Equilibrating financially sustainable growth and environmental, social, and governance sustainable growth

• Published date: 01 December 2023
• Author: Francesco Bellandi
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/emre.12554

THEORETICAL ARTICLE

Equilibrating financially sustainable growth and environmental,

social, and governance sustainable growth

Francesco Bellandi

Unaffiliated, New York, New York, USA

Correspondence

Francesco Bellandi.

Email: francesco_bellandi@yahoo.com.

Abstract

Should financially sustainable growth and environmental, social, and governance

(ESG) sustainable growth targets interact? Does a company’s growth add to both

shareholders’surplus and surplus of stakeholders different from shareholders?

The objective of this study is to address the unconventional problem of equilib-

rium between financially sustainable growth and ESG sustainable growth and

how to detect and correct imbalances in those two dimensions. It develops both

an incremental framework that articulates, organizes, and connects current theo-

ries of financially sustainable growth, ESG, sustainable development, corporate

social responsibility, and stakeholder theory, and a revelatory model, the finan-

cial/ESG sustainable growth matrix. It inspires new multiple-disciplinary research

to see growth differently, as the impact on shareholders versus stakeholders differ-

ent from shareholders of equilibrium and tension between financial and ESG

growth. The model developed is directly applicable to management practice and

beneficial to a broader community, as it reveals companies that create or destroy

societal surplus.

KEYWORDS

corporate social responsibility, environmental social and governance, finance, stakeholder, strategy,

sustainable growth

INTRODUCTION TO FINANCIAL/ESG

CONSISTENCY

Prospects for a new concept of growth

Should the determination of optimum growth that

finance theory has been suggesting so far be revised to

consider environmental, social, and governance (ESG)?

How does the balance between financial and ESG growth

impact shareholders versus stakeholders different from

shareholders? The objective of this study is to address a

problem-driven question concerning a wide and signifi-

cant domain that requires theorizing: whether a company

should target its sales growth rate to achieve consistency

between financially sustainable and ESG sustainable

growth and how to detect and correct imbalances in those

two dimensions. “Financially sustainable growth”rate is

the maximum sales growth that is sustainable by

accumulated comprehensive income without altering a

company’s current (or target) profitability and financing

policies. “ESG sustainable growth”rate is the maximum

sales growth that is sustainable without modifying its cur-

rent (or target) ESG factors.

This article tries to solve the “whether”problem by

studying what happens to stakeholders if growth is unbal-

anced (a diagnosis view). It tries to disentangle the “how”

problem through an analytical tool that rates financial

growth and ESG growth to detect inconsistencies and

develop correcting strategic options (a prescriptive view).

Methodological approach

This contribution is situated within the literature on

financially sustainable growth, ESG, sustainable develop-

ment, corporate social responsibility (CSR), and stake-

holder theory (ST). It follows both an incremental and a

revelatory theoretical approach. As an incremental

insight, it walks the reader through an integrative frame-

work that extracts lessons learned from those theories

There are no conflicts of interest.

Data sharing is not applicable to this article as no datasets were generated or

analyzed during the current study.

DOI: 10.1111/emre.12554

794 © 2023 European Academy of Management (EURAM). European Management Review. 2023;20:794–812.wileyonlinelibrary.com/journal/emre

and creates new original connections from their interplay.

As a revelatory insight, it places a revolutionary brand

new model at the heart of the framework, which rates the

phenomenon of sustainable growth in an innovative

way by its impact on equilibrium and tension between

stakeholders. As a choice of method, it follows a

theoretical method through a narrative process model

(Cornelissen, 2017), not an empirical approach.

The first step of this journey has been questioning

what we can learn about financially sustainable growth,

and the findings are that scholars know a lot already.

