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Evaluating and Enhancing the Impact of Sustainability Reporting Tools (SRTs)

Sustainability reporting tools (SRTs) have proliferated in order to meet the demand of stakeholders for higher transparency on environmental and social issues. Despite the increasing reliance on SRTs in decision making, much is still unknown about their effectiveness. If SRTs prove to be ineffective, they may pose a serious obstacle to sustainable development as well as to the discourse associated with it. To address this gap, this thesis evaluates the impact of SRTs in the context of companies as well as the building/infrastructure sector, in order to enhance their impact. In evaluating the impact of SRTs, four investigations are conducted. First, the link between environmental, social and governance (ESG) and financial performance is analysed using univariate, multivariate and portfolio analysis. Data for the period 2008-2010 are used. Results show that there is a weak relationship between ESG and financial performance represented by a wide range of financial ratios and stock returns. The portfolio of ESG leaders does not outperform the ESG laggards. Although analysts’ forecast error is found to be negatively correlated to ESG, this observation is not significant. Second, the behaviour (price movement, index trend and trading volume) of the FTSE4Good Australia Index and its constituents are examined using a Markov chain analysis. Based on the results obtained, these company stocks do not seem to demonstrate superior performance. Third, an examination of building SRTs reveals that: variation in criteria scores and weights need to be accounted for; there is no large difference in occupants’ satisfaction levels between a sustainable building (ascertained by building SRTs) and a non-sustainable building; and criteria scores are inconsistent for buildings with similar sustainability awards. Fourth, the current state of sustainability reporting of publicly-listed Australian construction companies is investigated. Contrary to expectation, the state of sustainability reporting is found to be poor with high evidence of graph obfuscation. That is, there is a biased use of graphs to depict favourable criteria in sustainability reports. Corroborative evidence from all four investigations appears to suggest that the effectiveness of SRTs is questionable. To enhance the impact of SRTs, this thesis presents an alternative multi-criteria framework to assess sustainability performance of companies and building/infrastructure projects based on second order moment thinking. This framework is designed to overcome existing limitations and encompasses six different elements: (i) Criteria selection; (ii) Quantitative measurement scales for the criteria; (iii) Characterising each criterion by measures of central tendency and dispersion; (iv) The distinction of additionality; (v) Criteria weighting; and (vi) Combining criteria to give an overall sustainability score characterised by a measure of central tendency and a measure of dispersion. A tree form classification model of companies’ sustainability performance is proposed. This model is developed using a combination of agglomerative hierarchical clustering and classification and regression tree (CART) techniques. Extending this model, the link between different clusters of companies (‘Leader’, ‘Average’ and ‘Laggard’) and sustainability maturity levels is established. As well, the fuzzy-based approach is recommended as a way to measure project sustainability maturity levels. While the nature of return–risk efficient portfolio frontier has been discussed at length in the literature, it has not been extended to incorporate the analysis of sustainability issues, as done in this thesis. Leveraging on a few concepts such as the centre of gravity (COG) and Euclidean distances, the superiority of portfolios is differentiated by accounting for both return–risk and ESG–variance. These tools adopted are original contributions to help enhance stakeholders’ decision making process.