Environmental Sustainability orientation and its impact on firm
performance
The effect of Sustainable orientation on firm performance via innovativeness and perceived CSR-reputation as mediators in this relationship
Master Thesis Strategic Innovation Management
Peter de Zee University of Groningen Faculty of Economics and Business
p.de.zee@student.rug.nl Student number: S2925869
Supervisor: J.D. van der Bij Co-assessor: I. Estrada
Word count excluding references: 7497
Abstract
Despite growing interest in environmental sustainability among academics, research has not yet adequately addressed how and when sustainability initiatives lead to firm performance. This study aims to find out how this relationship works by studying two mediators. Results show that the positive effect of environmental sustainability orientation on firm performance is fully mediated by firm innovativeness and CSR-reputation.
Keywords: Environmental Sustainability, Sustainable Performance, Financial Performance, Firm Performance, Firm innovativeness, CSR-reputation
Introduction
The depletion of fossil fuels and the risks of climate change urge world's society to make fundamental and systemic societal changes by addressing socio-technical transitions, especially energy. For a shift towards a more environmentally sustainable future we are transitioning to renewable energy sources (Weaver et al. 2000). “Transitions” are described as structural changes in societal systems which involve a shift from one equilibrium to another, typically stretching over several generations (Kemp and Rotmans, 2005). Society has known three energy transitions. The first being from wood to coal, the second from coal to petroleum and natural gas and lastly the current transition being from fossil fuels to renewable energy sources.
It is no longer enough for firms to be concerned solely with making a profit during this ongoing energy transition. Firms should also give something back to society and minimize their negative impact on the environment (Walker & Jones, 2012). Today sustainable development is defined as “meeting the
needs of the present without compromising the ability of future generations to meet their own needs”
(World Commission on Environment and Development, 1987, p. 43). Environmental sustainability orientation is one part of corporate social responsibility (CSR) and this orientation is more than just environmental issues, it is a business approach that aims for long term shareholder value by addressing opportunities that derive from the economic and environmental developments in the modern world (Esty and Winston, 2008). Companies around the world have shown interest in environmental-friendly manufacturing initiatives the last few years.
Volkswagen shares fell 37.5% (Yahoo!Finance, 2019). It is clear that the sustainable image of Volkswagen got damaged and that this had a harmful effect on the firm performance. Since sustainability is one of the three dimensions of CSR it makes sense to study the effect of sustainability orientation on firm performance via CSR-reputation.
This study makes three main contributions. First by adding innovativeness and reputation it sheds new light on the link between environmental sustainability orientation and firm performance. Second it contributes to the research on drivers of innovativeness by investigating the effect of an environmental sustainability orientation on firm innovativeness. Lastly it contributes to the research on business reputation by investigating the effect of environmental sustainability orientation on the CSR-reputation the business has among its customers and the effect of this CSR-reputation on firm performance, since CSR-reputation is a part of the total business reputation.
THEORY
Environmental Sustainability Orientation
A firm’s strategic orientation refers to its organization-wide stance and to pursue a direction that shapes the organization’s consistent pattern of actions as it interacts with its business environments (Roxas, Ashill & Chadee, 2017). Sustainable development is defined as “meeting the needs of the
present without compromising the ability of future generations to meet their own needs” (World
Commission on Environment and Development, 1987, p.43). Environmental Sustainability orientation is therefore defined as the level of concern about the environmental protection and the pursuing of initiatives in the organization that support the idea of sustainability (Kuckertz and Wagner, 2010). Examples of environmental actions by organizations can be reducing harmful emission or recycling waste and preventing spilling resources.
To understand environmental sustainability orientation it is necessary to first understand the meaning of Corporate Social Responsibility (CSR). The most used definition is the one used by the Commission of the European Communities and is as follows: “A concept whereby companies integrate
social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (Dahlsrud, 2006, p7). The three dimensions of CSR are: ethical,
The so called ‘green revolution’ in business with the emphasis on environmental impact, requires an organizational philosophy where all individuals are involved in greening the company (Sarkis et al., 2010). It is argued that by implementing environmentally friendly policies and introducing sustainable products, firms are more likely to improve their efficiency, leading to the development of a superior source of competitive advantage (Aragón‐Correa & Sharma, 2003; Hart, 1995).
