Sustainability and differentiation: Understanding materiality from the context of Indian firms☆,☆☆
Introduction
“At Motorola, we look at the whole picture when it comes to the environment. This means mak(ing) every product greener, from the moment it's made, … to the end of its life.”
Bill Olson, Director - Sustainability and Stewardship (Motorola Corporate Responsibility website, 2010).
Sustainability announcements frequently dominate media attention. Focusing on the use of resources that minimize or negate environmental impact and enable conservation for future generations, firms are increasingly adopting sustainability initiatives (WCED, 1987). Firms, as consumers of resources, emphasize their role as drivers of a sustainable society (Ekins, 1993). Strategies that incorporate environmental challenges into strategic management can overcome mismatches between needs and resources (Hart, 1995).
Literature on aspects of sustainability such as green supply chain management (GSCM) examines strategies addressing issues pertaining to the environmental consequences of a firm's operations (Ko, E., et al., 2013, Sarkis, J., et al., 2011). GSCM comprises facets such as purchasing and procurement, and sustainable supply chain (Sarkis et al., 2011). Research examines sustainability via lenses such as complexity and institutional theory, resource based view (RBV), resource dependency, social network, and transaction cost economics (Sarkis et al., 2011). Supply chain management has a significant locational aspect, and salient institutional factors in GSCM practice are rooted here. GSCM theory examines practices in many sectors (Wu, Ding, & Chen, 2012) and countries (Lai & Wong, 2012) and scholars explore the antecedents of GSCM practice (Hsu, Lee, & Chao, 2013). However, researchers notably assign equal importance to individual GSCM practices. Even in the broader realm of sustainability, the focus is on understanding antecedents and consequences.
Lately, interest in the materiality is accelerating (Etzion & Ferraro, 2010). Materiality, which refers to financial and sustainability reportage, relates to specific aspects of performance that are relevant for different stakeholders. Therefore, business executives consider sustainability practices as unequally important for all stakeholders, and tend to focus on specific practices to influence stakeholder perceptions. For example:
“For the purposes of this sustainability report, we consider material information to be that which is of greatest interest to, and which has the potential to affect the perception of those stakeholders who wish to make informed decisions and judgments about the Company's commitment to environmental, social and economic progress.” (Etzion & Ferraro, 2010, p. 1103; Ford Motor Company, 2005, p. 9).
As sustainability includes GSCM practices, materiality is applicable to such practices too. Neglecting materiality in GSCM research is surprising because materiality could be salient in firm adoption of specific practices. In addition to institutional pressure—which appears in previous research—firms could adopt specific practices building on their own differential analyses and—to some extent—predetermine the success of these practices. Thus, this study explores GSCM practices that firms consider material in an emerging economy, specifically India.
According to prior research, the GSCM integrates environmental concerns into supply chain management practices such as procurement, environmental management and reverse logistics (Günther, E. and Scheibe, L., 2006, Sharfman, M. P., et al., 2009). The study explores NRBV and research on sustainable operations as lenses to determine GSCM practices. Then, the study explores specific practices that firms consider material in an emerging economy. The study presents two key research questions:
- RQ1:
Do firms in emerging economies consider all GSCM practices equally material?
- RQ2:
Which are the most material GSCM practices?
This study constitutes an attempt to address materiality under GSCM. This research departs from prior studies by deliberating on GSCM practices considered material rather than assigning equal importance to all. This empirical analysis suggests that firms in emerging economies do not give equal importance to these practices. Therefore, these practices provide support for theoretical lenses such as the paradox lens, which emphasizes challenges for firms in managing multiple sustainability practices.
Whereas research focusing on environmental sustainability, often focuses upon emissions or outcomes such as toxic waste (Albertini, 2013), the findings of the present study show that practices focusing on outcome-based measures such as emissions are not the most important GSCM practices in India. Instead, this study shows that an outcome focus is not necessarily valid in every context and thus underpins sustainability practices' contextualization. Indeed, these foci may not be as relevant for emerging economies, leading to some new implications and ramifications for GSCM.
Theoretical lenses such as NRBV and sustainability portfolio relate to the positive economic consequences of sustainability activities. This study indicates that firms may ‘predetermine’ the importance of sustainability practices before adoption. This supposition raises a potential endogeneity issue in the empirical examination of the business value of sustainability.
Methodologically, this study demonstrates that mining unstructured data using novel techniques can help develop different perspectives and insights into sustainability.
Section 1 builds on the theoretical lenses under study. Section 2 discusses materiality, which forms the theoretical basis for analysis. Section 3 deals with the method. Section 4 concludes with discussion, limitations, and recommendations for future research.
Section snippets
Background
This study intersects two research streams: sustainability portfolio and NRBV and materiality of various sustainability practices.
Materiality concept
Financial reporting uses materiality, and sustainability reporting increasingly applies materiality. In financial reporting, materiality differentiates the important from the trivial (Heitzman, Wasley, & Zimmerman, 2010; ‘‘Sustainability practices in Greece’ EY Greece, 2015). Recent studies (EY, 2014; Ocean Tomo, 2012) suggest that materiality is more important for accounting practice. For example:
“[…] physical and financial assets make up only 20% of a company's value […] 80% of corporate
Method
As an emerging economy, India offers a unique context for understanding materiality; two criteria justify this choice. First, India, which is one of the fastest-growing economies globally, has to balance economic growth with environmental sustainability. Second, India implemented a law according to which large firms must compulsorily spend 2% of their net annual profit on corporate social responsibility (Forbes, 2014). Such law resulted in a change in India's institutional environment. Without
Findings
Practices focusing on resource efficiency and on reducing carbonfootprints dominate the GSCM literature. At a higher level, supply chain issues focusing on suppliers, product recycle, and end of lifecycle management are less important to firms in comparison to practices targeting resource conservation and carbon footprint reduction. Firms focus on the environmental consequences of their operations, because firms account directly for them. Water (conservation) is most material to the firms
Concluding remarks
This study provides an initial understanding of the complexities and applicability of sustainability and materiality. From a theoretical standpoint, this study contributes to the literature by demonstrating the presence of materiality in the sustainability practices of Indian firms. This study finds that sustainability practices adoption mainly focuses on resource efficiency. Water is the most critical resource for Indian firms. The literature shows the need to shift the focus from energy and
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Cited by (0)
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The authors thank two GIKA anonymous reviewers for their insightful recommendations, which have contributed to enhancing the quality of this study.
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The authors also express their gratitude to three Academy of Management Annual Meeting 2014 reviewers, whose comments for an earlier version of this studyenabled significant improvement.
- 1
School of Business IT and Logistics and Platform Technologies Research Institute, RMIT University, Australia.
- 2
School of Business, National University of Singapore, Singapore.