financial sustainability research paper

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Article Contents

Sustainable finance.

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Alex Edmans, Marcin Kacperczyk, Sustainable Finance, Review of Finance , Volume 26, Issue 6, November 2022, Pages 1309–1313, https://doi.org/10.1093/rof/rfac069

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Sustainable finance—the integration of environmental, social, and governance (“ESG”) issues into financial decisions—is an increasingly important topic. Within companies, sustainability is no longer an ancillary issue confined to corporate social responsibility departments, but a CEO-level issue fundamental to the core business. Within the investment industry, sustainability used to be the exclusive domain of “socially responsible investors” who had social as well as financial objectives, but is now mainstream and includes investors with purely financial goals. This article introduces the RF Special Issue on Sustainability. It highlights three reasons for the rapid rise in sustainable finance—its financial relevance, its contribution to nonfinancial objectives, and investor tastes. It then summarizes the eight articles in the Special Issue, in particular drawing out their contributions to the literature. Finally, we offer ideas for future research.

Sustainable finance—the integration of environmental, social, and governance (“ESG”) issues into financial decisions—is an increasingly important topic. Within companies, sustainability is no longer an ancillary issue confined to corporate social responsibility departments, but a CEO-level issue fundamental to the core business. Within the investment industry, sustainability used to be the exclusive domain of “socially responsible investors” who had social as well as financial objectives, but is now mainstream and includes investors with purely financial goals. More broadly, the sustainability of business has a crucial impact on how it is viewed by wider society, including policymakers and citizens, including its social license to operate.

The increasing interest in sustainability among investors—which, in turn, flows through to companies—stems from three forces. The first is financial relevance . Companies with a positive impact on society may be more likely to attract customers and employees, capture business opportunities related to societal trends such as climate change and financial inclusion, and avoid environmental fines or regulatory intervention. If these benefits are not fully priced in, such companies will generate high risk-adjusted returns, and thus even investors with purely financial motives will prefer them. The second is nonfinancial objectives . For example, a pension fund invests on behalf of its beneficiaries, who care not only about their income in retirement but the state of the planet and the cohesiveness of society. Thus, they may support a company increasing its societal impact even if doing so sacrifices profits.

The third is tastes— that investors prefer to hold “green” stocks over “brown” stocks. Note that the second and third channels are subtly different. Under the second channel, a sustainable investor would only sacrifice financial returns if doing so has a causal impact on societal returns—for example, divesting from a “brown” stock increases its cost of capital and hinders it from expanding. Under the third channel, no causal effects are necessary. Even if the supply of capital is perfectly elastic, so divestment has no price impact, a sustainable investor will still boycott a brown stock since she suffers disutility from holding such a company. 1

Due to this increasing importance, the Review of Finance launched a Special Issue on Sustainable Finance. Among 176 submissions we received between June and December 2021, we aimed to publish papers that meet the following ordered criteria: (i) papers that are high-quality academic work; (ii) papers that are of interest to a mainstream finance audience, not only readers who work in sustainable finance; (iii) papers that have implications for both theoretical and empirical research, and for both academia and practice. We sought to publish papers across all major research areas: corporate finance, asset pricing, financial intermediation, behavioral finance, and mutual funds. This Special Issue contains eight papers that satisfied the above criteria. We summarize their content and placement in the broader discussion on the topic in the order in which they appear in the issue. We would like to emphasize the important role of the reviewers, whose hard work has enabled us to put this issue together. Their input has been invaluable to the success of this endeavor.

One key challenge in sustainable finance is how to evaluate the sustainability of a company. In “Aggregate Confusion: The Divergence of ESG Ratings,” Florian Berg, Julian Koelbel, and Roberto Rigobon document a significant discrepancy between the ESG ratings issued by six prominent ESG rating agencies: Sustainalytics, Moody’s ESG (formerly Vigeo-Eiris), S&P Global (formerly RobecoSAM), Refinitiv (formerly Asset4), MSCI, and KLD (discontinued in 2017). They found an average pairwise correlation between rating agencies of 38%-71%, substantially lower than the 99% for credit ratings. They found that 56% of the divergence stems from measurement (e.g., labor practices could be measured by workforce turnover, or number of labor cases against the firm), 38% is due to scope (e.g., some rating agencies consider lobbying an ESG factor, others do not), and 6% results from different weightings. Their findings have important implications for both academics and practitioners. For academics, the choice of rating agency for empirical research is not innocuous, and it is important to demonstrate robustness to other providers. For practitioners, ESG ratings should be viewed as opinion, not fact. Responsible investors should not choose stocks by simply following one provider’s rating.

Given information about a company’s ESG performance, how does it affect asset prices, both theoretically and empirically? “A Sustainable Capital Asset Pricing Model” by Olivier David Zerbib is an important step in answering these questions. The article proposes a model in which sustainability features as an important force driving investors’ portfolio decisions. The main contribution of the article is to show that expected returns can be decomposed into a part that reflects the negative exclusion preferences, along the lines of Merton (1987) , and the part that reflects tastes for ESG. Using the evidence from USA sin stocks, the article shows that the exclusion forces contribute about 2.7% per year to the observed risk premia and the taste forces add on roughly 2% per year extra.

Many commentators point to the growth in assets under management by UN Principles for Responsible Investment (“PRI”) signatories, from $6.5 trillion in 2006 to $121 trillion by the end of 2021, as evidence of the rise in sustainable investing. But does signing the PRI mean anything? In “Do Responsible Investors Invest Responsibly?”, Rajna Gibson Brandon, Simon Glossner, Philipp Krueger, Pedro Matos, and Tom Steffen study whether signatories invest in firms with higher ESG ratings, measured using either Sustainalytics, Refinitiv, or MSCI scores. They find that non-US signatories have superior ESG portfolio-level ESG scores than nonsignatories. However, in the USA, signatories have at best similar ESG ratings, or worse ratings if they have underperformed recently, are retail-client facing, and joined the PRI late—indicators that they may have signed the PRI to greenwash. An alternative explanation is that US investors buy ESG underperformers and engage with them to improve their ratings, but the authors find no such improvements. The different behavior of investors in the USA may be due to commercial incentives to become a PRI signatory being higher, more regulatory uncertainty as to whether ESG investing is consistent with fiduciary duty, and the lower maturity of the ESG market making it easier to greenwash.

One potential explanation for such behavior is that it is not clear that green investors should be avoiding brown stocks once you take into account the importance of hedging. How to hedge the risks in the presence of climate-related externalities is the topic of the theoretical piece “Asset Prices and Portfolios With Externalities” by Steven Baker, Burton Hollifield, and Emilio Osambela. In their model, agents who suffer disproportionately from pollution have a desire to hedge against this. If states in which pollution is high are also states in which polluting firms do well, then investing in polluting firms becomes a natural hedge. Environmentalists, who take pollution as given, will then invest disproportionately in polluting firms in order to hedge this risk, thus driving up capital allocations into such firms. In the process of understanding the economic mechanism behind their results, the authors also consider two countervailing forces that could reverse the surprising results on returns and investments: (i) investors coordinate so that they internalize their effect on pollution and (ii) investors derive nonpecuniary benefit from investing in nonpolluting firms.

Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li tackle the question of whether investor behavior can affect company behavior in “Does Money Talk? Divestitures and Corporate Environmental and Social Policies.” They study whether governance through exit can improve firms’ environmental and social (E&S) policies. The authors find that negative E&S incidents are indeed followed by divestitures, but the magnitudes are relatively small. The authors conjecture that even more powerful than actual exit upon an E&S incident might be the threat of future exit if E&S performance remains poor. Consistent with this conjecture, after an E&S incident, firms decrease their greenhouse gas emissions and improve their E&S scores significantly if they have a high proportion of E&S-conscious investors and the CEO recives equity compensation so is concerned about the effect of investor exit on share prices. These results suggest that the threat of exit improves E&S performance if investors are E&S-conscious and CEO wealth is tied to the stock price.

Much of the financial costs associated with climate finance relates to transition risk ensuing from uncertain technological, political, and policy environment. But financial costs could also result from physical damages affected by climate-related events. The extent to which such physical risk is reflected in asset prices is a topic of “Climate Change Risk and the Cost of Mortgage Credit” by Duc Nguyen, Steven Ongena, Shusen Qi, and Vathunyoo Sila. The authors study the question in the context of mortgage markets. This setting is different from other studies that directly focus on valuations of climate-affected assets, such as real estate or insurance companies. Using data on 1,581,600 first-lien 30-year mortgages from BlackKnight McDash originated in the USA between January 1992 and June 2018 the authors document that financing costs of houses that are exposed to more sea level rise see higher interest rate spreads which are 10.2 basis points larger for mortgages in a zip code where all properties are exposed to SLR relative to a zip with no sea level rise. The interesting feature of this result is that, even though some of the risks may be still distant in the future financial, markets already price them in through the credit contracts.

While much of the literature on sustainable investors’ concerns institutions, Anders Anderson and David Robinson study household investors in “Financial Literacy in the Age of Green Investment.” They survey a large sample of Swedish households on their environmental preferences, such as the relative importance of environmental versus financial goals to them, and show that green households, surprisingly, do not hold green portfolios. One explanation is financial disengagement. Green households are generally uninterested in investing, being less likely to own stocks, check pension balances, or make active pension choices (instead relying on the default allocation). The second is informational constraints, which prevent households from finding investments that match their preferences. For example, they buy mutual funds with pro-environmental names even if they are not ESG-compliant, as classified by the Swedish Pension Authority. Many practitioners and policymakers argue that “people’s capitalism” will force companies to improve environmental performance, but the authors’ results suggest that, without financial literacy, households are unable to reflect their preferences in actions.

Finally, an important question pertaining to sustainable finance relates to portfolio ownership, incentives driving decisions, and performance consequences for investors with designated sustainable principles. In “Responsible Hedge Funds” Hao Liang, Lin Sun, and Melvyn Teo study this question in the context of hedge funds. They show that hedge funds that endorse the PRI underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. The authors attribute the main explanation of their findings to the apparent disconnect between the stated mandate and the observed exposure of investors to ESG factors, which is consistent with the story of greenwashing frequently brought up by ESG skeptics.

While we believe that these eight papers make substantial contributions to the area of sustainable finance, many questions are still to be answered. We repeat here the potential research directions that we included in the Call for Papers (with some additions) in the hope that they might spark future research. Needless to say, the Review of Finance will strive to consider high-quality papers that address the following questions for publication in regular issues:

Research on different aspects of sustainability—not only climate but environmental issues beyond climate (including financing of biodiversity protection), and other stakeholders such as employees, customers, communities, and suppliers.

Research using non-US data, studying private companies, or asset classes other than equity.

Research on how company practices (e.g., reporting, signing commitments, governance structures) help to embed sustainability, and how investors do so within their investee companies.

The effect, and potential unintended consequences, of policy and regulation on sustainability.

Research on the extent to which asset prices incorporate, or do not incorporate, sustainability, and whether this is through a cash flow and/or cost of capital channel.

Research on innovation and technological solutions to ESG issues.

Research on the adoption of green energy, emissions abatement, and the value of stranded assets.

Contrarian research, for example, showing that sustainable business practices may not be associated with superior long-term company performance; that sustainable investing may not achieve its desired objectives; or that companies/investors that claim to be sustainable may not actually “walk the talk.”

The effect of public attitudes and the media on sustainability, and the effect of company/investor sustainability practices on public attitudes.

Theoretical models of the effect of sustainable practices by companies, investors, and regulators.

Experimental or survey research on the households’, investors’, or executives’ sustainability preferences or beliefs.

Methodological papers on the evaluation/certification of sustainability datasets and giving best practice on which ones to use and any issues that arise.

Descriptive research that does not make causal claims, as long as “clean identification” is not central to the research question being addressed.

The moral philosopher Bernard Williams (1973) highlights the difference in the following example. Jim, on a botanical expedition in South America, finds himself in a town square. Twenty natives are tied up against the war and about to be killed for protesting against the government. Since Jim is an honored visitor from another land, the captain offers him the privilege of killing one of the natives himself; if he does so, the other natives will be let off. Even though the “societal return” from killing the native is positive, Jim may choose not to do so due to tastes—he suffers disutility from killing.

Merton R. C. ( 1987 ): A simplemodel of capital market equilibrium with incomplete information , Journal of Finance 42 , 483 – 510 .

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Williams B. ( 1973 ): A critique of utilitarianism, in Williams B. , Smart J. J. C. (eds.), Utilitarianism: For and Against . Cambridge University Press , Cambridge .

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Budget transparency and financial sustainability

Journal of Public Budgeting, Accounting & Financial Management

ISSN : 1096-3367

Article publication date: 16 June 2022

Issue publication date: 19 December 2022

This study investigates the transparency of budgets by examining its relationship with financial sustainability, which is a central area of research in the public-sector context.

Design/methodology/approach

Referring to the public value framework, a large sample of 110 countries has been investigated, implementing econometric models where the dependent variable is the Open Budget Index (OBI), published by the International Budget Partnership (IBP), and the test variables are different indicators of financial sustainability.

The results that emerge from the analysis suggest that budget transparency could be positively associated with the financial sustainability of governments, beyond the traditional aims of enhancing citizens' trust and participation.

Originality/value

This research offers important insights for policy areas, suggesting that improving budget transparency could be beneficial for public administrations because of the positive association with financial sustainability.

• Budget transparency
• Financial sustainability

Cuadrado-Ballesteros, B. and Bisogno, M. (2022), "Budget transparency and financial sustainability", Journal of Public Budgeting, Accounting & Financial Management , Vol. 34 No. 6, pp. 210-234. https://doi.org/10.1108/JPBAFM-02-2022-0025

Emerald Publishing Limited

Copyright © 2022, Beatriz Cuadrado-Ballesteros and Marco Bisogno

Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

The 2008 global financial crisis and the current worldwide crisis due to COVID-19 have put great pressure on governments to boost economic recovery through new investments, while ensuring balanced budgets. This can affect the financial sustainability of the strategies and policies decided on by politicians, especially in the long run, due to the need to sustain well-being for future generations ( Schick, 2005 ). This can also affect budget transparency, as it becomes important to clarify which public programs and policies governments have implemented or aim to implement.