Innovativeness
Innovation is known to be a catalyst of growth in business and economy. Innovation is generally defined as the process and outcome of creation and commercialization of something new (Schumpeter, 1934). Innovativeness has often been described as one of the most important strategic orientations for firms to achieve long term success (Noble, Sinha, & Kumar, 2002) and it has a significant effect on venture performance (Rauch & Frese, 2000; Utsch & Rauch, 2000). However, there is no real consensus on the meaning of innovativeness (Roehrich, 2004). In prior research the term innovativeness is used to describe a firm’s ability to develop, launch and commercialize new products or services at a fast rate and ahead of his competitors (Danneels,1998; Hurley & Hult, 1998; Meybodi, 2003; Michalisin, 2001; Subramanian & Nilakanta, 1996). But following a distinction made by Zaltman, Duncan, and Holbek (1973), Hurley and Hult (1988) and Hult et al. (2003), innovativeness is the first construct of innovation (the initiation process) and it is the notion of openness to new ideas as an aspect of a firm’s culture towards innovation. The definition used of innovativeness refers to “a firm’s capacity to engage in new
enterprise that is, introduction of new processes, products, or ideas in the organization” (Hult, Hurley
& Knight, 2004 p.429). Hult et al. (2003) proposed that innovativeness is a process of which openness to innovation is an important part.
Openness to innovation refers to the extent to which someone or the organization as a whole is willing to adopt an innovation. Van de Ven (1986) refers to recognizing the need for new ideas and action by the management of an organization. This capacity to recognize and to innovate is among the most important factors influencing firm performance and a successful business future (Porter, 1990). It is through innovativeness that industrial managers find solutions to business problems and challenges, which provide the basis for success of the firm. Innovativeness is also likely to be a strategic choice firms use to deal with changes in turbulent environments (Hult et al., 2004).
CSR Reputation
CSR reputation is the reputation the firm has among its customers in the topic of social, environmental and ethical responsibility. Reputation is defined as: “a perceptual representation of a
company’s past actions and future prospects that describes the firm’s overall appeal to all its key constituents when compared with other leading rivals’ ” (Fombrum, 1996 p.72). Reputation is an
important attribute of business organisations and reflects the extent to which a firm is perceived as good or bad (Roberts and Dowling, 2002).
Reputation of firms has been studied using different approaches, including game theory, information theory, the theory of organizational effectiveness, agency theory, transaction cost theory and the resource based view (Ramos-Gonzalos, Rubio-Andres & Sastre-Castillo, 2017). The resource based view has contributed most to the development of the concept of corporate reputation. It is argued that reputation is multidisciplinary concept which as a resource, enables firm to gain a sustainable competitive advantage (Ramos-Gonzalos et al., 2017). Hall (1992) and Teece et al. (1991) identified reputation as an important intangible asset for managers and as an important information source for the firm’s customers, suppliers and competitors.
It is argued that a strong CSR-reputation allows a firm to achieve above average profitability and that sustainable efforts also serve to signal the high quality of a firm’s products (Adams et al., 2012; Milgrom & Roberts, 1986). According to the 2010 McKinsey survey, over 50% of the CEOs said that their investment in sustainability and social activities enhances their firm’s ability to build its corporate reputation. Maintaining or improving the business reputation was also the top reason to address sustainability. Next to that it also seems that developing and marketing new products associated with sustainability issues is of considerable importance for growth of firms (Adams et al. 2012). Therefore there is an expected role for CSR reputation and the link between environmental sustainability orientation and firm performance.
Hypothesis Development
existence of many variables that influence firm performance, making it extremely difficult to determine the impact of such an environmental orientation effectively.
Also there seems to be a lack of understanding about how environmental orientation could influence firm performance since there is little attention to mediators or moderators in this relationship. Contextual variables on which scholars have focused is the growth within an industry. These studies have demonstrated that the direct effect of corporate sustainability on firm performance is especially evident in high-growth industries (Goll and Rasheed, 2004; Greenley and Foxall, 1997; Russo and Fouts, 1997). In this study, the mediation effect of two intangible resources, namely firm innovativeness and firm CSR reputation, will be studied to investigate the relation between environmental sustainability orientation and firm performance.
