performance indicators (PR) Product and service labelling
Marketing and
Customer privacy

6.3 Measurement of Explanatory Variables

As noted above, variables associated with disclosure level and quality include size, industry, age
and financial performance. In this study company size is determined using total market
capitalisation (number of voting shares of the company multiplied by the share price as at 5
August 2013) and total number of full-time equivalent employees for the year 2011-2012.

Studies by Jenkins and Yakovleva (2006), Henri and Journeault (2008) and Dilling (2010) also
used these two measures among other measures for company size.

Financial performance is measured by revenue and return on equity (ROE). Revenue reflects
total annual revenue in terms of LKR Million for 2011-2012. ROE is the net income returned as
a percentage of shareholders’ equity. These two measures were chosen among other financial
indicators, as they were available for all the companies. Studies by Hubbard (2009) and Dilling
(2010) examined the effect of sustainability reporting on financial performance by using these
two measures as well as other indicators of financial performance such as leverage, return on
assets and growth in sales.

Company age refers to the length of time since the entity became a publicly listed company.
Industry is measured as a dummy variable to reflect the industry group to which each sample
company belongs. Some industries were necessarily combined due to small numbers. Finally,
report type is measured as a binary dummy variable to represent reporting in the annual report
versus reporting in a standalone report or via an extensive web-based report.

6.4 Regression Analysis

Measures of association help to establish the degree of correlation that exists between
different variables (Cohen 2003). They help to determine whether two variables are related
and, if so, the direction and degree of the relationship. The degree of association between the
dependent variable (sustainability score) and all of the independent variables, except industry
sector, was explored using Pearson’s correlation coefficient (Cohen, 2003). See Table 4.

Table 4. Correlation Matrix

Score Market Revenue Employees ROE Age

Score 1
Market 0.4655 1
Revenue 0.1866 0.119 1
Employees 0.4624 0.3441 0.0442 1
ROE 0.1322 0.458 0.085 -0.0676 1
Age 0.1923 0.3147 0.0425 0.4668 -0.0174 1

Multiple regression is performed to describe the dependence of the sustainability score on the
other variables. The following regression model was run:

Score = market + employees +  age + ROE + revenue + industry +

Score is the sustainability reporting score for each company
Revenue is the total revenue earned in the current year
Employees is the number of employees working in the firm in the current year
Age is the age of the company in years
ROE is the return on equity earned by the company in the current year
Industry is a dummy variable representing the industry sector
Reporttype is a dummy variable representing the type of report (annual report or stand-
alone report)

Ordinary least squares (OLS) regression was considered appropriate as the assumptions of this
analysis were met. The independent variables are measured without error. The histogram of
standardised residuals for the model suggests the errors are approximately normally
distributed. Homogeneity of variance was tested using the Breusch-Pagan / Cook-Weisberg test
and a p-value of 0.74 indicates no heteroscedasticity. Multicollinearity was tested using the
Variance Inflation Factor and was not found to be evident (VIF=1.81).

7. Research Results

7.1 Extent and Nature of Sustainability Reporting

The first phase of the analysis in this study comprised a descriptive analysis of the extent to
which firms in the sample are reporting, the nature of that reporting and the sustainability
scores achieved by those companies.

Of the 60 companies examined in the study, 33 companies (55%), excluding multinational

subsidiaries, reported on sustainability either as a separate report, as disclosures or as a
separate sustainability report within the annual report. The majority of data were found in the
annual report, which appears to be the main medium for sustainability reporting by Sri Lankan

companies. In almost all cases, if there were any website disclosures, they mirrored what was
disclosed in the annual reports or in the standalone reports. Of the 33 companies, only five
companies were first time reporters and the rest had previously reported on sustainability, in at
least one year.

Of the top 30 companies (those with the highest market capitalisation), twenty-six (87%) report
on sustainability either as reports or in disclosures. Two of the top 30 companies are
subsidiaries of multinationals (Nestle Global & Carlsberg group) and the database used did not
provide data for these. However, supplementary research revealed that, in both cases,
sustainability reporting was carried out for the whole group. Two other companies did not
report on sustainability at all in their annual reports or websites. The average score for the top
30 companies calculated using the Sustainability Reporting Scoring Model was approximately
28 out of 40.