Previous studies on transparency have primarily concentrated on two areas: accountability and participation, by adopting a “blinkered” vision. The current research agenda suggests taking a more comprehensive perspective ( Michener, 2019 ), to enrich the discussion on the budget transparency discourse. Furthermore, Anessi-Pessina et al. (2016) , in their literature review on public-sector budgeting, called for further research on the integration of budgeting and performance management, especially considering the allocation and the managerial functions of budgeting. Indeed, the analysis of the relationship between budget transparency and financial management has been less thoroughly investigated as previous studies have mainly concentrated on the effects of budget transparency on citizens' participation and trust. Therefore, this study intends to contribute to this debate by investigating if an association exists between budget transparency and financial sustainability, concentrating on the central government level. The focus on financial sustainability is motivated by the increasing relevance of this concept from both a theoretical and practical perspective ( Caruana et al. , 2019 ).

A large sample of 110 countries is used for the analysis, implementing econometric models where the dependent variable is the Open Budget Index (OBI), published by the International Budget Partnership (IBP), and the test variables are different indicators of financial sustainability. The research hypothesis of the study and the related discussion of the results of the analysis are based on the public value framework ( Bozeman, 2007 ), whose principles are believed to affect the budgeting process and its allocation, managerial and accountability functions ( Douglas and Overmans, 2020 ).

This study contributes to the literature in several ways. First, it bridges two strands of literature, going a step beyond the classic approach, which traditionally links transparency to accountability and participation. Therefore, this study enriches the literature on the effects of budget transparency by examining its influence on financial sustainability, which is a less thoroughly investigated area. Second, it contributes to the literature concerning financial sustainability by capturing several dimensions of this complex, not easily operationalized concept. This research also offers important insights for policy areas, suggesting that improving budget transparency could be beneficial for public administrations because of the positive association with financial sustainability.

The paper begins by reviewing the literature on financial sustainability and budget transparency. The following section depicts the theoretical framework and develops the research hypothesis, while section four illustrates the research methodology (sample, model and variables). Section five presents the results, which are discussed in the final section, along with conclusive remarks and suggestions for future developments of the research.

2. Literature review

2.1 financial sustainability.

Financial sustainability is an emerging area of research, representing a key concept in the public-sector context ( Caruana et al. , 2019 ). In the beginning, scholars mainly focused on the financial distress of public-sector entities, to reveal the possible causal factors of this situation ( Groves and Valente, 2003 ; Kleine et al. , 2003 ; Carmeli, 2007 ; Jones and Walker, 2007 ; Zafra Gómez et al. , 2009 ; Cohen et al. , 2012 ). Other studies concentrated on how to improve the financial conditions of public administrations ( Adams et al. , 2014 ; Drew and Dollery, 2014 ). More recent research has investigated the determinants of financial sustainability and the initiatives implemented by governments ( Navarro-Galera et al. , 2016 ; Rodríguez-Bolívar et al. , 2014 , 2016 ; Bisogno et al. , 2017 ).

One of the fil rouges which links these studies is that financial sustainability is a multifaceted concept, projected in a long-term perspective and based on several dimensions. IPSASB (2013) suggests considering service, revenue and debt dimensions, emphasizing the importance of preserving the entity's ability to maintain (or change) these dimensions while reducing its dependence on factors outside its influence. Therefore, the capacity to satisfy present and future obligations is only part of the issue. It is also necessary to consider the capability of governments to provide public services ( IPSASB, 2013 ) which are assessed in both the short and long run. This means that the ability to manage the financial capacity of a public-sector entity should coincide with the ability to maintain an adequate level of services. Furthermore, the implementation of public programs and policies should guarantee intergenerational equity, ensuring the feasible provision of public services to both current and future generations, while securing the long-term financial sustainability of these programs ( Moldavanova, 2016 ; Caruana et al. , 2019 ). Accommodating these two issues could be complicated and generates potential conflicts between democratic accountability and financial sustainability ( Justice and Miller, 2011 ).

The shift to a long-term perspective implies that the way public administrations think about financial sustainability is different. The central issue is not only current solvency but also the effects that programs and policies could have in the future, as they could affect the future capacity of the entity to create public values, interfere with economic growth, determine an increase in tax burdens, or transfer costs onto future generations. Accordingly, and to operationalize the concept, more than one dimension should be considered ( Cuadrado-Ballesteros and Bisogno, 2019 ; Zafra-Gómez et al. , 2009 ).

Building on Schick (2005) , this research uses four dimensions: solvency, growth, stability and fairness. The first dimension, solvency, refers to the ability of a public-sector entity to satisfy its financial obligations. Traditionally, solvency has been an issue for underdeveloped countries, which are often characterized by incurring high levels of debt to finance their expenditures. However, several developed and developing countries have also had solvency problems due to the 2008 global financial crisis and during the current COVID-19 crisis.

The second dimension, growth, refers to a fiscal policy which aims at sustaining economic growth. Generally, to sustain growth, governments should avoid budget imbalances while they maintain their debt below a specific level. In certain contexts, specific levels are defined by international organizations, and central governments are expected to comply with them. For example, in the European Union (EU) context, budget imbalances of member countries should be below 3% of the GDP, and gross debt should be below 60%. The basic idea supporting the growth dimension is that improving the economic condition of a country will guarantee higher tax revenues in the future because citizens and businesses will pay higher taxes on increased private income. This could pave the way for future budgetary maneuvers geared toward cutting taxes and/or increasing public investments to improve the well-being of future generations. This is the well-known Keynesian approach ( Keynes, 1936 ), according to which deficits are considered suitable when the economic conditions of a country are adverse. One of the main implications is that budgets cannot be retained as a tool to manage short-term adjustments. They should be considered as part of a strategic plan to be managed in a pluri-annual horizon.

The third dimension, stability, expresses the capacity of a public-sector entity to meet future obligations with existing tax burdens. Taxes can be considered as a cost paid by households and private-sector entities for receiving services by governments; these services, in turn, are expected to improve living standards. Therefore, governments should not concern themselves about the increase of taxes (due to spending pressures), as a concurrent increase in living standards is expected to occur. Indeed, according to Wagner's (1912) law, an exponential curve should illustrate the trend of the ratio between public expenditure and national income, and services provided by the government is supposed to have a demand elasticity greater than 1. However, further studies have documented that this law does not take into account appropriately the social cost of distortionary taxation ( Florio and Colautti, 2005 ), namely that the excess burden of taxation can function as a constraint to the supply of public services. Furthermore, it should also be considered the effects of reduced trust in government performance ( Schick, 2005 ) due to corruption, inefficiencies and opportunistic behavior ( Bisogno and Cuadrado-Ballesteros, 2021 ), coupled with the increase—occurred in many countries—of the tax burden (at times almost reaching 50%). Consequently, an increase in the tax burden to cover future expenditures should not be taken-for-granted, especially when considering that levels of expenditure generally tend to increase as well. Therefore, financial sustainability could be compromised in the future, and governments are required to pursue tax stability and, in a broader perspective that also considers the growth dimension, to maintain control over the fiscal balance.

The fourth dimension, fairness, refers to the capacity of a public-sector entity to satisfy current obligations without shifting the cost onto future generations. Despite its apparent simplicity and linearity, fairness is a complex concept to operationalize and measure. Heller (2003) observed that there is no single or universally accepted definition of fairness, and its evaluations across generations by policymakers could be arduous. Accordingly, Schick (2005) suggested interpreting fairness as a sort of social contract across generations. He claimed that disproportionate distributions of tax burdens and expenditure benefits would not be sustainable in economic and political terms, since the predominant need for tax rate (which tends to discourage work, investments and savings) could set back the wellbeing of the country, and future taxpayers could insurge against what they may perceive as confiscatory tax rates ( Schick, 2005 ).

This study uses budget balance, tax burden, public indebtedness and economic growth to represent the first three dimensions, that is, solvency, growth and stability. These are the most relevant and measurable indicators to be considered as proxies for financial sustainability when presenting a holistic picture of this multifaceted concept. Fairness is not directly represented because it is very complicated to operationalize ( Heller, 2003 ). Nevertheless, the four dimensions of sustainability (solvency, growth, stability and fairness) overlap, so the four indicators used here indirectly refer to fairness as well.

2.2 Budget transparency

Transparency is a broad term which has been used to point out various aspects of governmental activities. Consequently, different frameworks have been used and a risk of overlapping could result. Following Cucciniello et al. (2017) , two approaches can be identified. The first one is based on the availability of information, which, in turn, refers to different issues such as budgetary or political matters, administrative procedures ( Meijer et al. , 2012 ; Pina et al. , 2010 ) and operational issues ( Tejedo-Romero and Araújo, 2018 ).

The second approach relies on the flow of information ( Hollyer et al. , 2011 ; Kaufmann and Bellver, 2005 ), which means focusing on the relationship between a public-sector entity and its stakeholders. Transparency can therefore be investigated through both a horizontal dimension (people outside the organization can observe what is going on inside it and vice versa: outward and inward transparency, respectively) and a vertical dimension (from subordinates to superiors or vice versa: upward and downward transparency, respectively) ( Heald, 2006 , 2012 ).

Retaining these frameworks as a reference, budget transparency can be defined as the disclosure of full fiscal information in a timely and systematic way ( OECD, 2002 ). Previous literature ( Premchand, 1993 ; Kopits and Craig, 1998 ) defined budget transparency as the public availability of information regarding governments' decision procedures and transactions, emphasizing that information must be reliable, timely, understandable and internationally comparable. These characteristics allow the observation of the ways in which public affairs are conducted ( Heald, 2012 ), which enables citizens to correctly assess the financial performance of governments ( Rodríguez-Bolivar et al. , 2007 ) and to observe the strategies and results of governments' decisions ( Alt and Lassen, 2006a , b ).

Outward transparency has been particularly emphasized, considering citizens as the primary audience for information provided by public-sector entities. This is particularly important in the case of budget transparency due to the key role played by the budget in framing citizens' relationships with these types of organizations. Indeed, among the different forms of transparency—namely, administrative, political and budgetary—most previous studies have investigated budgetary transparency ( Cucciniello et al. , 2017 ), making it clear how governments intend to collect and spend money and how they plan to disclose this kind of information.

Outward transparency also considers the outcome of budget transparency, examining its effects on both citizens and governments. In the first case, budget transparency is believed to improve citizens' participation as well as their trust in government ( Orosz, 2002 ; Justice and Dülger, 2009 ; Harrison and Sayogo, 2014 ; Ríos et al. , 2017 ). In the second case, the focus is on accountability, involving what Michener (2019 , p. 139) calls a “fixation on the transparency-as-a-means-to-accountability-and-participation paradigm”.

As a result, other areas of research have been less vigorously investigated, for instance, financial management. Spending, debt and deficits are standard outcomes examined in the wider literature on budget transparency, but the macro results are unconclusive ( De Renzio and Wehner, 2017 ; Alt, 2019 ). Alt and Lassen (2006a , b) noted larger deficits and debt levels in low-transparency countries. Similarly, Benito and Bastida (2009) document that higher levels of budget transparency reduce the possibility for politicians to use fiscal deficits to pursue opportunistic objectives, consequently improving financial management; these studies, however, found no evidence on debt levels. Blume and Voigt (2013) find neither association between budget transparency and government spending in the 1990s, although Alt and Lowry (2010) noted that increased transparency led to greater fiscal scale in the USA.

In such a situation, Anessi-Pessina et al. (2016) suggest investigating the relationship between budgeting and performance management more deeply, especially considering the managerial and the allocation function of budgeting. Accordingly, budgeting should not be regarded as an internal matter. Following Reddick et al. (2017) , budget transparency should be oriented toward the creation of public value, and governments are required to ensure a good level of financial sustainability of the policies to be implemented as expressed through the budget.

3. Theoretical framework and research hypothesis

This study refers to the public value framework to investigate the association between budget transparency and financial sustainability. Broadly speaking, the concept of public value is based on the rights and benefits citizens should (and should not) be entitled to, the obligations of citizens to society and the state, and the principles on which governments and policies should be based ( Bozeman, 2007 ). It can be expressed by referring to governments' ability to meet the needs of citizens ( Spano, 2009 ), meaning that public value relates to what is perceived as good for the public, which must be then reflected in governmental performance ( Steccolini, 2019 ). Relying on the pragmatic conception of the public interest as developed by Dewey (1927) , the public value concept has been interpreted as a concrete tool to move from deliberation to action ( Bozeman, 2007 ), namely—in the case investigated here—from budget approval to budget execution and related controls. In this vein, political participation, accountability and transparency are retained to be fundamental pillars in the public value discourse. Indeed, as Douglas and Overmans (2020) point out, public value principles can affect the budgeting process and its allocation, managerial and accountability functions.

The allocation function was usually conceived as the result of a political conflict, where different parties try to get as much money as possible. As a result, budgets tended to lose their connection with the objectives to be achieved ( Rubin, 2010 ), which conversely are put at the heart of the budgeting process in the following (business-like) step, where budgets have been perceived as the result of a technocratic effort to associate spending and performance ( Osborne and Gaebler, 1992 ). Under the public value framework, the allocation function is perceived as an attempt to go beyond the narrow aim of pursuing organizational objectives, to achieve collectively desired outcome, requiring more decision-making and more transparency ( Douglas and Overmans, 2020 ).

The managerial function has traditionally received less attention ( Schick, 2009 ), as budgets were managed through authorizing executive actors after formal approvals. Subsequently, the concept of performance budget was emphasized to underline the importance of achieving output targets connected to the budget. The public value framework suggests adopting a broader perspective to involve more community actors ( Posner et al. , 2009 ), which in its turn asks for more transparency in the management process ( Douglas and Overmans, 2020 ).

The accountability function was initially based on formal checks to assess if money was spent correctly, namely in accordance with their dedicated line-items and following the prescribed procedures. Later on, according to the development of the managerial function, accountability started focusing on the outputs achieved, making it possible to discuss governments' performance and the value for money achieved. The public value framework tends to enrich further the accountability discourse ( Gains and Stoker, 2009 ). Although this larger concept does not imply that a shared vision—regarding which values should be pursued—is automatically achieved (budgets remain based on political debates), a greater transparency level is required.

Transparency seems then to be the fil rouge that links the three budget functions, and scholars clearly state that transparency is “a condition for the creation of public value” ( Douglas and Meijer, 2016 , p. 941). Integrating public value into the budgeting process is believed to improve the transparency and clarity of the budget, facilitating balancing democratic requests with efficiency needs ( Bracci et al. , 2019 ).

It is also worth observing that institutional and legal frameworks are implemented to reduce the propensity of politicians to partake in opportunistic activities ( Cuadrado-Ballesteros et al. , 2019 ). Indeed, institutional expectations are assumed to be accommodated by public-sector organizations ( Brandtner and Suárez, 2021 ), whose behaviors are responses to external pressure ( DiMaggio and Powell, 1983 ; Meyer and Rowan, 1977 ; Powell and DiMaggio, 1991 ). In the same vein, politicians could be subjected to external pressure to disclose information, leading to the implementation of an open budget approach.