Environmental Sustainability Orientation
The reputation a firm has among its stakeholders is dependent of the information these stakeholders possess about the firm (Ramos-Gonzalos et al., 2017). This information affects the decision-making process used by individuals and businesses, because decisions are made based on the available information (Connely et al., 2011). In his formulation of signalling theory, Spence (1973) used the labour market to illustrate the signalling function of education. Potential employers lack information about the quality of job candidates. The candidates obtain education to signal their quality and reduce information asymmetries. This is presumed as a reliable signal because lower quality candidates would not be able to show off high educational diplomas. The signalling theory consists of three elements: the signaller, the signal itself and the receiver. The essence of the signalling theory is that signallers are insiders, for example executives or managers (Spence, 1973). Signalling theory focuses primarily on the deliberate communication of positive information in an effort to communicate positive organizational attributes (Connelly et al., 2011).
There are two characteristics of signals. Signal observability is the first, which refers to the extent to which people, receivers, are able to notice the signal. Signal cost is the second characteristic which involves the fact that some firms are in a better position than other firms to pay the price for obtaining and communicating the signal. For example the costs for obtaining an ISO9000 certification are lower for a high-quality manufacturer than a low-quality manufacturer who would need to make more changes to get this certificate. The receiver of the signal is the third element in the signalling process (Spence, 1973). Signallers and receivers also have partially conflicting interests such that successful signal would benefit the signaller at the expense of the receiver (Bird & Smith, 2005). The signaller could benefit by an action from the receiver that would not have happened without the signal. For example the receiver could make a choice about purchasing or investing (Connely et al., 2011).
communicate their outcomes and impacts more often with their stakeholders compared to firms with lower levels of sustainability performance who even tend to hide their results (Li, Richardson & Thornton., 1997; Bewley and Li, 2000; Clarkson, Richardson & Vasvari, 2008). The most used form to signal environmental sustainable performance is with a CSR-report, which also contains information about the social and ethical actions taken by the company. A CSR report can hence be seen as a signalling action that requires resources in order to show that the company fulfils its responsibility (Galbreath, 2010; Hahn and Kühnen, 2013). Galbreath (2010) describes that environmental sustainable actions are expected to signal to stakeholders a positive image of corporate behaviour, which increases the firm reputation (Galbreath, 2010). Therefore it is argued that companies voluntarily disclose CSR reports to signal their values about environmental and social issues and to ensure that stakeholders are aware of the appropriateness of the actions taken by the company to take care of these issues (Clarkson et al., 2008). I hypothesize:
H1: Environmental sustainable orientation has a positive direct effect on CSR reputation as perceived by the business customer.
Academic literature has shown that an entrepreneurial orientation is a driver of innovativeness (Wang, 2008; Rhee, Park & Lee, 2010). It is argued that entrepreneurial orientation leads to an active pursuit of new opportunities (Lumpkin and Dess, 1996). This could also be said for environmental sustainability orientation which requires an organization wide philosophy looking for new opportunities to green the company, for example by pollution reduction strategies. Therefore there is an expected role for sustainable orientation as a driver of firm innovativeness. In this part I will make use of examples of the path of least resistance theory of Ward (1994, 1995) to hypothesise the relationship between environmental orientation and firm innovativeness.
sustainability orientation a firm will move away from its path of least resistance in terms of energy use. When focussing on environmental sustainability firms will have to move away from the path of least resistance in order to save energy and cut emissions. For example by installing solar panels or a heat pump and stop using gas and central heating.
Focusing on environmental sustainability in business requires an organizational philosophy where all individuals are involved in greening the company (Sarkis et al., 2010). By deterring from the path of least resistance the individuals and the firm need to find other options or invent new methods. Therefore I hypothesize that firms with an environmental sustainability orientation have higher levels of firm innovativeness, because these firms will move away from their path of least resistance and will therefore have to find new innovative methods.
H2: Environmental sustainability orientation has a positive direct effect on firm innovativeness.
CSR Reputation
High brand recognition, a price premium, and high level of repeated buying and customer retention are indicators of good corporate reputation (Grant, 1995). Satisfied customers who rate the business reputation high will improve a firm’s performance by their loyalty and repeated purchases. The supply of high-quality products and services to customers as well as the avoidance of activities that customers deem unacceptable (Fombrun and Shanley, 1990) can be viewed as a proxy for firm reputation. In this study I will look at the CSR reputation a firm has among its business customers since sustainability issues are a growing field of concern among customers and sustainability is one the three dimensions of CSR. It is argued that CSR-reputation allows firms to achieve above average profitability and that sustainability efforts also signal the high quality of a firm’s products (Adams et al., 2012; Milgrom & Roberts, 1986). Besides that, sustainability investments are actually often made with the idea to improve the brand CSR reputation according to 50% of the interviewed CEO’s in a survey (Mckinsey, 2010). In this part I will use the resource-based view of the firm to hypothesise the relationship between CSR reputation and firm performance.