Of the bottom 30 companies (those with the lowest market capitalisation), seven (23%)
reported on sustainability either as reports or in disclosures. The average Sustainability
Reporting Scoring Model score for these companies was approximately 4 out of 40.

Therefore, there was a significant difference in the extent and quality of sustainability reporting
between the top thirty and the bottom thirty publicly listed companies.

The sustainability reports were constructed in a manner that could easily be comprehended by
users, with the use of charts, graphs, pictures and photos, consistent with what been noted in
prior literature (Jones 2011). The highest number of pages of a sustainability report was 80,
and the lowest was five. Most reports included information on all three dimensions of
sustainability and addressed all of the five stakeholder groups examined in this study. Two
companies, Hatton National Bank PLC and Dialog Axiata PLC scored 40 points, five companies
scored 39, and National Development Bank scored 38, making these the most extensive
reporters of sustainability. The variation in the scores for these eight companies can largely be
attributed to the GRI application level A, B or C. However, this classification is primarily
dependent upon the number of sustainability KPIs they have reported on. These companies
also include details of sustainability committees, progress made towards sustainability goals set
in the previous financial year, and specific information on their sustainability strategies and

Of the top 30 companies, nine provided only disclosures within the annual report. Of the
bottom 30 companies, all of the seven companies which had addressed sustainability at all did
so through disclosures in the annual report, and none through separate reports. If sustainability
disclosures found throughout the annual report were collated together, the highest equivalent
number of pages of sustainability disclosures would be approximately two and the lowest, one.
All these disclosures addressed one or two dimensions of sustainability and between two and
three stakeholder groups, particularly shareholders, employees and the local community.
Disclosures also briefly referred to companies’ commitments and strategy on sustainability.

7.2 Extent and Nature of Sustainability KPI reporting

The second phase of the analysis comprised consideration of the specific KPI reporting. Of the
33 companies with sustainability disclosures or reports, 13 (39%) followed the GRI guidelines
and specified an application level. These companies report on KPIs relating to all the three
dimensions of sustainability. The indicators considered are only those fully reported by the
companies. A fully reported indicator reports on all the facets relating to that indicator. This
helps to be consistent in compiling and analysing data as some of the companies have only
partially reported indicators, but not declared which facets they have omitted. A partially
reported indicator is one in which some facets are not addressed. For instance, Dialog Axiata
PLC partially reported on LA13 (Composition of governance bodies and breakdown of
employees per category according to gender, age group, minority group membership, and other
indicators of diversity) but omitted minority group membership.

Table 5 presents the list of indicators that were most reported by the companies. The results
show that more companies report on indicators from the economic and social dimension than
on the environmental dimension. An average of 5.5 companies out of 13 (42%) report on
indicators for the economic dimension and only 2.6 (20%) companies report on the
environmental dimension. The social dimension consists of numerous indicators, thus averages
are considered separately for the individual categories. Averages across the four categories of
social dimension are: 5.7 (44%) for labour practices and decent work performance indicators,
4.0 (31%) for human rights performance indicators, 4.8 (47%) for product responsibility
performance indicators and 5.2 (40%) for society performance indicators. These results may
reflect the need to report under existing rules and regulations governing economic activities,

and labour and product responsibility practices. For instance, Sri Lanka has signed the
International Labour Organisation (ILO) convention on child labour, employee rights and
employment conditions. Also, the National Labour Department, National Child Protection
Authority and other authorities have policies and laws to ensure safe working conditions and
establish good working relationships between employers and employees. Reporting of
economic activities is also governed by Acts relevant to particular industries (e.g. Banking Act
1988), accounting standards, CSE regulations, and othe r laws.