Following Barrett (2002) , transparency is essential to ensure that public bodies are fully accountable. Therefore, being accountable and “opening” the budget could stimulate politicians to act in the interest of citizens by attempting to allocate public resources in the best possible way, which leads to better financial sustainability. In fact, gross disproportionate distribution of both tax burdens and expenditure benefits would not be acceptable, as they may lead to economic and political issues ( Schick, 2005 ), as observed in Section 2.1 . According to Reddick et al. (2017) , budgeting and budget transparency should be oriented toward the creation of public value, preserving the well-being of both current and future generations through the financial sustainability of implemented policies.

A higher level of budget transparency is positively associated with the financial sustainability of governments.

The sample selection is determined by the availability of data about budget transparency, which have been retrieved from the IBP Website [1] . This is an independent non-profit organization, formerly a project of the Center on Budget and Policy Priorities. IBP works in collaboration with multiple actors (civil society, state actors, international institutions, and, most recently, the private sector) to empower citizens to participate in budgeting processes and to shape policies and practices that promote equity and justice on a sustainable basis ( IBP, 2018 ).

IBP develops the Open Budget Survey to ranking a wide range of countries according to the amount and timeliness of budget information that governments make publicly available ( De Renzio and Masud, 2011 ). This organization has published the results of the Open Budget Survey in the period 2006–2019, although with some gaps. Concretely, data are available for 2006, 2008, 2010, 2012, 2015, 2017 and 2019.

For this study, a sample of 110 countries has been chosen from which data regarding budget transparency are published on the Open Budget Surveys for 2008, 2010, 2012, 2015, 2017 and 2019 [2] (see Appendix ). To deal with the gaps (2009, 2011, 2013, 2014, 2016 and 2018), there are two ways of working: firstly, scores may be interpolated for non-survey years, by using the mean value; secondly, the panel data may be considered unbalanced and using only the available information ( Gelman and Hill, 2006 ). This issue is discussed in the next section.

Data concerning financial sustainability were obtained from the World Development Indicators (WDI) database, which is the primary World Bank collection of development indicators. These sustainability indicators refer to solvency, growth, tax stability and fairness, according to Schick (2005) and will be described in the following section. Given the sample of selected countries based on the available data on budget transparency, as many sustainability indicators as possible were selected from the data found in the World Bank database.

Furthermore, the results were controlled by other socioeconomic and political factors. The socioeconomic data were obtained from the WDI database; while data on political factors were obtained from the Database of Political Institutions (DPI), which presents institutional and electoral results data, such as measures of checks and balances, tenure and stability of the government, identification of party affiliation and ideology, and fragmentation of opposition and government parties in the legislature, among other factors ( Cruz et al. , 2018 ).

4.2 Model and variables

This research uses the following model to test the relationship between budget transparency and financial sustainability: (1) Sustainability i t = γ + λ   Sustainability i t - 1 + α   OBI i t - 1 + β   Controls i t + η i + ε i t

In the model, i and t refer to each country and year, respectively; γ , λ , α and β are the parameters to be estimated; η i refers to unobservable heterogeneity and ε it is the classic disturbance term.

Fiscal balance (Balance) is calculated as central government revenue, minus expense and the net investment in nonfinancial assets, expressed as a percentage of the GDP. It represents two situations, namely, net lending (+) or net borrowing (−).

Short-term debt (Debt) is a percentage of the total external debt of the central government. This is a proxy for solvency problems since the greater use of short-term debt implies having a greater amount of resources available in the short term to be able to face the volume of debt that matures in less than a year.

Tax burden (Revenue) is represented by the ratio of central government revenue (excluding grants) to GDP, which will have to increase to finance commitments that will come due in the future. Revenue is cash receipts from taxes, social contributions and other revenue such as fines, fees, rent and income from property or sales.

Economic development (Growth) is one of the main objectives of governments, but it should be sustainable, which means that governments should manage their finances prudently to assure future growth and well-being. Fiscal imbalance diminishes future growth, so economic growth could be used as a proxy for financial sustainability. Concretely, the GDP per capita growth is used here.

OBI represents the level of budget transparency of central government, by using the OBI published by the IBP. This index takes values between 0 and 100, from the lowest to the highest level of transparency. The scoring criteria is based on 92 questions that assess the amount and timeliness of budget information that governments make publicly available in eight key budget documents that every country should publish ( De Renzio and Masud, 2011 ): Pre-Budget Statement, Executive's Budget Proposal, Enacted Budget, Citizens Budget, In-Year Report on financial situation, Mid-Year Review of financial situation, Year-End Report on financial situation and Audit Report. Additionally, as OBI has year gaps, the variable OBI_mean was created to fill the gaps and then being able to use a full dataset without missing values in the main indicator, that is OBI. Despite there are several techniques for this issue, the most traditional and classical method ( Gelman and Hill, 2006 ) was used here, and each missing OBI value was replaced with the mean of the observed values [3] for that variable.

It must be considered that OBI has undergone adjustments in the survey questionnaire over time, especially in 2017, when the definition of “public availability” of documents changed to consider technological developments over the past decade. From 2017, only those budget documents that are posted on a relevant government website in a timely manner are now considered publicly available ( IBP, 2017 ), while documents that were published in hard copy only in a timely manner were considered available in prior rounds. Nevertheless, for most countries included in the survey, that change had no effect on their 2017 scores or on the 2015–2017 comparisons ( IBP, 2017 ).

Controls is the vector of the control variables, which represent different socioeconomic and political factors that affect levels of financial sustainability ( Bisogno et al. , 2017 ). Socioeconomic characteristics refer to the whole economy, and political factors refer to the central government. Concretely, the number of inhabitants (Population), unemployment rate (Unemployment), natural resource wealth (Nat_resources), the level of freedom of the press (Media_free), government ideology (Left), the government fragmentation and political competition (Fragmentation and Votes), the electoral and pre-electoral moment (Elections) and the legal origin of company laws or commercial codes (Origin). Table 1 shows the definition and source of each variable.

4.3 Technique of analysis

Initially, the fixed- or random-effects (FE or RE) estimators could be used to estimate parameters γ , λ , α and β in the model. However, the two estimators require homoscedasticity and no serial correlated errors. So, these conditions were firstly tested by using the Breusch–Pagan test and the Wooldridge test, respectively. The p -values obtained are lower than 0.05, which means that the null hypotheses of homoscedastic errors, and no serially correlated errors must be rejected. Thus, neither FE nor RE estimators are appropriate in this case.

In addition, endogeneity problems also appear in the model for three reasons ( Wooldridge, 2010 ): (1) the use of proxy variables to represent concepts that are difficult to represent because they are not directly observed, such as OBI; (2) results could be controlled by additional variables (e.g. inflation, population density, dependency ratio, immigration, education level, quality of life, etc.) but have been omitted due to multicollinearity problems with other control variables, especially with OBI ( Alcaide Muñoz et al. , 2017 ); and (3) there is reverse causality because it may be that fiscal situation impacts on transparency, for governments will be more transparent when fiscal outcomes are better. Furthermore, the model is autoregressive, so endogeneity is obviously a problem in this case.

Endogeneity should be addressed, by using instrumental variables (IV) methods, but, in the presence of heteroscedasticity (which is the case in this dataset), the conventional IV estimator is consistent but inefficient ( Baum et al. , 2003 ). So, the model was estimated using the Generalized Method of Moment (GMM) of Arellano and Bover (1995) , which uses the lagged values of endogenous and predetermined variables as instruments to correct endogeneity. It has been demonstrated that these instruments are uncorrelated with the error term ( Arellano and Bond, 1991 ), and they usually contain better information on the current value of the variable than outside instruments.

However, this approach may lead to a proliferation of instruments. A higher number of instruments increases the efficiency of the estimator ( Arellano and Bond, 1991 ); however, if the number of instruments is excessively high (overidentification), this can negatively affect the consistency of the estimates and the reliability of the specification tests ( Bontempi and Mammi, 2015 ). Accordingly, instrument validity is tested with the Hansen test, under the null hypothesis that “the over-identifying restrictions are valid”. In addition, this estimator requires the condition of no correlation in the error term ( Cameron and Trivedi, 2009 ). To check this condition, we use the Arellano-Bond test for AR(2) of first differences, under the null hypothesis of “no serial correlation between the error terms”. The results of these tests are shown at the bottom of the table of results.

5.1 Descriptive analysis

Table 2 illustrates the descriptive statistics for all the variables used in this study. The mean value of Balance suggests a situation of fiscal deficit, on average, although there are huge differences in the sample: Timor-Leste shows the maximum values until 2014, but it also shows the minimum value (−52.52%) in 2016. The mean value of Debt suggests that short-term debt is about 13% of the total external debt, on average. This value rises to 84.37% in Timor-Leste in 2012, while other countries show a percentage near 0, like Burkina Faso, Lesotho, Liberia, Nigeria and Senegal.

Revenue is about 26.4% of the GDP, on average. Timor-Leste had the highest level (341.52% in 2012), and Myanmar showed the lowest value (26.40% in 2018). The last proxy for financial sustainability considered in this study is the GDP (per capita) growth, which is 1.91%, on average. The country in the sample with the lowest GDP growth is South Sudan (−47.59% in 2012), while Afghanistan shows the highest growth rate (18.52% in 2009).

Regarding the budget transparency indicator (OBI), the mean value is 43.18 in a range of 0–100, suggesting that, in general, sample countries show a low level of budget transparency. The variable OBI_mean, which was artificially created by assigning the mean value to between the years prior and after each gap, shows similar descriptive statistics to OBI. New Zealand has the best situation (OBI = 93 in 2012), while some countries show the lowest value (OBI = 0), like Chad, Equatorial Guinea, Qatar and Sudan. In general, levels of budget transparency improved since 2008, as Figure 1 illustrates, although the overall score lowered in 2017 because some countries saw their ratings reduced, such as Venezuela, Yemen, Niger and Lesotho; OBI value of these countries fell to 0 in 2017. In 2019, the OBI value increased again, especially in some countries, like Vietnam and Zimbabwe, where the OBI increase more than 100% between 2017 and 2019.

Finally, Table 2 also shows the descriptive statistics of the rest of the control variables and Table 3 shows the bivariate correlations between the explanatory variables used in this study. In general, independent/control variables are not strongly correlated, i.e. in descriptive terms most of the correlation coefficients are less than 0.5, which is the accepted threshold for multicollinearity problems ( Wooldridge, 2010 ). Nevertheless, two variables seem to be problematic, with correlations close to 0.5; Media_free and Nat_resources are highly correlated with OBI. In such a situation, the Variance Inflation Factors (VIF) [4] are calculated, being lower than 5 in all cases (the highest VIF is 2.65). So, it can be concluded that there are not multicollinearity problems.

5.2 Exploratory analysis

Table 4 exhibits the empirical results of the model. Each equation shows the association between OBI and each dependent variable that represents the financial sustainability of government: Balance, Debt, Revenue and Growth. The p -values of Arellano-Bond test for AR(2) and Hansen test do not allow rejecting the null hypothesis of “no serial correlation between the error terms” and “the over-identifying restrictions are valid”. Therefore, instruments are valid to control endogeneity, although results should not be interpreted in terms of a strict causal link, but they illustrate the relationship between budget transparency and financial sustainability.

In every equation, the first-order lag of the dependent variable can be observed, since the model is autoregressive (i.e. the response variable in the previous period is a predictor). This lag is statistically relevant in all the equations, being positive in all the cases, except in the case of Growth since its coefficient is negative.

OBI is statistically relevant in all the equations. In the first one, the coefficient is positive, meaning that budget transparency is positively associated with the fiscal balance (in other words, it is negatively associated with the deficits). In the second equation, OBI has a negative coefficient, indicating that the higher the level of budget transparency, the lower the level of public indebtedness. These two results suggest that budget transparency could be a good tool to improve government solvency by reducing fiscal deficits and decreasing the use of short-term debt.

In equation (3) ( Table 4 ), OBI is positively linked with Revenue, which means that a higher degree of open budget is associated with (and can, therefore, contribute to explain) a higher level of public revenue. Budget transparency could be a strategy to demonstrate the use of resources that are provided by citizens (through taxes, fees, social contributions, etc.). This legitimizes governments to increase fiscal pressure if the use of these resources is accountable and transparent.

Finally, the last equation shows a positive relationship between OBI and Growth. Accordingly, it could be ascertained that budget transparency is positively associated with the national economic growth, meaning that governments are managing their finances prudently because, if they did not, growth would not be sustainable in the long run. Findings arising from the four explanatory variables are in accordance with the proposed hypothesis, indicating that budget transparency is positively connected with financial sustainability.

Table 4 also includes the coefficients of the control variables.

Regarding socioeconomic variables, Population and Unemployment are negatively related with financial sustainability because they impact negatively on Balance and positively on Debt and Growth. The variable press freedom is positively associated with Balance and Debt but negatively with Growth. Considering that Media_free ranges between 0 (total press freedom) and 100 (no press freedom), the negative links with the former variables suggest that countries with lower levels of press freedom show higher levels of deficits and higher levels of indebtedness. Furthermore, the negative link between Media_free and Growth suggests that press freedom positively contributes to economic growth, since the press may reduce the gap between the government and the general public due to the information flow, thereby helping in the implementation of policies effectively and more efficiently ( Alam and Ali Shah, 2013 ). So, we may conclude that press freedom is positively associated with the financial sustainability. In addition, Nat_resources variable is positively associated with Balance, Revenue and Growth and negatively with Debt. Therefore, it could be presumed that financial sustainability would be better in countries with larger rents from natural resources, even though in the long run, they might be vulnerable to depletion.

Regarding political factors, ideology is statistically relevant in the second and third equations. Concretely, the coefficients of Left are positive, indicating that left-wing governments tend to use more debt and taxes than other governments, probably because they are more oriented toward providing services through public resources. This could explain the positive link with Balance, suggesting a better financial position of countries governed by left-wing parties. The electoral moment is statistically relevant in equation (1) and coefficient is negative, suggesting that deficits are more probable when an election is close to be held. Government fragmentation and political competition are not so relevant. Fragmentation is positively associated with the economic growth; and Votes is positively associated with Balance; but they are not statistically relevant in the rest of equations.