The recent 2016 Paris agreement received enormous media coverage and political participation when 196 state parties signed the agreement. The purpose of this conference was to reach an agreement on emission control. With this agreement the attention for consumers towards sustainability issues got a boost. Consumers are becoming increasingly more aware of the harmful effects of pollution and emissions (Adams et al., 2012). Since sustainability is one of the three pillars of CSR I argue that good CSR-reputation has a positive effect on firm performance, because customers value the importance of sustainability and next to that, customers are increasingly more actively looking for sustainable brands (Adams et al., 2012). The CSR-reputation is therefore an intangible firm resource a firm can leverage to gain a competitive advantage.
H3: CSR reputation has a positive direct effect on firm performance.
Innovativeness
Innovativeness has been empirically proven to be among the most important factors that positively influence business performance many times already (e.g., Burns & Stalker, 1961; Hurley, Hult, & Tomas, 1998; Porter, 1990; Schumpeter, 1934). Next to the empirical evidence I will use the resource-based view of the firm to discuss the importance of innovativeness for firm performance. The resource-based view focuses on the firm’s resources and capabilities to understand business strategy and to provide direction to strategy formulation. Capabilities are features and managerial skills forming organizational routines, which lead to competitive advantage. Dynamic capabilities have been defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to
address rapidly changing environments” (Teece et al. 1997 p.511). Innovation capabilities can be
considered as a subset of dynamic organizational capabilities. This is defined by Burgelman et al. (1996) as the comprehensive set of characteristics of an organization that facilitate and support innovation strategies. Firm innovativeness sparks innovative attitudes that results in new processes, services, or products (Dibrell, Craig, & Hansen, 2011). Firm innovativeness is therefore a capability which enables firms to get competitive advantages by innovating. This innovation capability is described as the most important determinant of firm performance (Mone, McKinley & Barker, 1998). Firms that have high frequency in adopting innovation, progress faster along the learning curve and become more efficient than firms that focus less on innovation (Mahoney and Pandian, 1992).
It is in line with the resource-based view theory that firms’ innovativeness leads to firm performance by achieving competitive advantages through innovation and that it is competitive advantage that leads to firm performance. and therefore I hypothesise.
H4: Firm innovativeness has a positive direct effect on firm performance.
Environmental Sustainability Orientation and Firm Performance
In strategy and management literature, researchers have argued that a firm's competitive advantage can be derived from its strategic resources (Barney, 2002; Barney & Hesterley, 2006; Grant, 1991; Wernerfelt, 1984). The resource‐based view (Barney, 1991; Grant,1991) suggests that these resources have to be rare, non-substitutable, and inimitable, to lead to a sustained competitive advantage (Barney, 1991). An extension of the resource‐based view is the natural resource‐based view of the firm (Hart, 1995; Hart & Dowell, 2011), this theory posits that firms can obtain competitive advantage by taking into account the problems in the natural environment. This view is based on the idea that businesses in the future will be constrained by and dependent on nature. According to this perspective, a firm's ability to develop an environmental sustainability strategy to reduce its ecological footprint would enable it to achieve competitive advantage. A firm's strategic capabilities are directed to solve environmental problems such as pollution, product stewardship, and sustainable development and this is likely to enhance its competitive performance (Hart, 1995). Russo and Fouts (1997) test this theory empirically on firm-level data and find that companies with higher environmental performance also have higher financial performance. Also Porter (1991) stated that strict environmental codes might actually foster competitiveness.
Manning (2004) reports in his essay “Benefits of Environmental Stewardship” that more than ever before, the air we breathe and the water we drink are not strictly ‘environmental’ issues. He describes that they're now also business issues. This is in line with the natural resource-based view of the firm of Hart (1995). He goes on to explain that this is true because more than any time in our history, business and the environment are inextricably linked and successful companies know this. These successful companies communicate regularly with people and businesses in the market they serve and they avoid taking steps that could be perceived as harming them in any way (Manning, 2004 p.9).