However, those contributions had been written when

ESG was not an issue. Regrettably, theories address ESG

instrumentally to corporate financial performance, not

for a determination of optimum growth rate. Further-

more, although several ratings and indices exist to mea-

sure specific ESG factors, they cannot see the forest for

the trees to define an overall indicator of growth that is

ESG sustainable. On the other hand, ST may be reused

to evaluate the outputs of growth. Therefore, although

current research cannot fully address the problem, when

there are some inputs and outputs, chances are that a

new framework could link different theories. This has

been the second step of our journey: connecting those

theories along the dimension of sustainable growth. Yet,

a link was missing. The useful theoretical reflections of

current literature leave an empty space for a conceptual

model that could be made operational. Then, we used ST

as the acid test to assess the effect on shareholders’sur-

plus and surplus of stakeholders different from share-

holders of management policy making concerning

growth. This has ended up with the financial/ESG sus-

tainable growth matrix, which is where the revelatory

insights come from.

This study initiates, and encourages new research, in

three areas: 1) finding equilibrium between financially

sustainable and ESG sustainable growth, 2) disentangling

parameters to link multiple disciplines along sustainable

growth, and 3) devising metrics of ESG sustainable

growth. Great management inventions are often simple:

Therefore, the proposed matrix had to be strong but sim-

ple to be effective, which is what companies seek. As a

practical implication, it can be really applied by manage-

ment to position a company against competitors, decom-

pose growth, detect success or disaster sequences, and re-

position strategies.

What is the motivation for giving such an importance

to growth consistency? Sustainability is a topic that mat-

ters, where scholars should draw attention to anticipate

prescient theoretical solutions to future problem domains

(Corley & Gioia, 2011). High growth has an important

role in creating jobs, increasing productivity, and

recovering an economy (Mason & Brown, 2011;

Monteiroa, 2019; Organisation for Economic Coopera-

tion and Development (OECD), 2013). From a manage-

ment perspective, ESG may constrain financial growth:

setting a growth target informs the whole strategy of a

firm. It dictates the investment level, working capital

needs and related financing, marketing, research and

development, production, and interests of different stake-

holders. The discussion is also timing. ESG market cover-

age of US public companies has reached almost 25% and

78% of the world’s total market capitalization (Boffo &

Patalano, 2020); 21% of 2020 annual financial statements

of 112 FTSE 350 companies published strategic reports

with ESG-related information, 63% reported actions

upon carbon reduction commitments, 24% incorporated

ESG into their strategic section, and 23% mentioned cli-

mate change (PriceWaterhouseCoopers (PWC), 2021).

A JOURNEY THROUGH THEORIES AND

WHAT WE CAN AND CANNOT LEARN

We know a lot from the theory of financially

sustainable growth …

Financially sustainable growth is not new in corporate

finance. Zakon (1976) develops a model to determine a

growth rate that is financially sustainable. He uses

plowback return on equity (ROE), that is, ROE not dis-

tributed through dividends, divided by beginning equity,

as the rate of growth of revenues that can be entirely

financed by retained earnings, without changing

economic and financing policies. This ratio implicitly

assumes that all parameters, such as profitability ratios,

the average cost of debt, debt-to-equity ratio, effective

tax rate, and dividend payout ratio are constant. In

effect, growth can be decomposed along the ROE multi-

plier, which considers those parameters. Higgins (1977)

develops a concept of sustainable growth rate as the max-

imum rate that is in line with a company’s financial poli-

cies, if the company wants to maintain a target dividend

policy and financial structure. Arellano and Higgins

(2007) extend Higgins’model to consider cost structure

behavior in the short term. Van Horne and James (1998)

define sales sustainable growth rate similarly to Higgins,

however with explicit operating, debt, and dividend–

payout ratios targets. Johnson (1981) extends Higgins’

model by considering the effect of leverage in the

presence of short- and long-term liabilities in the context

of inflation. Huang and Liu (2009) consider the effect of

operating and financial leverages. Dhanapal and

Ganesan (2010) compare Van Horne and Huang models

and distinguish internal growth without external financ-

ing from sustainable growth with no additional equity

financing. Amouzesh et al., (2011) discover a significant

relationship between the difference between actual and

sustainable growth on one hand and return on assets and

price/book ratio on the other hand, whereas they find no

relationship with liquidity. Fonseka et al. (2012) compare

the models of Higgins and Van Horne and conclude that

they are approximately the same in relation to most com-

mon financial characteristics of a firm, although the

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