Table 5 exhibits the empirical results of the model by using OBI_mean as independent variable. This allows to increase the number of observations because OBI has no missing values, so the sample covers the whole period (2008–2019) without gaps. The results are like those obtained previously in Table 4 : OBI is positively associated with Balance, Revenue and Growth, but it is negatively related with the level of short-term debt.

6. Discussion and conclusive remarks

The results that emerge from the analysis suggest that budget transparency is positively associated with the financial sustainability of governments. Therefore, illustrating how governments intend to both collect and spend resources in a transparent way is pivotal to their relationship with citizens, according to the outward perspective ( Cucciniello et al. , 2017 ; Heald, 2006 , 2012 ). Our findings are consistent with those of Benito and Bastida (2009) , whose study evidenced that higher levels of budget transparency may reduce the possibility for politicians to use fiscal deficits to achieve opportunistic objectives. This also emphasizes how important it is investigating budgeting and its transparency in connection with the sustainability of governmental policies. Budgets cannot be hidden away in an ivory tower, as they play a central role in creating value for citizens ( Reddick et al. , 2017 ).

Integrating public value into the budgeting process emphasizes the importance of budgets' transparency, helping to balance democratic requests with efficiency needs ( Bracci et al. , 2019 ). From a theoretical perspective, therefore, this research merges two streams of public administration literature. It enriches the literature concerning budget transparency, as it proposes a broader approach, going a step beyond the classic perspective that connects transparency with accountability and participation ( Michener, 2019 ). Interpreted in light of the public value framework, the budget allocation function suggests going beyond narrow organizational goals to pursue collectively desired outcome, to be expressed through the budget. Similarly, the managerial budget function asks for more transparency in the management process. Public values, affecting the budgeting process and its functions ( Douglas and Overmans, 2020 ), are expected to be reflected in governmental performance ( Steccolini, 2019 ). Accordingly—and adhering to the call by Anessi-Pessina et al. (2016) to examine the relationship between budgeting and performance management in greater depth—this study explored the association between budget transparency and financial sustainability by considering different dimensions, also proposing a comparative approach by investigating a large sample consisting of both developed and developing countries.

This study also has practical implications. While implementing reforms to embrace the “openness” movement aimed at improving budget transparency levels, politicians and managers should consider not only the effects on citizens' trust and participation. They should also pay attention to the link that budget transparency can have on the financial sustainability of governments. Therefore, this study contributes to the growing literature on governmental transparency ( Cucciniello et al. , 2017 ) by illustrating that improving transparency levels could be beneficial for public administrations. This is an important insight for policy areas, which suggests that improving transparency is not (only) a window-dressing policy, but it is also related to financial sustainability.

There are three reasons to advise caution in drawing firm conclusions from our findings. First, the relationship between budget transparency and financial sustainability should not be interpreted in terms of a strict causal relationship, as it expresses more an association. Second, financial sustainability is a complex concept which is not easy to observe directly, and it can be operationalized by using different indicators ( Zafra-Gómez et al. , 2009 ). Therefore, future research could investigate the effects of budget transparency on financial sustainability by utilizing different approaches. Third, we have indicated previously that OBI has undergone adjustments in the survey questionnaire over time, especially in 2017. Since that year, only those budget documents that are posted on a relevant government website in a timely manner are considered “publicly available” ( IBP, 2017 ). Nevertheless, for most countries included in the survey, that change has no effect on their 2017 scores or on the 2015–2017 comparisons ( IBP, 2017 ). So, findings that arise from this study are consistent, although this adjustment in the methodology should be considered by readers. Fourth, the sample includes developing as well as developed and transition economies. Although the effects due to different economic development is implicitly captured by variables included in our model (e.g. Growth), it could be interesting to investigate in future research whether the association between budget transparency and financial sustainability differs because of the different development stage of each country.

Furthermore, a promising future research area could consist of investigating the effects of budget transparency on internal organizational routines and decision-making processes. Then, it could be interesting to investigate these effects by considering the viewpoint of politicians and managers, using a case-study approach based on interviews and questionnaires.

OBI evolution (2008–2019)

Description of variables

Descriptive statistics

Bivariate correlations

https://www.internationalbudget.org .

Although there are also data in 2006, the number of countries is reduced in comparison with the rest of years. OBI covers 59 countries in 2006; 84 countries in 2008; 94 countries in 2010; 100 countries in 2012; 102 countries in 2015; 115 in 2017; and 117 in 2019.

OBI 2009 is the mean value between OBI 2008 and OBI 2010; OBI 2011 is the mean value between OBI 2010 and OBI 2012; OBI 2013 is the mean value between OBI 2012 and OBI 2015 because OBI 2014 is not available; OBI 2014 is the mean value between OBI 2012 and OBI 2015 because OBI 2013 is not available; OBI 2016 is the mean value between OBI 2015 and OBI 2017; OBI 2018 is the mean value between OBI 2017 and OBI 2019.

VIF values range from 1 upwards, showing that the percentage of the variance is inflated for each coefficient because it is correlated with other predictors, causing multicollinearity. In general, VIF values higher than 5 suggest the existence of high correlations between predictors and then multicollinearity problems. The VIF values results are not shown here, but they are available under request.

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ORIGINAL RESEARCH article

Financial sustainability and corporate social responsibility under mediating effect of operational self-sustainability.

• 1 Department of Management Sciences, University of Okara, Okara, Pakistan
• 2 Business Studies Department, Namal Institute, Mianwali, Pakistan

Operational and financial sustainability have, over time, remained as issues in the microfinance industry. The microfinance industry is struggling to gain self-sufficiency in Pakistan due to non-performing loans and operating costs. Simultaneously, deliberation on corporate social responsibility (CSR) is also considered in academic literature and organizational practices. However, studies on CSR and financial performance in the microfinance sector are scarce, especially in Pakistan. CSR will develop customer attraction and loyalty, employee attraction, motivation and commitment, MFIs' reputation and access to capital, and eventually build financial performance. Interviews were conducted with branch managers of microfinance institutions to test previous questionnaires. A self-administered survey was conducted to collect data from the managers of the microfinance banks operating in Punjab. Descriptive and inferential statistics were performed to answer research questions using Smart PLS. Most of the microfinance institutions believe in social responsibilities but lacks fund allocation and approval from higher management, and results are in line with prior studies. These empirical findings lead to the perception that CSR is not a barrier performance in microfinance banks as they have access to capital. The results indicated a strong positive correlation between CSR and the financial performance of the MFIs. CSR also positively correlates with customer retention, employees' motivation and attraction, and business reputation. CSR was associated with access to capital but was found to be weak. The research also narrated the limitation and practical implications of the study. The study also discusses further research directions.

Introduction

The microfinance sector has gained attention in the last decade. Microfinance institutions (MFIs) provide microloans to the poor at their doorstep, which is costly and is the main hurdle in operational sustainability. Corporate social responsibility is a further added pressure on these MFIs to gain OSS and financial sustainability. Financial performance is the key to the future expansion of any enterprise. Financial sustainability (FS) is obtained through operational self-sustainability (OSS). It means that enterprises can only be financially sustainable if these are operationally economical ( Hudon and Traca, 2011 ). Corporate social responsibility increases the share price and provides signals to prospective investors ( Godfrey et al., 2009 ; Yang and Suvd, 2017 ; Hussain et al., 2020a , b ). The debacle of corporate social responsibility (CSR) have been well-established in developed economies for the last three decades ( Cochran and Wood, 1984 ; Torugsa et al., 2012 ), but remains a lively debate in emerging nations ( Islam et al., 2017 ). A firm's CSR and financial performance are widely tested, but researchers do not agree on the same points, in terms of these variables' association. Prior studies were conducted to review the relationship between CSR and FS but no conclusive evidence could be found, nor could a consensus be reached on the nature of the relationship ( Cochran and Wood, 1984 ; McWilliams and Siegel, 2000 ; Fauzi and Idris, 2009 ; Lin et al., 2009 ; Tang et al., 2012 ; Abdelkbir and Faiçal, 2015 ; Jiang and Yang, 2015 ; Akben Selcuk and Kiymaz, 2017 ).

Corporate social responsibility is still an essential issue for the microfinance sector as the social impact can only be achieved through outreach ( Woller, 2007 ; Shu and Oney, 2014 ; Nurmakhanova et al., 2015 ; Cho et al., 2019 ). Targeting low income customers is the primary concern for large and sustainable MFIs ( Thomas and Jyothi, 2016 ). Therefore, MFIs have to invest resources in social performance that distract MFIs from core objectives of profitability and operational and financial sustainability ( Woller, 2007 ; Nurmakhanova et al., 2015 ; Naz et al., 2019 ). The target for financial sustainability puts pressure on the MFIs to distract CRS and to target easier-to-reach rich customers to reduce the default risk. This action will result in dislodging from a mission to provide services to the unbanked. On the other hand, CSR will increase social roots, customers' loyalty, poverty alleviation, employee attraction, and access to capital ( Cochran and Wood, 1984 ; Woller, 2007 ; Sweeney, 2009 ; Naz et al., 2019 ). Thus, MFIs have to trade-off between CSR and financial self-sufficiency ( Nurmakhanova et al., 2015 ).

The paper contributes to prior research in three areas. The mediating effect of operational self-sustainability is ignored, which is more significant in the microfinance industry as it has a higher operating cost than conventional banking ( Naz et al., 2019 ). CSR in microfinance institutions (MFIs) is more important than any other industry as MFIs receive donations from donors to enhance outreach and social projects ( Sweeney, 2009 ). Finally, CSR and financial performance are mostly tested through secondary data based on historical data ( Abdelkbir and Faiçal, 2015 ; Manokaran et al., 2018 ). The current study used primary data obtained from the managers [consistent with prior studies of Sweeney (2009) ] of the larger pool of MFIs to find the relationship between CSR and financial sustainability.

The research paper's sequence includes the theory and hypothesis development of financial sustainability, operational self-sustainability, and the corporate social responsibility of MFIs. The following passage discusses the material and data used in the analysis and the empirical findings generated in the study. Furthermore, results of previous reviews, limitations, and implications thereof are also discussed.

Theory and Hypotheses Development

This study looks at the modern finance theory, i.e., efficient market hypothesis, signaling theory, reputation theory, and stakeholder theory to develop hypotheses. Stakeholder theory focuses not only on the interests of stockholders but also fulfills the CSR toward stakeholders, both internally and externally ( Woller, 2007 ; Sayekti, 2015 ; Rhou et al., 2016 ; Freeman and Dmytriyev, 2017 ). Signaling theory posits signals to the company's interested users ( Watts and Zimmerman, 1978 ; Godfrey et al., 2009 ). Thus, Watts and Zimmerman (1978) signaling theory urges one to follow full disclosure assumptions so that stakeholders have complete information about the enterprise. Modern finance theory, i.e., efficient market hypothesis (EMH), reflects that all information about the assets is readily available to the investors and is reflected in the share price ( Malkiel, 2003 , 2005 ; Fama and French, 2004 ). Therefore, the financial performance of the company will send the signal to investors for their future decisions.

Financial Sustainability

Microfinance institutions can cover all expenses, operational costs, financial costs, and service expenses to enhance equity market value and to achieve their social goals ( Thomas and Jyothi, 2016 ). MFIs charge a high-interest rate to attain financial sustainability, which is often criticized by the customers and policymakers in developing countries like Pakistan, India, and Bangladesh ( Thomas and Jyothi, 2016 ). Return measures financial performance on Assets ( Sweeney, 2009 ), which is the core goal of all stakeholders. Most prior studies ( Cochran and Wood, 1984 ; Tucker, 2001 ; Hartarska and Nadolnyak, 2007 ; Sweeney, 2009 ; Gibson, 2012 ; Thomas and Jyothi, 2016 ) look at the return on equity (ROE), return on assets (ROA), return on sales, and earnings per share (EPS). These studies also find a positive association between CSR and financial performance. Financial sustainability is measured through two approaches; accounting returns and investor returns ( Cochran and Wood, 1984 ; Lin et al., 2015 ).

Investor Returns

Prospective investors always want to know about returns on their investment. Investor return was employed in the studies of Moskowitz (1972) to measure the enterprise's financial performance and was then later used in many other studies ( Cochran and Wood, 1984 ; Naz et al., 2019 ). Price per share was used as an investor return in Moskowitz (1972) studies, which was later found to be faulty. The dividend yield is also used to measure investor returns ( Moskowitz, 1972 ; Cochran and Wood, 1984 ). These two measures of investor returns disregard the element of risk.

The finance theory or capital asset pricing model measures the risk and returns of holding assets ( Cochran and Wood, 1984 ; Fama and French, 2004 ). The concept of “beta” is introduced, which is the slope of regression. The average coefficient is one, and if the stock beta is below 1, the stock is considered defensive, while if stock beta is over 1, it is considered aggressive ( Cochran and Wood, 1984 ; Fama and French, 2004 ). Later, modern finance theory, the efficient market hypothesis, was generated, affecting future cash inflows and share prices ( Fama, 1991 ; Fama and French, 2004 ; Hussain et al., 2020a , b ).

Accounting Returns

Accounting returns remain the other measures for financial performance ( Cochran and Wood, 1984 ). The advantage of using accounting returns is to see the enterprise's implementation of reporting standards and managerial policies. Accounting returns are based on historical data, which leads to inflation that is the drawback of these measures ( Cochran and Wood, 1984 ). Three accounting returns are employed in the studies of Cochran and Wood (1984) ; (1) the ratio of EBIT to assets, (2) the ratio of EBIT to sales, and (3) excess market value. Cochran and Wood (1984) study discussed the specific weakness of financial leverage differences as firms are selected from different industries. The said issue does not arise in the present study as we have collected primary data from the managers of the MFIs.

Prior studies used earnings per share (ESP), return on equity (ROE), and return on assets (ROA) as a proxy for financial performance in accounting measures ( Tsoutsoura, 2004 ; Wafula et al., 2017 ; Cho et al., 2019 ). The current study also employs ESP, ROE, and ROA as an accounting measure to test financial performance. Still, the information is gathered through a questionnaire from the managers of MFIs banks.

Corporate Social Responsibility

Corporate social responsibility is the society's expectation from organization operating in their locality ( Baldo, 2014 ; Sayekti, 2015 ; Galdeano et al., 2019 ). CSR is part of business ethics, and business ethics must be followed in corporate sectors ( Christensen et al., 2007 ). Furthermore, the World Bank described that “companies with social responsibilities always think about their impact on environment, communities, and stakeholder goals to achieve profit.” Companies with CSR responsibilities have to think about customers, employees, the environment, and its reputation, which is known as win-win strategies ( Sayekti, 2015 ; Tuan, 2016 ). Nicolopoulou (2011) highlights the prominence of knowledge transfer toward CSR literature which helps in understanding the concept better.