(Porter, 1991; Hart, 1995). For example, the prevention of pollution may stimulate process innovations, because the screening of the environment requires firms to improve their expertise on measuring the production process (King and Lennox, 2002). Later, the innovations aimed at preventing pollution may lead to a cost reduction and savings in resources, which will improve firm performance (Russo and Fouts, 1997). A pollution-prevention strategy reduces emissions using continuous-improvement methods focussed on environmental objectives (Rooney, 1993). It can therefore be argued that this strategy improves firm performance by enhancing the focus on improving and innovating the process with continuous-improvement methods. Higher efficiency in working and producing means less costs and therefore higher margins and higher firm performance.
Customers are increasingly more aware of environmental performance by firms and their harmful effects to the world (Adams et al., 2012; Williams, Medhurst & Drew, 1993). Environmental sustainable firms will signal their environmental performance to their stakeholders who will then rate the firm reputation higher in terms of environmental sustainability. I argue that environmental sustainability orientation can be a source of competitive advantage by initiating innovations focussed on reducing waste and improving efficiency along with the optimizing of the firm's sustainability reputation.
H5: Environmental sustainability orientation has positive effect on firm performance
Figure 1. Conceptual Model
METHOD
Sample and Data Collection
In order to examine market and environmental orientation and innovativeness along multiple firms operating in a supply chain, survey data from three parties has been collected. Namely from the supplier, the focal firm and the customer. The respondents are executives of companies based in the Netherlands. The executives were asked to identify one of their key suppliers and one of their key customers. The data has been collected via a web-enabled survey tool and in a digital survey format. This database which has been put together in 2010 consists of 88 supply chains. The age of the database is argued to be of no major problem for this research. Since the current energy transition already started before 2010 this data is still relevant today. For this research there will be made use of the results from the focal firm and the customer, the supplier firm data will not be used. The focal firms in this database were operating in manufacturing (40.9%), information and communication (12.5%), wholesale and retail trade (7.9%), administrative and support activities(4.5%), and other industries (9.1%)
Measures
All variables are measured using one- to seven-point Likert scales.
Focal firm
Environmental sustainability orientation
At the focal firm, the CSR orientation has been assessed with a measurement scale inspired by the market orientation scale of Deshpandé and Farley (1998). The items for the environmental dimension of CSR are taken to reflect the environmental sustainability orientation. The scale contains the following items: “Our products and services are more environmental friendly than those of our
competitors”, “It is common sense for us to reduce energy consumption in our everyday tasks” and “We explore the environmental consequences of our business”.
Firm innovativeness
Firm innovativeness is assessed by using the definition of Hurley and Hult (1998) that measures innovativeness as the notion of openness to new ideas as an aspect of culture. A three-item scale was used including “in our management team we actively seek innovative ideas” and “in our firm, innovation
is readily accepted in program/project management”.
Firm Performance
model quality of the output in LISREL. Therefore there is an arrow from innovation performance to market performance and financial performance and an arrow from market performance to financial performance in the final model.
Innovation performance. Innovation performance is measured at the focal firm using a two-item scale
with the items “compared to our competitors we are market leaders in the field of number of new
products/services” and “compared to our competitors we are often first with bringing new products to the market”.
Market performance. Market performance is measured at the focal firm using a four-item scale by using
subjective evaluation based on measures comparing performance to competitors. This way, managers evaluated market growth, market retention, customer retention and attracting of new customers relative to competitors and compared to their own objectives over the last three years (Narver & Slater, 1990; Spanos & Lioukas, 2001).
Financial performance. Financial performance is measured at the focal firm using a four-item scale by
using subjective evaluation based on measures comparing performance to competitors. Managers evaluated return on equity, profit margin and net profits relative to competitors and compared to their own objectives over the last three years (Narver & Slater, 1990; Spanos & Lioukas, 2001).
Customer
CSR-reputation. CSR reputation is measured at the business customer using a seven-item scale by using
the perceived performance on the CSR-dimensions of the focal firm. Items include “this supplier is
known for its positive involvement in environment” and “this supplier is committed to local initiative for public interest”.