The most reported indicators from the economic dimension are direct economic value
generated (EC1), coverage of the organisation’s benefit plan obligations (EC3), and
development and impact of infrastructure investments and services provided primarily for
public benefit. Almost half of the companies report on energy saved due to conservation and
efficiency (EN5), initiatives to provide energy-efficient or renewable energy based products and
services (EN6) and land owned and leased adjacent to protected areas (EN11) for the
environmental dimension. More than half of the companies report on most of the performance
indicators of the four categories of the social dimension.

The 13 companies reporting on KPIs belong to the top 30 and they represent all the industry
sectors except the ‘plantations, oil palms’ and ‘chemicals and pharmaceuticals’ sectors. Just
over half (55%) of the companies are from the banks, finance, insurance sector, while over one
third (38%) of companies are from the diversified holdings sector. An equal number (17%) of
companies reporting KPIs are in the ‘beverage, food, tobacco’ and ‘manufacturing and
telecommunication’ industries. Ten percent of the companies are from the travel industry. It
may be argued that the prevalence of social and economic KPIs reported may reflect the
industry sectors represented by the 13 companies. The social dimension indicators relating to
employment, human rights, product and service responsibility and social responsibility, and the
economic indicators, are probably more relevant to these companies than those related to the

Table 5: Most reported Key Performance Indicators (KPIs) by GRI Companies

Key performance indicator Number of

Economic performance indicators
EC1: Direct economic value generated and distributed, including revenues, operating 12
costs, employee compensation, donations and other community investments,
retained earnings, and payments to capital providers and governments (CORE)
EC8: Development and impact of infrastructure investments and services provided 8
primarily for public benefit through commercial in-kind, or pro bono engagement
Environmental performance indicators
EN5: Energy saved due to conservation and efficiency improvements (ADD) 7
Labour practices and decent work performance indicators
LA2: Total number of and rate of new employee hires and employee turnover by age 8
group, gender and region (CORE)
LA3: Benefits provided to full time employees that are not provided to temporary or 10
part-time employees, by significant locations of operation (ADD)
LA8: Education, training, counselling, prevention and risk control programs in place to 9
assist workforce members, their families, or community members regarding serious
diseases (CORE)
LA10: Average hours of training per year per employee by gender, and by employee 8
LA12: % of employees receiving regular performance and career development 8
reviews by gender (ADD)
LA14: Ratio of basic salary and remuneration of women to men by employee 7
category, by significant locations of operation(CORE)
Child labour
HR6: Operations and significant suppliers identified as having significant risk for 7
incidents of child labour, and measures taken to contribute to effective abolition of
child labour (CORE)
Product responsibility performance indicators
PR6: Programs for adherence to laws, standards and voluntary codes concerning 9
marketing communications, including advertising, promotion and sponsorship (CORE)
Society performance indicators
S01: % of operations implemented with local community engagement, impact 8
assessments, and development programs (CORE)
SO2: % and total number of business units analysed for risks related to corruption 8
SO4: Actions taken in response to incidents of corruption (CORE) 7

7.3 Relationships between Company Characteristics, Company Performance and Sustainability


In the final part of the analysis in this study, firm characteristics were examined for their
relationship to the Sustainability Reporting Score. The results of the OLS Regression analysis
are presented in Table 61.

The model was re-run after excluding insignificant variables, but no difference resulted. Other specifications
were also run and no differences were observed.

Table 6: Multiple Regression Results

Source SS df MS Number of observations: 60

F(10, 40) 7.51
Model 816.300 10 816.6 Prob > F 0.00
Residual 5326.682 49 108.71 R-squared 0.6052
Adj R-squared 0.5247
Total 13492.98 59 228.7 Root MSE 10.426

score Coef. Std. Err. t P [95% Conf. Interval]

market 0.1046 0.0351 2.98 0.004** 0.0341 0.1751
revenue 0.0090 0.0103 0.87 0.386 -0.0117 0.0297
employees 0.9626 0.3528 2.73 0.009* 0.2536 1.6716
roe -0.0960 0.0839 -1.15 0.258 -0.2645 0.0725
age 0.0317 0.0817 -0.39 0.699 -0.1324 0.1959