CSR has a positive impact on sales, share price, and profit, leading to financial performance ( Yang and Suvd, 2017 ). Jaakson et al. (2009) , Loew et al. (2004) , and Galdeano et al. (2019) defined CSR as “a concept whereby companies integrate social and environmental concerns in their business operations and their interaction with their stakeholders” voluntarily. CSR includes social responsibilities like legal, economical, and ethical activities ( Cho et al., 2019 ) and a firm's contribution toward society, but these are not followed adequately in developing countries ( Ofori and Hinson, 2007 ).

CSR's role as a moderating variable is tested in the studies of Tuan (2016) on organizational ambidexterity-entrepreneurial orientation relationships. CSR has positively moderated the relationship between both variables. CSR activities are not performed in all industries that never served CSR activities, but claimed regular exercises as CSR activities ( Cherapanukorn and Focken, 2014 ). Furthermore, SMEs and family firms cannot correctly implement social and environmental practices ( Murillo and Lozano, 2006 ; Marques et al., 2014 ).

Social performance in the microfinance industry is the outreach of microfinance to low income customers which is the objective of microfinance institutions ( Woller, 2007 ; Thomas and Jyothi, 2016 ). The activities covered under social performance in MFIs include targeting customers and assessing the customers' needs ( Thomas and Jyothi, 2016 ). In the current study, social responsibility involves customer retention, employees' trust in their MFIs to perform in terms of social objectives, social acceptance, and social capital building ( Sweeney, 2009 ). These objectives of social performance will increase the future sustainability of the enterprise. CSR is mostly applied in enterprises but is not tested in MFIs.

Customers Retention

Corporate social responsibility contributed positively toward the enterprise image and developed the customers' trust in the firms that had enhanced the organization's financial performance ( Galdeano et al., 2019 ). Customer retention is a benefit of CSR activity in an organization, which eventually contributes to sales and profit ( Lee and Heo, 2009 ; Lee and Shin, 2010 ). On the other hand, customers argue that firms actively involved in CSR activities are trusted and produce higher quality products ( McWilliams and Siegel, 2000 ). Prior studies claim a positive impact of CSR on sustainability and that it also increases customer retention ( Berman et al., 1999 ; Brammer and Pavalin, 2006 ; Brammer et al., 2007 ; Carmeli et al., 2007 ).

Consumers are more interested in the firm's CSR activities than traditional factors like product price, quality, intrinsic value, and the financial performance of the firm ( Brammer and Millington, 2008 ; Sweeney, 2009 ; Jose et al., 2012 ). The evidence of consumers' interest in CSR can be reviewed in many prior studies ranging from theories, blogs, magazines, books, and publications like “Shopping for a Better World.” Sometimes, customers even care more about CSR activities than product quality and price ( Sweeney, 2009 ). Prior studies mainly focus on customer retention as a formative construct of CSR in manufacturing firms but it is mostly ignored in the microfinance sector. Therefore, this gap is filled in the present study.

Employees Attraction and Loyalty

Corporate social responsibility also motivates internal employees ( Skudiene and Auruskeviciene, 2012 ) to increase their commitment toward their work and firm ( Brammer et al., 2007 ; Collier and Esterban, 2007 ). Employee engagement increases in firms where CSR activities are performed, and these activities impact the businesses in various positive ways ( Hurst and Ihlen, 2018 ). Employees' loyalty develops toward multiple benefits like higher performance, improved customer service, and attracts new employees ( Galdeano et al., 2019 ). It means that employees with higher loyalty and engagement put forward their best efforts to increase the financial performance of the organization ( Brammer and Pavalin, 2006 ; Brammer et al., 2007 ; Brammer and Millington, 2008 ).

A potential applicant for a job prefers to apply to firms that are engaged in CSR activities. Furthermore, firms with CSR attract more applicants to open positions ( Sweeney, 2009 ). The findings are furthered confirmed, in that potential employees pay closer attention to the firms' contribution to environmental issues, community projects, and diversity issues ( Sweeney, 2009 ). Employee loyalty and attraction are considered in all manufacturing firms but is not used in the microfinance sector.

Enterprise Reputation

Enterprise reputation is an intangible asset and often deals with goodwill ( Davies and Miles, 1998 ). Goodwill is sold and narrated in financial statements at different values using International Accounting Standards (IASs). This reputation affects the share value in the long-run and satisfies stakeholders' satisfaction with the firm's policies ( Siano et al., 2010 ; Baldarelli and Gigli, 2014 ). Stakeholder theory and reputation theory are the drivers of corporate social responsibilities. The relationships of enterprise reputation and corporate social responsibilities in practice have already been tested in many prior studies and contribute to the literature. Reputation is an intricate marvel but is the primary formative variable of CSR ( Janney and Gove, 2011 ).

CSR develops the enterprise's reputational capital, which increases public trust ( Tang et al., 2012 ) and market value, indicating financial performance ( Jiang and Yang, 2015 ; Yang and Suvd, 2017 ). CSR contributes to reputation theory and, in return, enhances corporate financial performance ( Wang and Shenghua, 2016 ). Prior studies focused on the nature of the relationship between CSR and CFP in firms that had outperformed the market ( Moskowitz, 1972 , 1975 ; Galdeano et al., 2019 ). Likewise, CSR activities increase the enterprise's financial performance, which increases the enterprise itself ( Brammer and Pavalin, 2006 ; Brammer et al., 2007 ; Brammer and Millington, 2008 ; Iamandi, 2012 ). Reputation was tested as a mediating variable in the studies of Sweeney (2009) between CSR-FP.

The resource-based view generates a competitive advantage and signals to shareholders and investors who want to make future contracts with the firm ( Sweeney, 2009 ). Prior studies ( Brammer and Pavalin, 2006 ; Sweeney, 2009 ; Siano et al., 2010 ) found a positive association between enterprise reputation and financial performance. Therefore, a firm's good reputation enhances share market values, and people trust the firm's information, whereas a lousy reputation reduces the market value of products and services. Therefore, the authors wanted to see the importance of MFIs' contribution in CSR activities.

Social Capital Availability

Under the resource-based view, the CSR-CFP link enhances the social capital for firms engaged in social and environmental activities ( Brammer and Pavalin, 2006 ; Brammer et al., 2007 ; Brammer and Millington, 2008 ). More resources are allocated for CSR activities by some corporate companies. Some companies resisted the concept of additional investment in society for the environment and other activities as it reduces its profit ( McWilliams and Siegel, 2000 ). Firms performing CSR activities have a greater chance of accessing social capital. Potential investors choose to invest in firms with adequate CSR ( Baron, 2008 ). Sweeney (2009) also mentioned in his studies that creditors like credit unions, banks, and MFIs lean more toward firms with social responsibilities. Therefore, the authors wanted to test social capital available for firms with more CSR activities.

Corporate Social Responsibility and Financial Performance

Corporate social responsibility and financial performance have been reviewed in many prior studies in both developed and developing economies, and mixed results have been found, therefore, a meta-analysis was conducted and is discussed in the following subheadings.

Developed Economies

Cochran and Wood (1984) provided evidence of a weak positive correlation among CSR and FS in 39 firms registered in America. Yang and Suvd (2017) analyzed CSR's impact on the financial performance of 16 low-cost airlines. CSR increases the financial performance of carriers. Wang and Shenghua (2016) reviewed CSR and CFP links in the meta-analytic framework in 42 studies. The relationship was found to be positive and significant and supported the stakeholder theory. CSR and CFP also support the market efficiency hypothesis. The association of CSR and financial performance is more notable for developed countries than in developing countries; however, it was found to be neutral in McWilliams and Siegel (2000) study.

Rhou et al. (2016) researched CSR awareness as a mediating variable on CSR and FP's association in 5,812 restaurants in Northern America from CPI. The results indicate that CSR awareness affects the initiatives of the managers for CSR and financial performance. The data for 500 companies registered in the American stock exchange from 1998 to 2008 were collected for the analysis of CSR and intellectual capital and financial performance was collected from the Compustat database ( Lin et al., 2015 ). The results indicate a direct impact of CSR on FP through the mediating effect of intellectual capital. Tsoutsoura (2004) demonstrated a positive and significant impact of social responsibilities on financial performance in S&P 500 firms in Northern America.

The broader Canadian firms were motivated to issue separate CSR reports as they faced political and societal pressures. In contrast, small firms were found to be less-interested in the publication of information ( Thorne et al., 2014 ). It generates concerns that even in developed countries, small firms hesitate to take part in CSR activities. Tang et al. (2012) collected longitudinal data from 130 firms of the S&P 500 from 1995 to 2007 to establish the CSR-CFP relationship in the presence of an engagement strategy. The results could not, however, establish the relationship of CSR-CFP.

Stubbs and Schapper (2011) worked on sustainability and CSR in the educational institutes of Australia. The authors' used a case study on two subjects of corporate sustainability. CSR and sustainability have a positive relationship. Australian SMEs were researched in Torugsa et al. (2012) , where the authors empirically tested the association of proactive CSR and FP. The study results are consistent with the BRV theory and found its capabilities to improve financial performance. Sweeney (2009) used the structural equational model in SMEs and larger firms to determine CSR and FP's positive association and obtained results consistent with prior studies.

Emerging Markets and Developing Economies

Fauzi and Idris (2009) researched the association of CSR and corporate financial performance, of the good management theory and the slack resource theory of firms in Indonesia. The findings showed that CSR positively impacted the financial performance of companies. Sayekti (2015) studied Indonesia Stock Exchange companies for 4 years to determine the relationship between strategic CSR and non-strategic CSR and financial performance. The empirical findings showed a positive effect of strategic CSR on financial performance, whereas non-strategic CSR was negatively associated with FP.

The relationship between social performance and financial sustainability of MFIs in India was assessed by Thomas and Jyothi (2016) . The financial sustainability of MFIs is different from conventional banks and are measured differently as it includes the balance between social and financial performance. Akben Selcuk and Kiymaz (2017) found a relationship between firm performance and CSR in firms listed in Borsa Istanbul and used the content analysis to obtain data from financial statements. The results showed a negative association among the variables.

A study was conducted by Cho et al. (2019) on 191 firms listed at the Korea stock exchange to measure CSR performance and financial performance (profitability, firm value). Profitability was measured through return on assets. The empirical evidence found a positive relationship between CSR performance and profitability and firm value. The association was also tested in the studies of Platonova et al. (2018) , where the authors found a significant positive association of CSR disclosure and financial performance in the Islamic banks of GCC over 15 years.

Another study was conducted by Ofori and Hinson (2007) in Ghana to gain insight on CSR's perspective in 100 leading firms. The prior study was further extended in Kuada and Hinson (2012) studies in Ghana, where local firms adopt CSR policies according to society's local culture. Galdeano et al. (2019) predicted future financial performance through CSR and the moderator role of organizational engagement in Bahrain's banking industry. The findings showed a positive relationship of CSR on the FP and reported a significant impact of organizational engagement on the CSR-FP relationship. Doh et al. (2015) focused on the emergence of CSR and sustainability in Brazil's emerging markets. The authors worked on the impact of societal, institutional, and organizational (CSR activities) on society.

Using the extensive literature on the CSR and FP in both developed and developing countries, CSR was applied to the Aviation industry, Higher Education, Restaurant Industry, SMEs, Islamic banks, and manufacturing firms. The CSR and Financial performance were not tested in the microfinance sector of Pakistan. The following hypothesis was generated for testing.

Hypothesis 1 : Corporate Social Responsibility is positively attached to Financial Sustainability.

Esampally and Joshi (2016) identified five OSS determinants in India's MFIs and non-banking financial companies. These include yield on GLP, total assets, cost per borrower, GLP, and several active borrowers. The findings showed that the increase of OSS could be obtained through a rise in total assets and yield on GLP, while OSS will decrease with cost per borrower and active borrowers in MFIs. Strategies were developed for CSR and sustainability in developing countries' multinational enterprises (DCMNES). CSR directly improves the OSS of the companies and enhances the firm's value ( Doh et al., 2015 ). The following hypothesis can therefore be generated.

Hypothesis 2 : Corporate Social Responsibility is positively associated with Operational Self-Sustainability in the microfinance sector of Pakistan.

Operational Self-Sustainability

The operational cost of MFIs is higher than other banks as these provide services to the unbanked at their doorstep ( Naz et al., 2019 ). The MFIs have to perform this function to raise low-income customers' income levels ( Akram and Hussain, 2011 ). Therefore, measurement of OSS (revenues minus operational expenses) is a better approach than FSS ( Rai et al., 2010 ; Schäfer and Fukasawa, 2011 ; Rai and Rai, 2012 ). Operational self-sufficiency is expressed in percentage and shows whether MFI covers operating cost, financial cost, and loan losses, and is achieved if it is more than 100 percent ( Esampally and Joshi, 2016 ). OSS can be found by reducing cost or increasing revenues ( Adongo and Stork, 2006 ; Schäfer and Fukasawa, 2011 ; Beg, 2016 ).

The financial sustainability in MFIs can be obtained through the gaining of operational self-sufficiency in the long term, which reduces cost and increases efficiency ( Adongo and Stork, 2006 ; Balkenhol, 2007 ; Rai et al., 2010 ; Rai and Rai, 2012 ; Hamad and Duman, 2013 ; Velnamby and Alagathurai, 2014 ; Balagobei, 2016 ; Beg, 2016 ; Esampally and Joshi, 2016 ; Lensink et al., 2018 ). Khan and Sulaiman (2015) reported the inefficiency of MFIs in operating cost and loan officers and optimal use of financial assets. It means that an MFI is financially sustainable if it is operationally self-sustained. The following hypothesis can therefore be generated.

Hypothesis 3 : Operational Self-Sustainability is positively associated with financial sustainability.

Corporate Social Responsibility was directly tested with Financial performance in many prior studies ( Adongo and Stork, 2006 ; Balkenhol, 2007 ; Rai et al., 2010 ; Rai and Rai, 2012 ; Hamad and Duman, 2013 ; Velnamby and Alagathurai, 2014 ; Balagobei, 2016 ; Beg, 2016 ; Esampally and Joshi, 2016 ; Lensink et al., 2018 ) but operational self-sustainability is the critical variable in the Microfinance sector. OSS's role cannot be ignored as the literature depicts that an MFI is financially viable if its operational cost is less than its operating income, whereas, CSR increases the operational expenses and decreases the profitability of the firm. The study therefore tests the following hypothesis.