Controls
Analysis
Table 1: Descriptive statistics and Correlation Matrix
Mean Standard Deviation A B C D E F G H
Sustainability orientation A 4.66 1.30 Firm innovativeness B 5.28 1.13 .33** CSR reputation C 4.64 .96 .21* .04 Innovation performance D 4.86 1.48 .23* .65** .15 Market performance E 5.15 .97 .23* .47** .17 .47** Financial performance F 4.69 1.16 .19* .25* .08 .29** .48** Technology turbulence G 4.24 1.65 -.06 .31** -.01 .31** .28** .13 Firm size H 1.40 .82 .03 -.08 -.01 -.08 -.06 .07 -.04 Competitiveness I 4.50 1.68 .09 .09 .02 -.12 .08 .02 .16 .04
**. Correlation is significant at the 0.01 level *. Correlation is significant at the 0.05 level
Table 1 shows the descriptive statistics and correlations for the constructs in the conceptual model. Results show high correlations between sustainability orientation and the performance indicators in this model. Also between the different performance indicators there are high correlations. First step in the analysis will be to check for the construct validity. The confirmatory factor analysis (CFA) in LISREL has been used to find out whether the measurement items reflect the constructs they are designed to measure. Items have been deleted to improve the model quality based on the modification indices in the output of LISREL.
Table 2: Confirmatory Factor Analysis Loadings, t-Values, Cronbach’s α.
Construct Item Factor Loadings t-Value Cronbach’s alpha
Environmental sustainability so2 .50 4.31 α = 0.70
orientation so4 .64 5.60 so6 .83 7.15 Innovativeness inn1 .69 6.68 α = 0.70 inn2 .66 6.27 inn3 .64 6.07 CSR reputation sov1 .83 9.28 sov2 .64 6.48 sov3 .87 10.02 α = 0.90 sov4 .71 7.34 sov5 .73 7.76 sov6 .70 7.24 sov7 .82 9.07
Firm innovation performance ip3 .89 9.87 α = 0.87
ip4 .86 9.32
Firm market performance mp4 .90 10.34
mp5 .84 9.32 α = 0.84
mp6 .66 6.61
mp7 .64 6.38
Firm financial performance fpst5 .85 9.96
fpst6 .88 10.35 α = 0.95
fpst7 .99 12.78
fpst8 .94 11.77
𝑋2 = 257.53, df = 215, RMSEA = .048, NFI = .88, CFI = .97, GFI = .85
The measurement model based on the results of the CFA is displayed in Table 2. Subsequently a reliability analysis has been performed on the measurement items that remained after the factor analysis. Cronbach alphas will be calculated for every construct to make sure the measurement scales are reliable. The Cronbach alphas of the constructs are also presented in Table 2. The Cronbach alphas range from .70 to .95, which means that they are in the acceptable range (Nunnally, 1978).
This measurement model has an acceptable fit with, respectively, 𝑋2 = 257.53, df = 215, root mean square error of approximation (RMSEA) = .048, normed fit index (NFI) = .88, comparative fit index (CFI) = .97, goodness-of-fit index (GFI) = .85. The scales demonstrate convergent validity because all loading are highly significant (p <.01), and all but one standardized loading are higher than .5 (Fornell and Larcker, 1981). Additionally, I concluded discriminant validity from the absence of interfactor correlations in the phi matrix.
The next step was to explore the structural relations among the constructs using the path analysis procedure in LISREL. The path coefficient variables are presented in Figure 2.
Figure 2. Nonstandardized Path Coefficients of the Conceptual Model
*p < 0.1; **p < 0.05; ***p < .01, 𝑋2 = 4.18, d.f. = 8, RMSEA = .0 , NFI = .98 , CFI = 1 , GFI = .99
RESULTS
The results in figure 1 support my conceptual model. In this part I will explain all results regarding my hypotheses. To test each hypothesis in this study, the total effects and its significance will be used.
H1 suggested that environmental sustainability orientation has a positive direct effect on CSR reputation as perceived by the business customer. This relationship is supported by my findings with a total effect of .16 (p<.05). H2 suggest a direct positive relationship between sustainability orientation and firm innovativeness. This hypothesis is supported with a total effect of .31 (p<.01).