Banking & finance 18.1155 4.8117 3.76 0.000** 8.4460 27.7850
Travel 0.8657 5.1086 -0.17 0.866 -9.4004 11.1319
Manufact, telecom 1.7837 5.0317 0.35 0.724 -8.3278 11.8953
Chem, Plant, oil -4.2218 5.2689 -0.80 0.427 -14.8101 6.3664
Report Type 11.0427 5.3147 2.08 0.043* 0.3625 21.7230
_cons 5.0179 5.6972 0.88 0.3833 -6.4313 16.467
* significant at 5% level; ** significant at 1% level.

8. Discussion of Findings

As shown in Table 6, the results indicate that there appears to be a size-effect as both market
capitalisation and number of employees are highly significant, supporting H1A. Henri and
Journeault (2008) also found a correlation between company size and the extent of
environmental reporting. They suggest that this may be due to public scrutiny as well as
availability of resources for the larger established companies, suggesting a legitimacy motive.
Jenkins and Yakovleva (2006) similarly concluded that the top ten mining companies around
the world prepare more sophisticated, stand-alone sustainability reports compared to other
smaller companies in the mining industry.

The banking and finance industry is the only sector that shows significantly higher disclosure
than the base industry (diversified), and this remains true for other specifications of the base

industry2, therefore H1B is only partially supported. This is consistent with previous research
by Wijesinghe (2012) who reported similar results in which the banks, finance, and insurance
sector in Sri Lanka recorded the highest level of disclosures across a five year period. Md.
Habib-Uz-Zaman et al. (2011) also examined sustainability reporting by major commercial
banks in Bangladesh but concluded that reporting is still at formative stages, so this evidence
suggests continued development of reporting in this industry. It has been reported that Sri
Lankan business are motivated by the need for welfare improvement, such as, orphanages,
elderly homes, hospitals and health services (Global Insights 2013), and banks are also
important for this aspect through their lending for development projects, therefore, they may
feel some stakeholder pressure from the government when there is a policy focus in this area.

Studies by Kolk (2003), Jenkins and Yakovleva (2006) and Dilling (2010) identify energy,
pharmaceutical, utility and mining industry sectors as prominent sustainability reporting
sectors in developed countries. This may be due to the higher natural resource consumption of
these industries, which attracts more social/political pressure to improve on sustainability
reporting and thus firms are likely to use reporting as a legitimacy device to reduce or allay any
potential threat to legitimacy. The insignificant finding in this study may be due to the
relatively smaller scale of these companies in Sri Lanka, or may indicate that legitimacy motives
are less important than other factors in the developing country context. Again, the
government’s focus on infrastructure development to improve social welfare may mean that
mining companies feel less pressure at this point.

The results show that company age is not associated with sustainability reporting, therefore
H1C is not supported. This is most likely due to some companies in the sample, such as Dialog
Axiata PLC and Asian Hotels & Properties PLC, producing sophisticated sustainability reports
despite operating for less than twenty years. There is no evidence that older companies
produce more reporting so no suggestion that they have a different approach to managing
legitimacy threats.

As discussed earlier, there is mixed and inconclusive evidence from prior research as to
whether there is any relationship between sustainability reporting and financial performance

Different base-cases were also tried as well as a more disaggregated set of industry classifications. In addition, a
binary dummy variable (financial versus non-financial) was tried, but no differences in significance were
observed; under all specifications the finance industry is the only industry that is significant.

of companies. In this study, neither total revenue nor ROE are related to the level of
sustainability reporting by the companies, so both H2A and H2B are not supported. This could
be due to the fact that the data were observed for a short period of one year and there may be
lags involved in the relationship. Further, longitudinal, analysis is important for future research.
Hubbard (2009) and Dilling (2010) contend that some sustainability or CSR projects add value
to companies and that this is reflected in their financial performance. Thus, the relationship
may run in the counter-direction, with better sustainability reporters achieving improved
financial performance. However, Wagner (2005), Horváthová (2010) and Miret-Pastor et al.
(2014) find inverse relationships between sustainability reporting and financial performance of
companies, so this is another important area for future investigation.