Hypothesis 4 : Operational Self-Sustainability mediates the relationship of CSR and Financial Sustainability in MFIs operating in Pakistan.

Figure 1 depicts the theoretical framework, explaining corporate social responsibility as an independent variable, operational self-sustainability as a mediator, and financial sustainability as a dependent variable.

Figure 1 . Theoretical framework.

Materials and Methods

Data collection and analysis.

Pilot testing was conducted with 30 Territory and Area Managers to validate the adaptation of the questionnaire of Sweeney (2009) along with rigorous testing before final the self-administration ( Saunders et al., 2019 ). In the pilot testing, the acceptable response rate was achieved as the researcher personal visited the respondents' offices. Questions that were not adequately understood by mid-level managers, were modified again.

A common method, the survey method, was used to collect the data from the 1,400 branch managers of large MFIs operating in Pakistan. Seven hundred questionnaires were posted and emailed to managers in Sindh, Khyber Pakhtunkhwa and Balochistan, Gilgit Baltistan, and Azad Jammu Kashmir. In contrast, data from Punjab and Islamabad were personally collected. A judgmental sampling technique was used to collect data from managers of MFIs. The response rate for posted and emailed questionnaires was 31%, whereas personally administrated questionnaires obtained a response rate of over 69%. A total of 422 completed questionnaires were collected. Only 372 questionnaires were useable. The demographic information of the respondents is provided below in Table 1 .

Table 1 . Demographic information of respondents.

Measures of Variables

In prior studies, CSR has generally been measured in two ways ( Cochran and Wood, 1984 ) ( Table 2 ). First, it is calculated based on some indicators determined by experts in the relevant field of CSR. The second method has already been used in the studies of Moskowitz (1972 , 1975) , where the reputation index was developed with a ranking scale of “outstanding,” “honorable,” and “worst.” Both of these measures are more subjective. Therefore, other dimensions of CSR are used in this study which can easily measure the variable, i.e., customer retention (CR), employee attraction and loyalty (EL), enterprise reputation (ER), and access to capital (SC) ( Cochran and Wood, 1984 ; Sweeney, 2009 ; Jose et al., 2012 ; Tang et al., 2012 ; Torugsa et al., 2012 ). A five-point Likert scale was used to measure these variables.

Table 2 . Measurement of variables.

Compared to CSR, financial performance is challenging to measure as researchers have not reached a consensus on a measurement method. However, financial performance is measured through investors' returns and accounting returns ( Cochran and Wood, 1984 ; Sweeney, 2009 ; Torugsa et al., 2012 ).

The data was collected through a questionnaire, and is known as primary data. To analyze the primary data gathered in the collection process, Smart PLS 3.0 is applied. This software has many advantages over others. Formative constructs can be interpreted as possible with the help of Smart PLS, whereas covariance-based software like AMOS cannot handle this. The present study applied PLS-SEM to analyze and validate the relationship between the defined variables in the model.

Measurement Model

As shown in Table 3 , SmartPLS tests the reliability and provides the values for Cronbach's alpha and composite reliability (CR) of all defined variables in the model. The values that are >0.70 are acceptable; thus, all values of the variables meet the requirements of CR cut off ( Marakas et al., 2007 ). Both Cronbach's alpha and CR are used to calculate the reliability of the questionnaire. The Average Variance Extracted (AVE) is estimated to determine convergent validity. The convergent validity threshold criterion is that the AVE should be higher than 0.50, for all the build ( Hair et al., 2016 ). The values suggested that these variables satisfy those requirements.

Table 3 . Reliability analysis.

The present study applied the well-known criteria ( Fornell and Larcker, 1981 ). It describes that AVE's square root should be greater than its correlation with any other latent variables in a model. Table 4 explains that AVE's square roots are greater than the correlation of other latent variables, which confirmed the condition of discriminant validity.

Table 4 . Discriminant validity.

HTMT correlation ratio is also determined and was based and proposed by Henseler et al. (2015) . It is a new instrument used for assessing discrimination's legitimacy. HTMT 's maximum appropriate value for verifying discriminant validity is 0.85, whereas any value above suggests a validity issue ( Henseler et al., 2015 ). The findings of the HTMT are provided in Table 5 .

Table 5 . HTMT.

Formative Constructs

The present study applied the latest convictions ( Hajli, 2014 ; Gaskin et al., 2018 ). Corporate social responsibility (CSR) is used as a multidimensional construct in this research, so it is essential to validate its four dimensions. After applying the guidelines suggested by Gaskin et al. (2018) . The results proved that the four dimensions (Social capital, reputation, EL, and CR) are traits of corporate social responsibility and are shown in Table 6 . These figures demonstrated that CSR could work as a higher-operative construct in this study.

Table 6 . Validating formative constructs.

Common Method Biased Variance

Data were obtained from a single source and is cross-sectional, so Harman's single-factor test was used to verify the common system variance (CMV). Since a popular method was used in data collection, spurious covariance shared among variables was tested ( Podsakoff et al., 2003 ). An exploratory factor analysis of all the build products' items showed that the first two factors cumulatively account for 39.92% of the variance, with the first factor accounting for 33.52% and the second factor explaining 6.39% of the overall variance. The single factor did not account for any variance, which means the data was not influenced.

Structural Model

The scores are calculated from Smart PLS which appear in Table 7 and Figure 2 . As the results show, each relationship is significant and noteworthy at the 0.05 level. The model's validity is determined by R square estimation ( Hair et al., 2010 ). R square has shown that 30.12% of the change in financial sustainability occurred due to operational self-sustainability and a 35.09% change in operational self-sustainability due to corporate social responsibility. For specific endogenous latent constructs, the Q 2 values measured must be >0 in the SEM. It demonstrates that the Q 2 values were equal to 0.401 and 0.311 for this study model, respectively, which was higher than the threshold limit, and supports the predictive relevance of the path model for the endogenous construct. The present study is deductive because it is used to clarify the relationships made in the model. The structural equation modeling technique was applied through bootstrapping and implemented to get the results of t-statistics. The bootstrapping of 5,000 resamples and 372 cases explained that corporate social responsibility significantly impacted operational self-sustainability, proving H1. Operational self-sustainability also has a significant and positive effect on financial sustainability ( T = 5.59, p < 0.05). Furthermore, the present study has also validated the results of H3, proving that corporate social responsibility has a positive impact on financial sustainability ( T = 3.90, p < 0.05). Table 7 and Figure 2 explains the results of the hypotheses explained in the research model.

Table 7 . Hypothesis results.

Figure 2 . Structural model results.

Mediation Analysis

To test for the mediating role through H4, the present study engaged the latest conventions ( MacKinnon et al., 2002 ; Hayes, 2013 ), focused on bootstrapping. For the mediating effect, the indirect effect must also be significant ( Hussain et al., 2020 ). Operational self-stability means working as a mediator, mediating corporate social responsibility and financial sustainability. The present study analyzed and discovered that corporate social responsibility has a significant and positive relationship with financial sustainability. Furthermore, the indirect effects of the hypothesis were also substantial. Table 8 describes mediation results, and this hypothesis is partially mediated. It further shows that Variance accounted for (VAF=indirect effect/Total effect) 22.53% of operational self-sustainability.

Table 8 . Mediation analysis.

Discussion and Conclusion

The study employed SmartPLS to test the direct association between CSR and financial performance, and the formative construct of CSR activities: customer retention, employees' attraction and loyalty, social capital, and enterprise reputation. Furthermore, the mediating effect of operational self-sufficiency on the CSR and financial performance relationship was also tested.

The formative construct of CSR activities, CR, EL, Reputation, and social capital, were significant positive contributors toward CSR. Customer retention was deemed a vital benefit of CSR and ultimately increased sales and profitability. Customers were more interested in CSR activities in the prior studies ( Berman et al., 1999 ; Brammer and Pavalin, 2006 ; Brammer and Millington, 2008 ). The findings were also consistent with Sweeney (2009) investigations in Ireland and Cochran and Wood (1984) in America, where weak positive association was found. Employee loyalty is another benefit of CSR that positively impacts its financial efficiency ( Brammer et al., 2007 ; Collier and Esterban, 2007 ; Brammer and Millington, 2008 ; Sweeney, 2009 ). This study's results are consistent with prior reviews and found a positive association between employee loyalty and CSR.

Enterprise reputation is another dimension of CSR and found a positive association between reputation and CSR in prior studies ( Brammer and Pavalin, 2006 ; Sweeney, 2009 ; Iamandi, 2012 ; Tang et al., 2012 ; Wang and Shenghua, 2016 ). The current study results indicate a positive contribution of a firm's reputation in CSR activities, consistent with prior studies. Social capital is more readily available for those firms which are engaged in CSR activities. People trust CSR-based firms and invest in those ( McWilliams and Siegel, 2000 ; Brammer and Pavalin, 2006 ; Baron, 2008 ; Sweeney, 2009 ). Social capital was significantly positively correlated to CSR—consistent with the prior studies.

The prior literature review highlighted the issue of non-consensus on the definition of corporate social responsibility ( Cochran and Wood, 1984 ; Christensen et al., 2007 ; Sweeney, 2009 ; Lee and Shin, 2010 ; Marques et al., 2014 ; Rhou et al., 2016 ; Naz et al., 2019 ). Each author presumes a different concept of CSR activities, and this was the first objective of this study—to see whether MFIs understand the CSR term in Pakistan. The common definition through the stakeholder theory was developed by narrating customers, community, environment, and employees. During the study, it was found that large MFIs were more familiar with the concept of CSR than small/new MFIs ( Sweeney, 2009 ).

CSR is the topic of great importance in Pakistani culture ( Khan and Sulaiman, 2015 ; Khan et al., 2017 ; Naz et al., 2019 ) and South Asian countries ( Cassar and Wydick, 2010 ; Jose et al., 2012 ; Sim and Prabhu, 2014 ; Thomas and Jyothi, 2016 ). The results also proved that CSR activities are an essential topic for Pakistani society, consistent with prior studies.

Hypothesis 1 shows the association of CSR and financial self-sufficiency, which are studied in many prior studies both in developed and emerging economies. The results generated were contradictory, and researchers did not reach a consensus on the relationship. CSR had a weak positive correlation with financial performance in the studies of Cochran and Wood (1984) , whereas a strong positive association was found in the studies of Tsoutsoura (2004) , Thorne et al. (2014) , Lin et al. (2015) , Rhou et al. (2016) , Wang and Shenghua (2016) , and Yang and Suvd (2017) . Sweeney (2009) also found a positive association between CSR and FP in SMEs of Ireland. Financial sustainability and social responsibilities were also tested in MFIs of India, Pakistan, Nigeria, and Bangladesh, and a positive relationship was found in prior studies.

Hypothesis 2 shows the association of Corporate Social Responsibility with Operational Self-Sustainability in the microfinance sector of Pakistan. CSR increases operational costs, on the one hand, and the other, enhances the companies' financial performance. The results of the prior studies depict a positive connotation between CSR and FP. The findings of the current study are consistent with previous studies. Hypothesis 3 illustrates the relationship between OSS and Financial sufficiency in the Microfinance sector of Pakistan. OSS was strongly positively associated with Financial sustainability in many prior studies both in developed and developing economies ( Adongo and Stork, 2006 ; Rai et al., 2010 ; Schäfer and Fukasawa, 2011 ; Rai and Rai, 2012 ; Beg, 2016 ; Esampally and Joshi, 2016 ; Naz et al., 2019 ). The current study results are consistent with prior studies except for Cochran and Wood (1984) , where a weak correlation was found between CSR-FP. It means that if the firm is operationally sustainable, it is financially self-sufficient. The current study also found a positive correlation between CSR and financial performance—consistent with prior studies.

Hypothesis 4 shows that Operational Self-Sustainability mediates the relationship of CSR and Financial Sustainability in MFIs operating in Pakistan. The results of the study show the partial mediation of OSS on the relationship between CSR and FS. Operational self-sufficiency was not tested as a mediator in prior studies but results depicted the importance of OSS in the model.

Theoretical Contributions

Stakeholder theory rests on the concept of protection to all firms' stakeholders, not only to shareholders. Stakeholder theory suggests the importance of employees, customers, and society. However, the stakeholder theory has not tested in the MFIs of Pakistan before. MFIs have to trade-off between CSR and financial sustainability; therefore, this study will contribute to existing literature to balance stakeholders' interests ( Marrewijk, 2003 ). The current research will also contribute to signaling theory that will provide signals to stakeholders for making a potential investment ( Watts and Zimmerman, 1978 ) in leading MFIs. Signaling theory is vital only when the financial market is efficient, representing full market information ( Watts and Zimmerman, 1978 ; Fama, 1991 ).

Practical Implications

The practical implication of this research is that prior studies ( Cochran and Wood, 1984 ; Brammer and Pavalin, 2006 ; Brammer et al., 2007 ; Ofori and Hinson, 2007 ; Brammer and Millington, 2008 ; Sweeney, 2009 ; Sim and Prabhu, 2014 ; Meyer, 2019 ) did not reach a consensus on the relationship of CSR and FP. Most of the prior studies found a positive association between CSR and FP, which was already being implemented in the firms. MFIs will do CSR activities, improving their operational sustainability, and ultimately leading to financial sustainability. This research tests the direct relationship between CSR and FP, and the impact of operational self-sufficiency as the mediating variable is included. The mediating role of OSS will further enhance the understanding of the CSR-FP relationship.

The results of the current study, consistent with prior studies, also mention that CSR activities would increase employees' commitment and engagement ( Brammer et al., 2007 ; Sweeney, 2009 ), customer loyalty ( Brammer and Millington, 2008 ; Lee and Heo, 2009 ; Sweeney, 2009 ), increase enterprise reputation ( Brammer and Pavalin, 2006 ; Sweeney, 2009 ), and enhance accessible social capital ( Sweeney, 2009 ). Therefore, managers are known to implement these CSR activities to obtain those benefits.

Limitations and Future Research Directions

The study was conducted in MFIs under immense pressure to gain self-sustainability and market value for further investment and outreach. Limited data was collected from managers of microfinance institutions only, which can cause issues for generalizability. Other studies should be conducted to compare CSR activities on financial performance (FP) in MFIs and conventional banks. A comparison of the findings generated from primary data through the questionnaire and secondary data (content analysis of financial statements) should be made to find the best method of conducting this type of study. Corporate governance also plays a vital role in implementing CSR activities and the improvement of financial performance. Hence, corporate governance should be used as a moderating variable to obtain the validity of results.