Since firm performance has been divided in three variables, there will be multiple results for hypothesis 3 and 4 which link to firm performance in my conceptual model. H3 related CSR-reputation to firm performance. Firstly the total effect of CSR-reputation on innovation performance is .22 (p<.10). The total effect of CSR-reputation on market performance is .17 (p<10) and lastly the total effect of CSR-reputation on financial performance is .11 (p<.10). H3 can thus be confirmed with significant relationships with all three performance indicators. H4 related firm innovativeness to firm performance. I have found that the total effect of firm innovativeness on innovation performance, market performance and financial performance is .75 (p<.01) .35 (p<.05) and .23 (p<.05) respectively. H4 can therefore be confirmed with significant effect on innovation performance and significant effects on market and financial performance. H5 related environmental sustainability orientation with firm performance. Looking at the total effect I found positive total effects of sustainability orientation on innovation performance, market performance and financial performance with effects of .31 (p<.05) .14 (p<.05) and .10 (p<.05) respectively. Although having no significant direct effect on any performance indicator in this study. H5 can therefore be confirmed since there are significant indirect effects of environmental sustainability orientation on the three firm performance variables.
Table 4: Chi-square and degrees of freedom for mediation
Model 1 with direct relationships Model 2 without direct relationships
𝑋2= 2.74 𝑋2= 4.18 d.f. = 5 d.f. = 8 𝑋2 𝑑. 𝑓.. = 0.55 𝑋2 𝑑. 𝑓.. = 0.52
Although not hypothesised in my conceptual model, I found relationships between the firm performance variables used in this study. Firstly there is a positive direct effect of innovation performance on market performance with .17 (p<.05). Secondly there is a positive total effect of innovation performance on financial performance with .17 (p<.10). And lastly there is a positive direct effect of market performance on financial performance with .54 (p<.01).
Concerning the control variables I have found a positive effect of technological turbulence on firm innovativeness, innovation performance and market performance with .23 (p<.01) .32 (p<.05) and .17 (p<.05) respectively. Competitiveness though shows a negative effect on innovation performance with an effect of -.18 (p<.05). The control variable firm size shows no significant effects on the study variables.
DISCUSSION
The objective of this study was to understand how environmental sustainability orientation influences firm performance, because there seemed to be little attention for mediators in this relationship in the current literature (Ray, Barney & Muhanna, 2004). Some research has been performed to study under which circumstances or contextual factors this relationship was valid but conclusive research on how this relation works was missing. For that purpose I included firm innovativeness and CSR reputation as mediators to be able to study an internal as well as an external effect of this sustainability orientation. Existing research was found to be inconsistent and contradictory, since the relationship between sustainability and firm performance has found to be positive, insignificant or negative in different studies (Ray, Barney & Muhanna, 2004). Hypotheses were developed applying insights from the resource based view (Porter, 1991), path of least resistance theory (Ward, 1994) and the signalling theory (Spence, 1973). With the insights from these theories I hypothesized a positive relationship between sustainability orientation and firm performance.
The results of the study explain how environmental sustainability support firm performance. Findings show significant total effect via the indirect relationships through firm innovativeness and CSR-reputation. Environmental sustainability orientation is in the first place a positive booster for firm innovativeness and CSR-reputation. This then goes on to both positively influence firm performance.
No direct effect of sustainability orientation on firm performance could be found in this study. This confirmed the statement of Ray, Barney & Muhanna (2004) who explain that the lack of consensus in the existing research is due to the many variables that influence firm performance. By integrating firm innovativeness and CSR-reputation I was able to find significant indirect effects on firm performance.
This view is based on the idea that businesses in the future will be constrained by and dependent on nature. According to this perspective, a firm's ability to develop an environmental sustainability strategy to reduce its ecological footprint would enable it to achieve competitive advantage (Hart, 1995). This study however, has shown that there are only significant indirect effects on firm performance and no evidence is found for a positive direct effect. The relationship is fully mediated by firm innovativeness and CSR-reputation.
This study also provides important implications and insights for managers. Firstly it confirms previous literature and the argued importance of firm innovativeness, since findings show significant effects on all firm performance indicators. Since openness to innovation and culture is what drives innovativeness it is important for managers to stimulate openness to innovations and grow a culture that supports new ideas. Next to that it is important for managers to be aware of the signaling effect of CSR-reports. This study shows that signaling a sustainable image has a positive effect on firm performance. It is therefore beneficial to report the sustainable efforts of the company in the CSR-report.
This study is also subject to limitations because the measurement of some constructs have very few items. Next to that, there is the chance of reversed causality because already profitable and successful companies have more financial resources to spend on environmental sustainability initiatives and innovations compared to less successful companies (Konar & Cohen, 2001). Furthermore, the degree of generalizability is also discussable because the sample only contains 88 firms in the Netherlands, which is for quantitative analysis a rather small number. Besides that, the data is also not very recent since it was collected in 2010.
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