A significant finding of this study is that over half of the sample companies, predominantly
those with higher market capitalisation, report on sustainability either as a separate report, as
disclosures throughout the annual report or as a separate sustainability report within the
annual report, supported by the significant result for report type in the regression. This is not
surprising as stand-alone reports are, by their nature, likely to contain more information
explicitly on sustainability issues, than a section in the annual report. Notwithstanding this, as
stand-alone reports represented less than 10% of the sample, the results indicate that a
reasonable level of reporting in the annual report is evident, particularly for larger companies.

Therefore, the study confirms that sustainability reporting and KPI reporting are gaining
momentum in larger, publicly listed organisations in Sri Lanka. This may be due to the increased
investment by foreign companies in Sri Lanka, after the end of war and conflict in 2009. Also,
awards such as the Association of Chartered Certified Accountants (ACCA) sustainability awards
and National Energy Efficiency Awards also may have encouraged sustainability reporting.
Wijesinghe (2012) predicted an increasing growth of CSR disclosures and this trend is
supported by the results. Similar results are reported for other developing countries such as
Malaysia (Sumiani et al. 2007) and Bangladesh (Md. Habib-Uz-Zaman et al. 2011).

The study also provides evidence on the sustainability KPIs reported by the companies, in
relation to the GRI framework. Previous research by Senaratne and Liyanagedara (2012)
concluded that GRI compliance of listed companies is low. This research indicates that this is
changing and that sustainability reports are becoming more sophisticated, covering a wide
range of issues and include KPIs. The results reveal that environmental indicators are less

reported relative to economic and social indicators, in contrast to other studies (de Villiers et al.
2014). This may be due to the fact that most of the companies came from industries such as
banks, insurance and finance, for which social and economic factors are considered more
relevant than environmental. It also suggests that primary stakeholders the intended audience
for the reporting. Given that Sri Lanka is now emerging from the era immediately after the civil
war, it is also likely that the economic and social issues arising during the transition dominate
the country’s agenda more than environmental issues. This may change in coming years and
tracking this is an important area for continued research. In studies where environmental
indicators have been found to predominate, environmentally sensitive industries, such as
mining, also major economic influence in the countries studied (such as South Africa (de Villiers
et al. 2014).

Another important finding is that 23% of the companies from the bottom thirty engage in some
degree of sustainability disclosure. This sheds light on the extent of sustainability reporting and
KPI reporting in relatively smaller organisations in Sri Lanka. Previous studies (Senaratne and
Liyanagedara 2012, Wijesinghe 2012) have generally only examined the top companies listed
on the CSE. The findings suggest that sustainability disclosures can be of value to companies to
communicate about their CSR/sustainability projects, even if they do not wish to utilise
additional resources to prepare fully-fledged reports.

The companies’ sustainability score was, on average, 28 out of 40 for the largest companies,
and most of these used either a stand-alone CSR report or a specific report within the annual
report. This indicates that larger companies in Sri Lanka, like their counterparts in other
countries, do undertake and report on sustainability activities. This was supported by the
regression results which found company size to be significant, however, it is important to note
the limitation of the analysis that was restricted to listed organisations, which general tend to
be larger; further research is necessary to confirm this result.

9. Conclusions and Further Research

The objectives of this study were to produce some preliminary empirical evidence on the
extent of sustainability reporting and sustainability KPI reporting in public listed companies in
Sri Lanka. In addition, the study examined the relationships between the extent of

sustainability reporting and company characteristics such as company size, age and financial

The results indicate that Sri Lankan sustainability reporting is quite significant, particularly
among larger firms, but other factors found to be relevant in previous literature do not
necessarily have any influence. This suggests that there is more work to be done to understand
the motivations behind the reporting practices of Sri Lankan firms. The study sheds some light
on current sustainability reporting practices, which is important because Sri Lanka is an
emerging economy in the South Asian region, and the challenge for Sri Lanka is to achieve high
economic growth without causing irreversible damage to the environment and to eliminate
social issues such as poverty, malnutrition and poor workplace ethics. The key findings suggest
a future research agenda for investigation of Sri Lanka is important:

 Size is a significant factor influencing sustainability and KPI reporting in Sri Lanka as has
been found in most other countries, and this is likely a reflection of increased foreign
investment and influence of global guidelines. Further research on the take up of the
GRI and other frameworks is needed to confirm this relationship.