Data Availability Statement

The raw data supporting the conclusions of this article will be made available by the authors, without undue reservation.

Ethics Statement

The studies involving human participants were reviewed and approved by the ethics committee of the Department of Management Sciences, University of Okara, Pakistan. The participants provided their written informed consent to participate in this study.

Author Contributions

RH, SB, and SH conceived of the presented idea. RH developed the theory and SH performed the computations. SB verified the analytical methods. RH encouraged SH to investigate CSR and Operational self-sustainability and supervised the findings of this work. All authors discussed the results and contributed to the final manuscript.

Conflict of Interest

The authors declare that the research was conducted in the absence of any commercial or financial relationships that could be construed as a potential conflict of interest.

Acknowledgments

The authors acknowledge the contributions of microfinance institutions that provided information to complete this research paper.

Supplementary Material

The Supplementary Material for this article can be found online at: https://www.frontiersin.org/articles/10.3389/fpsyg.2020.550029/full#supplementary-material

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Keywords: stakeholder theory, financial sustainability, corporate social (ir)responsibility, operational self-sustainability, microfinance

Citation: Hussain RI, Bashir S and Hussain S (2020) Financial Sustainability and Corporate Social Responsibility Under Mediating Effect of Operational Self-Sustainability. Front. Psychol. 11:550029. doi: 10.3389/fpsyg.2020.550029

Received: 08 April 2020; Accepted: 22 October 2020; Published: 14 December 2020.

Reviewed by:

Copyright © 2020 Hussain, Bashir and Hussain. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) . The use, distribution or reproduction in other forums is permitted, provided the original author(s) and the copyright owner(s) are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

*Correspondence: Rai Imtiaz Hussain, rai.hussain@uo.edu.pk

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Research financial sustainability: issues paper

Introduction.

UK Research and Innovation (UKRI) recognises that the long-term financial sustainability of the research and innovation system is critical to maintaining the UK’s global leadership and leveraging our competitive advantage. As set out in the UKRI strategy 2022 to 2027 , our resilience principle for change demonstrates that we are committed to improving the financial resilience of the UK’s research and innovation system.

UKRI’s Research Financial Sustainability programme seeks to build evidence and understanding around the issues and factors affecting the financial sustainability of research activities and the resilience of the UK’s research and innovation system.

This paper presents some of the data and analysis we have built up through the Research Financial Sustainability programme. We have also published an accompanying set of data visualisations, the UKRI data pack on research financial sustainability .

Maintaining a world-leading position

The UK has a world-leading research and innovation system, and we need to keep it world-leading in the future. To maintain our position as a science and technology superpower, the public money we invest must help ensure the long-term financial sustainability of our research and innovation activities.

A sustainable research and innovation system is one that is not only able to meet present research and development needs but will also enable us to meet the needs of the future. By investing for the future as well as the present, we can build a resilient system that has the capability, flexibility and capacity to:

• withstand shocks
• deliver long-term goals
• pivot to capture new opportunities

A financially sustainable research and innovation system should include:

• a culture of sustainable financial management and efficient operations
• funding that covers the full costs of that research, with funding and costs balanced through different streams to incentivise appropriate behaviours
• public contributions to co-funded research activities sufficient to incentivise co-investment and long-term collaboration
• resilience to major fluctuations in a single non-public income stream

Research takes place across a diverse landscape

The UK’s research and innovation landscape is made up of a range of different organisations across the public, higher education, and private and non-profit sectors. The diversity of organisations across these sectors is a strength of the system, as is the connectivity between them.

To remain strong, the system and the organisations within it need to be resilient and financially sustainable. This is why UKRI is committed to working with government and other funders, to use our investments, policies and convening power to improve the financial sustainability and resilience of the UK’s research and innovation system.

Funding UK research

Research activities are primarily funded by:

• public funders like UKRI
• government departments
• universities
• charities and philanthropists

In 2021, public funding accounted for £9.5 billion (approximately half) of research and development funding performed by the public, higher education and non-profit sectors. This figure includes funding from government, UKRI (including Research England) and the three devolved higher education funding bodies.

The higher education sector itself was the second-largest investor, spending £5.6 billion of its own money on research and development.

Research activity in the UK Research and innovation activities take place in:

• research facilities and institutes

The distribution of UK research activity (excluding business activity) is:

• 77% in higher education institutions
• 17% in the public sector (government and UKRI)
• 5% in the private non-profit sector

In the 2022 to 2023 academic year, UKRI supported 3,661 organisations to conduct research and innovation, including 142 universities and our 59 institutes, centres and Catapults.

Financial sustainability issues

The UK’s research and innovation system faces several sustainability issues, each of which is a financial pressure. The cumulative effect of these issues is reducing our ability to mitigate their impacts.

Over the past decade, the amount of funding going into the system has increasingly fallen short of the costs of undertaking world-leading research and innovation activities.

The COVID-19 pandemic severely disrupted research and teaching activities. Between 2018 and 2021, there was an estimated 29% fall in medical research charity spending , equating to a £270 million drop in research investment.

In October 2022, consumer price inflation reached 11.1% in the UK, a 41-year high, and is currently higher than increases in funding for research. In addition, increases to interest rates by the Bank of England to lower inflation have made borrowing more expensive.

Financial sustainability in universities

Universities play an important role. They:

• provide higher education across the full range of disciplines
• undertake cutting-edge research
• carry out knowledge exchange activities and engagement with sectors beyond academia

According to data published by the Higher Education Statistics Agency , the UK’s university sector receives 53% of its income from tuition fees and education contracts. Research grants and contracts make up just 15% of its income, although this proportion is typically much higher for research-intensive universities.

However, across the sector, the full economic cost of research and publicly funded teaching activities in universities is increasing and exceeding the dedicated income for those activities.

The deficit on research reached almost £5 billion in the 2021 to 2022 academic year, having risen 14% over five years. The estimated deficit in public teaching is currently over £1 billion.

It is worth noting that the public funding of teaching is a devolved matter, with different approaches across the four UK nations. In England, the tuition fee for domestic students has been capped at £9,250 since 2017, with no planned change until at least the end of the 2024 to 2025 academic year.

As highlighted by the Russell Group in its university business model explainer , the higher education sector relies on internal cross-subsidies from surplus-generating activities to cover the costs of deficits on research and teaching. In particular, this cross-subsidy comes from tuition fees for non-public teaching, paid primarily by international students, and from other commercial income streams.

Data published by the Higher Education Statistics Agency shows that international (non-EU) student fee income rose from around £4.5 billion in the 2016 to 2017 academic year to around £8.3 billion in the 2021 to 2022 academic year. In the 2021 to 2022 academic year 29% of non-EU first-year enrolments were from China (around 100,000 students), and 25% from India. After consistently increasing in the 2010s, the number of Chinese student enrolments has flattened over recent years, while those from India, Nigeria and other parts of Asia have increased rapidly.

Funding flows within universities

UKRI has developed a series of Sankey diagrams to illustrate the cross-flows of funding in the higher education sector, which you can view in the UKRI data pack on research financial sustainability. These diagrams use TRansparent Approach to Costing (TRAC) data to show the income levels for research, teaching and other activities and the full economic costs of delivering these activities. They represent an approximation of how income streams relate to costs, though in practice the precise funding flows vary between individual universities.

Universities may receive research funding from:

• research councils
• postgraduate funders
• other government departments
• UK charities
• EU research grants and contracts
• quality-related or equivalent funding from one of the devolved higher education funding bodies

Universities may receive teaching income from:

• publicly funded sources, including domestic student tuition fees and teaching grants
• non-publicly funded sources, including international student tuition fees

Universities may also receive income from other commercial and non-commercial activities.

Some of these income streams cover or exceed the full economic cost of the activities they support, generating a surplus that can be used to cross-subsidise other activities where income does not cover the full economic cost. For example, non-publicly funded teaching income consistently generates a surplus that can cross-subsidise publicly funded teaching and research.

However, at the sector level, the surpluses generated are not enough. In the 2021 to 2022 academic year, the full economic cost of teaching, research and other activities across UK universities exceeded the sector’s income by £2.2 billion.

It is worth noting that the £2.2 billion ‘sustainability gap’ does not by itself mean that the UK higher education sector, or individual universities within it, is in financial trouble. This is because TRAC accounting methodology does not include activities like borrowing or drawing down reserves, which universities may use to cover deficits.

But as the deficits on publicly funded teaching and research increase, there is greater reliance on surplus-generating income streams such as non-publicly funded teaching.

Detailed analysis of funding flows for the 2021 to 2022 academic year is available in the UKRI data pack on research financial sustainability. This shows how funding flows vary between peer groups of universities (PDF, 104KB) at different levels of research intensity.

Financial sustainability in UKRI institutes

Fifty-nine research institutes receive long-term funding from UKRI. In the 2022 to 2023 academic year, UKRI provided £1.1 billion in funding to these institutes.

Given the diversity of the institute landscape, each institute may face specific sustainability issues unique to its circumstances. Many institutes receive a form of core funding similar to quality-related (QR) funding. However, most institutes do not have access to the surplus-generating activities available to universities, such as international student fee income, that contribute towards the full economic cost of research. Long-term, relatively flat core budgets for many institutes have resulted in a steady real-terms decline in funding. More information about UKRI’s institutes is available in our explainer: how UKRI’s institutes support research and innovation .

Research activity deficit

Research performed in universities resulted in a deficit of over £5 billion across the sector in the 2021 to 2022 academic year. This equates to a cost recovery ratio, (the proportion of research costs covered by research income) of around 69%.

There are two main reasons for this:

• most funders do not pay the full economic costs of the activity funded by their grants
• universities invest money from other income sources into research activity

Since 2007, research council-funded grants have been typically awarded 80% of the full economic cost of the activity being funded. Funding at 80% of the full economic cost ensures that the organisations we fund are strategically invested in the awards they win, meaning that they are maintaining a grant portfolio that aligns with their strategic missions and is affordable. This system is designed so that research-performing organisations are partners in publicly funded research; they demonstrate their commitment through co-investment in research activities. This is called the dual support system .

Quality-related (QR) and equivalent funding supports universities with their choices around co-investment and allows them to pursue broader research interests outside project-specific funding, in line with their strategic visions and missions. QR funding can be used to support research and knowledge exchange activities.

However, TRAC data has shown that the overall cost recovery on research activities has fallen over the past decade. For research council project funding it has fallen to under 70% in the 2021 to 2022 academic year. This fall in cost recovery may mean that universities have to use a greater proportion of their strategic block grants (QR and equivalent funding) or their income to cover the full economic costs of project grants.

As a result, universities may invest less in longer-term priorities such as:

• exploring new opportunities
• capital and infrastructure
• sustaining and training their research workforce
• collaborating with business and international partners
• commercialising their research

This challenge will increase if the availability of cross-subsidy for research is reduced due to the need to cover deficits on teaching, or if the flow of international students slows or falls.

The impact of the deficit on the UK’s research and innovation system

The UK’s success as a global research nation and our ability to sustain strategic advantage depends on the resilience of our research and innovation system to:

A lack of financial sustainability could lead organisations in the system to:

• reduce the volume of research they undertake or lower the quality and outputs of their research activities
• delay projects or alter the scope of research programmes
• invest less money into long-term research and innovation capability, including attracting and retaining a talented workforce and investing in new and replacement infrastructure

Working together on financial sustainability

To support the financial sustainability of our research and innovation endeavour, everyone in the system needs to work together to create the right incentives, recognise interdependencies and look for unintended consequences.

The financial sustainability of our research and innovation system is a responsibility shared by government, funders, research organisations and researchers.

Government has a role to play in setting an overarching ambition for research and innovation in the UK. This includes the overall level of public funding for research and development and ensuring it is used to meet strategic priorities.

UKRI and other funders

UKRI (as the largest public funder of research) has a role to play in balancing funding across organisations, disciplines, strategic priorities and investment types while setting incentives and conditions for the system. Other funders have a similar role, although on a smaller scale.

Research-performing organisations

Research organisations have autonomy for their strategies, securing income and using their money to meet their charitable missions and respond to government and funder priorities.

Individual researchers and innovators

Individual researchers and innovators choose the grants and funders they apply to and take responsibility for ensuring the funding they receive is costed and spent appropriately to deliver outputs and outcomes.

UKRI’s role in supporting research financial sustainability

UKRI’s impact on the sustainability of the research and innovation system results from the strategic and operational choices we make when funding research activities.

There are many ways that we can support financial sustainability, both in terms of what and how we fund but also the incentives we create in the system, including:

• the balance of strategic block grant funding and project funding across the dual support system
• the proportion and types of costs we will fund on research grants
• the composition of our portfolio
• the mechanisms we use to assess research grants
• the mechanisms we use to assess research excellence
• size and length of project grants
• modes of funding (for example, for doctoral training)
• requirements for matched and leveraged funding
• the funding mechanisms we use
• the terms and conditions of our grants
• the operational mechanisms for our funding

As a funder, we make choices within the organisational and financial frameworks available to us, and we recognise that our choices may influence other participants in the research and innovation system. We believe that collective action across all funders, research organisations, researchers and policymakers will be needed to address the issues of financial sustainability and build a more resilient research and innovation system for the future. By publishing this data and our analysis we want to share information with the sector and open a conversation with our partners, stakeholders and participants in the research and innovation system. By working together to make informed decisions we can co-create a more resilient and sustainable system for the future.

UKRI’s Research Financial Sustainability programme will continue to analyse data on the financial sustainability of the UK’s research and innovation sector, and publish future insight into how these inform choices and incentives in the system. To find out more about our programme of work, or get in touch with the Research Financial Sustainability Team, visit the Research financial sustainability pages.