 In contrast to previous literature, being in a sensitive industry sector does not appear to
be a determinant of reporting. The significance of the banking industry is more likely
related to the country’s development priorities. Research on the government as a
stakeholder will shed light on this relationship.

 The specific context of the country appears to be influencing the choice of information
on which companies report, with environmental indicators notably lower than social
indicators. There is a history of philanthropic activity in Sri Lanka, that is largely led by
individuals whose values and actions stem from religious and cultural views (Beddewela
and Herzig 2013). An in-depth analysis of the social, economic and political context as a
background to further, longitudinal, empirical research will allow better theorisation of
the motivating factors for reporting.

The results of this study contribute to existing knowledge on sustainability reporting and
sustainability KPIs in three ways. First, the study helps to bridge the gap in sustainability
reporting studies in developing countries, which is still a largely neglected area in the literature.
In particular, there is a dearth of empirical research in the area of sustainability reporting in Sri
Lanka and this study fills this lacuna.

Secondly, this study contributes to the methodology of sustainability reporting research. A
comprehensive scoring model is used to assess the extent and nature of sustainability
reporting. Importantly, the model developed includes an ‘experience’ criterion, which has not
been included in other frameworks. Also, sustainability KPIs were examined in detail, and there
is a dearth of such studies in the literature. Sustainability KPIs are measurable and therefore
assist in meeting evolving disclosure requirements. Consequently, sustainability programs can
be managed effectively and linked with outcomes if KPIs are incorporated into companies’
sustainability reports.

Finally, this study's results add to existing evidence, and to the ongoing discussion, on whether
there is a relationship between firm characteristics, financial performance and sustainability
reporting. Whereas previous studies have concluded with varying results, this study provides
evidence that the decision to disclose sustainability related information is not necessarily
related to financial performance or industry, but confirms previous findings on the influence of
size. This suggests the potential for stakeholder pressure, and legitimising behaviour, to be
factors in Sri Lanka.

The findings also have practical implications. The results suggest that companies currently
undertaking or contemplating sustainability reporting could improve by including further
information on environmental consequences so that sustainability reporting will become more
holistic over time. The findings of the study also have implications for disclosure policy,
suggesting that the Sri Lankan government, the Ceylon Chamber of Commerce, Sri Lankan
environmental authority, non-governmental organisations and other authorities, should include
consideration of KPIs in their decision making.

Despite the important implications of the study, there are limitations should be acknowledged
and addressed by future research. First, the sample of respondents is biased towards larger,
publicly listed companies. This may imply that the findings can only be inferred to companies of
a certain size, and do not necessarily reflect the practices and views of other small or medium
scale companies, nor of companies which are privately owned. The second limitation relates to
sample size. The sample consists of sixty companies, only 20% of the total population of listed
companies in Sri Lanka. The small sample size also limited the number and type of statistical
tests that could be conducted.

Future research into sustainability reporting and sustainability KPI reporting is warranted,
involving a longitudinal study to recognise differences and similarities of these disclosures
across time. Also, future research carried out with a larger sample size will enable more
comprehensive statistical tests to be carried out, including panel data analysis. This will help to
further examine the relationships identified in this study as well as explore possible causes. In-
depth research is required into the factors that influence the companies to produce regular,
comprehensive sustainability reports. Size is one possible factor but it does not necessarily
explain the attitude of companies at the very end of the spectrum that still chose to report on
sustainability and KPIs. Future research could involve a survey or interviews of the senior
management to provide better insights into the companies’ real motives for disclosures,
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