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Climate-smart agriculture: adoption, impacts, and implications for sustainable development

• Original Article
• Open access
• Published: 29 April 2024
• Volume 29 , article number  44 , ( 2024 )

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You have full access to this open access article

• Wanglin Ma   ORCID: orcid.org/0000-0001-7847-8459 1 &
• Dil Bahadur Rahut   ORCID: orcid.org/0000-0002-7505-5271 2  

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The 19 papers included in this special issue examined the factors influencing the adoption of climate-smart agriculture (CSA) practices among smallholder farmers and estimated the impacts of CSA adoption on farm production, income, and well-being. Key findings from this special issue include: (1) the variables, including age, gender, education, risk perception and preferences, access to credit, farm size, production conditions, off-farm income, and labour allocation, have a mixed (either positive or negative) influence on the adoption of CSA practices; (2) the variables, including labour endowment, land tenure security, access to extension services, agricultural training, membership in farmers’ organizations, support from non-governmental organizations, climate conditions, and access to information consistently have a positive impact on CSA adoption; (3) diverse forms of capital (physical, social, human, financial, natural, and institutional), social responsibility awareness, and digital advisory services can effectively promote CSA adoption; (4) the establishment of climate-smart villages and civil-society organizations enhances CSA adoption by improving their access to credit; (5) CSA adoption contributes to improved farm resilience to climate change and mitigation of greenhouse gas emissions; (6) CSA adoption leads to higher crop yields, increased farm income, and greater economic diversification; (7) integrating CSA technologies into traditional agricultural practices not only boosts economic viability but also contributes to environmental sustainability and health benefits; and (8) there is a critical need for international collaboration in transferring technology for CSA. Overall, the findings of this special issue highlight that through targeted interventions and collaborative efforts, CSA can play a pivotal role in achieving food security, poverty alleviation, and climate resilience in farming communities worldwide and contribute to the achievements of the United Nations Sustainable Development Goals.

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1 Introduction

Climate change reduces agricultural productivity and leads to greater instability in crop production, disrupting the global food supply and resulting in food and nutritional insecurity. In particular, climate change adversely affects food production through water shortages, pest outbreaks, and soil degradation, leading to significant crop yield losses and posing significant challenges to global food security (Kang et al. 2009 ; Läderach et al. 2017 ; Arora 2019 ; Zizinga et al. 2022 ; Mirón et al. 2023 ). United Nations reported that the human population will reach 9.7 billion by 2050. In response, food-calorie production will have to expand by 70% to meet the food demand of the growing population (United Nations 2021 ). Hence, it is imperative to advocate for robust mitigation strategies that counteract the negative impacts of climate change and enhance the flexibility and speed of response in smallholder farming systems.

A transformation of the agricultural sector towards climate-resilient practices can help tackle food security and climate change challenges successfully. Climate-smart agriculture (CSA) is an approach that guides farmers’ actions to transform agrifood systems towards building the agricultural sector’s resilience to climate change based on three pillars: increasing farm productivity and incomes, enhancing the resilience of livelihoods and ecosystems, and reducing and removing greenhouse gas emissions from the atmosphere (FAO 2013 ). Promoting the adoption of CSA practices is crucial to improve smallholder farmers’ capacity to adapt to climate change, mitigate its impact, and help achieve the United Nations Sustainable Development Goals.

Realizing the benefits of adopting CSA, governments in different countries and international organizations such as the Consultative Group on International Agricultural Research (CGIAR), the Food and Agriculture Organisation (FAO) of the United Nations, and non-governmental organizations (NGOs) have made great efforts to scale up and out the CSA. For example, climate-smart villages in India (Alam and Sikka 2019 ; Hariharan et al. 2020 ) and civil society organizations in Africa, Asia, and Latin America (Waters-Bayer et al. 2015 ; Brown 2016 ) have been developed to reduce information costs and barriers and bridge the gap in finance access to promote farmers’ adoption of sustainable agricultural practices, including CSA. Besides, agricultural training programs have been used to enhance farmers’ knowledge of CSA and their adoption of the technology in Ghana (Zakaria et al. 2020 ; Martey et al. 2021 ).

As a result, smallholder farmers worldwide have adopted various CSA practices and technologies (e.g., integrated crop systems, drop diversification, inter-cropping, improved pest, water, and nutrient management, improved grassland management, reduced tillage and use of diverse varieties and breeds, restoring degraded lands, and improved the efficiency of input use) to reach the objectives of CSA (Kpadonou et al. 2017 ; Zakaria et al. 2020 ; Khatri-Chhetri et al. 2020 ; Aryal et al. 2020a ; Waaswa et al. 2022 ; Vatsa et al. 2023 ). In the Indian context, technologies such as laser land levelling and the happy seeder have been promoted widely for their potential in climate change adaptation and mitigation, offering benefits in terms of farm profitability, emission reduction, and water and land productivity (Aryal et al. 2020b ; Keil et al. 2021 ). In some African countries such as Tanzania and Kenya, climate-smart feeding practices in the livestock sector have been suggested to tackle challenges in feed quality and availability exacerbated by climate change, aiming to improve livestock productivity and resilience (García de Jalón et al. 2017 ; Shikuku et al. 2017 ; Radeny et al. 2022 ).

Several studies have investigated the factors influencing farmers’ decisions to adopt CSA practices. They have focused on, for example, farmers’ characteristics (e.g., age, gender, and education), farm-level characteristics (e.g., farm size, land fertility, and land tenure security), socioeconomic factors (e.g., economic conditions), institutional factors (e.g., development programs, membership in farmers’ organizations, and access to agricultural training), climate conditions, and access to information (Aryal et al. 2018 ; Tran et al. 2020 ; Zakaria et al. 2020 ; Kangogo et al. 2021 ; Diro et al. 2022 ; Kifle et al. 2022 ; Belay et al. 2023 ; Zhou et al. 2023 ). For example, Aryal et al. ( 2018 ) found that household characteristics (e.g., general caste, education, and migration status), plot characteristics (e.g., tenure of plot, plot size, and soil fertility), distance to market, and major climate risks are major factors determining farmers’ adoption of multiple CSA practices in India. Tran et al. ( 2020 ) reported that age, gender, number of family workers, climate-related factors, farm characteristics, distance to markets, access to climate information, confidence in the know-how of extension workers, membership in social/agricultural groups, and attitude toward risk are the major factors affecting rice farmers’ decisions to adopt CSA technologies in Vietnam. Diro et al.’s ( 2022 ) analysis revealed that coffee growers’ decisions to adopt CSA practices are determined by their education, extension (access to extension services and participation on field days), and ownership of communication devices, specifically radio in Ethiopia. Zhou et al. 2023 ) found that cooperative membership significantly increases the adoption of climate-smart agricultural practices among banana-producing farmers in China. These studies provide significant insights regarding the factors influencing farmers’ decisions regarding CSA adoption.

A growing body of studies have also estimated the effects of CSA adoption. They have found that CSA practices enhance food security and dietary diversity by increasing crop yields and rural incomes (Amadu et al. 2020 ; Akter et al. 2022 ; Santalucia 2023 ; Tabe-Ojong et al. 2023 ; Vatsa et al. 2023 ; Omotoso and Omotayo 2024 ). For example, Akter et al. ( 2022 ) found that adoption of CSA practices was positively associated with rice, wheat, and maize yields and household income, contributing to household food security in Bangladesh. By estimating data from rice farmers in China, Vatsa et al. ( 2023 ) reported that intensifying the adoption of climate-smart agricultural practices improved rice yield by 94 kg/mu and contributed to food security. Santalucia ( 2023 ) and Omotoso and Omotayo ( 2024 ) found that adoption of CSA practices (improved maize varieties and maize-legume intercropping) increases household dietary diversity and food security among smallholders in Tanzania and Nigeria, respectively.

Agriculture is crucial in climate change, accounting for roughly 20% of worldwide greenhouse gas (GHG) emissions. Additionally, it is responsible for approximately 45% of the global emissions of methane, a potent gas that significantly contributes to heat absorption in the atmosphere. CSA adoption improves farm resilience to climate variability (e.g., Makate et al. 2019 ; Jamil et al. 2021 ) and mitigates greenhouse gas emissions (Israel et al. 2020 ; McNunn et al. 2020 ). For example, Makate et al. ( 2019 ) for southern Africa and Jamil et al. ( 2021 ) for Pakistan found that promoting CSA innovations is crucial for boosting farmers’ resilience to climate change. McNunn et al. ( 2020 ) reported that CSA adoption significantly reduces greenhouse gas emissions from agriculture by increasing soil organic carbon stocks and decreasing nitrous oxide emissions.

Although a growing number of studies have enriched our understanding of the determinants and impacts of ICT adoption, it should be emphasized that no one-size-fits-all approach exists for CSA technology adoption due to geographical and environmental variability. The definitions of CSA should also be advanced to better adapt to changing climate and regional production conditions. Clearly, despite the extensive research on CSA, several gaps remain. First, there is a lack of comprehensive studies that consolidate findings across different geographical regions to inform policymaking effectively. The calls for studies on literature review and meta-analysis to synthesize the findings of the existing studies to make our understanding generalized. Second, although the literature on determinants of CSA adoption is becoming rich, there is a lack of understanding of how CSA adoption is influenced by different forms of capital, social responsibility awareness of farmers’ cultivating family farms, and digital advisory services. Third, there is a lack of understanding of how climate-smart villages and civil society organizations address farmers’ financial constraints and encourage them to adopt modern sustainable agricultural practices, including CSA practices. Fourth, very few studies have explored how CSA adoption influences the benefit–cost ratio of farm production, factor demand, and input substitution. Fifth, no previous studies have reported the progress of research on CSA. Addressing these gaps is crucial for designing and implementing effective policies and programs that support the widespread adoption of CSA practices, thereby contributing to sustainable agricultural development and climate resilience.

We address the research gaps mentioned above and extend the findings in previous studies by organizing a Special Issue on “Climate-Smart Agriculture: Adoption, Impacts, and Implications for Sustainable Development” in the Mitigation and Adaptation Strategies for Global Change (MASGC) journal. We aim to collect high-quality theoretical and applied research papers discussing CSA and seek to comprehensively understand the associations between CSA and sustainable rural and agricultural development. To achieve this goal, we aim to find answers to these questions: What are the CSA practices and technologies (either single or multiple) that are currently adopted in smallholder farming systems? What are the key barriers, challenges, and drivers of promoting CSA practices? What are the impacts of adopting these practices? Answers to these questions will help devise appropriate solutions for promoting sustainable agricultural production and rural development. They will also provide insights for policymakers to design appropriate policy instruments to develop agricultural practices and technologies and promote them to sustainably enhance the farm sector’s resilience to climate change and increase productivity.

Finally, 19 papers were selected after a rigorous peer-review process and published in this special issue. We collected 10 papers investigating the determinants of CSA adoption. Among them, four papers investigated the determinants of CSA adoption among smallholders by reviewing and summarizing the findings in the literature and conducting a meta-analysis. Three papers explored the role of social-economic factors on ICT adoption, including capital, social responsibility awareness, and digital advisory services. Besides, three papers examined the associations between external development interventions, including climate-smart villages and civil-society initiatives, and CSA adoption. We collected eight papers exploring the impacts of CSA adoption. Among them, one paper conducted a comprehensive literature review to summarize the impacts of CSA adoption on crop yields, farm income, and environmental sustainability. Six papers estimated the impacts of CSA adoption on crop yields and farm income, and one paper focused on the impact of CSA adoption on factor demand and input substitution. The last paper included in this special issue delved into the advancements in technological innovation for agricultural adaptation within the context of climate-smart agriculture.

The structure of this paper is as follows: Section  2 summarizes the papers received in this special issue. Section  3 introduces the international conference that was purposely organized for the special issue. Section  4 summarizes the key findings of the 19 papers published in the special issue, followed by a summary of their policy implications, presented in Section  5 . The final section provides a brief conclusion.

2 Summary of received manuscripts

The special issue received 77 submissions, with the contributing authors hailing from 22 countries, as illustrated in Fig.  1 . This diversity highlights the global interest and wide-ranging contributions to the issue. Notably, over half of these submissions (53.2%) originated from corresponding authors in India and China, with 29 and 12 manuscripts, respectively. New Zealand authors contributed six manuscripts, while their Australian counterparts submitted four. Following closely, authors from the United Kingdom and Kenya each submitted three manuscripts. Authors from Thailand, Pakistan, Japan, and Germany submitted two manuscripts each. The remaining 12 manuscripts came from authors in Vietnam, Uzbekistan, the Philippines, Nigeria, the Netherlands, Malaysia, Italy, Indonesia, Ghana, Ethiopia, Brazil, and Bangladesh.

Distributions of 77 received manuscripts by corresponding authors' countries

Among the 77 received manuscripts, 30 were desk-rejected by the guest editors because they did not meet the aims and scope of the special issue, and the remaining 47, considered candidate papers for the special issue, were sent for external review. The decision on each manuscript was made based on review reports of 2–4 experts in this field. The guest editors also read and commented on each manuscript before they made decisions.

3 ADBI virtual international conference

3.1 selected presentations.

The guest editors from Lincoln University (New Zealand) and the Asian Development Bank Institute (ADBI) (Tokyo, Japan) organized a virtual international conference on the special issue theme “ Climate-Smart Agriculture: Adoption, Impacts, and Implications for Sustainable Development ”. The conference was organized on 10–11 October 2023 and was supported by the ADBI. Footnote 1 As previously noted, the guest editors curated a selection of 47 manuscripts from the pool of 77 submissions, identifying them as potential candidates for inclusion in the special issue, and sent them out for external review. Given the logistical constraints of orchestrating a two-day conference, the guest editors ultimately extended invitations to 20 corresponding authors. These authors were invited to present their work at the virtual international conference.

Figure  2 illustrates the native countries of the presenters, showing that the presenters were from 10 different countries. Most of the presenters were from India, accounting for 40% of the presenters. This is followed by China, where the four presenters were originally from. The conference presentations and discussions proved immensely beneficial, fostering knowledge exchange among presenters, discussants, and participants. It significantly allowed presenters to refine their manuscripts, leveraging the constructive feedback from discussants and fellow attendees.

Distributions of selected presentations by corresponding authors' countries

3.2 Keynote speeches

The guest editors invited two keynote speakers to present at the two-day conference. They were Prof. Edward B. Barbier from the Colorado State University in the United States Footnote 2 and Prof. Tatsuyoshi Saijo from Kyoto University of Advanced Science in Japan. Footnote 3

Prof. Edward Barbier gave a speech, “ A Policy Strategy for Climate-Smart Agriculture for Sustainable Rural Development ”, on 10th October 2023. He outlined a strategic approach for integrating CSA into sustainable rural development, particularly within emerging markets and developing economies. He emphasized the necessity of CSA and nature-based solutions (NbS) to tackle food security, climate change, and rural poverty simultaneously. Highlighting the substantial investment needs and the significant role of international and domestic financing, Prof. Barbier advocated reducing harmful subsidies in agriculture, forestry, fishing, and fossil fuel consumption to redirect funds toward CSA and NbS investments. He also proposed the implementation of a tropical carbon tax as an innovative financing mechanism. By focusing on recycling environmentally harmful subsidies and leveraging additional funding through public and private investments, Prof. Barbier’s strategy aims to foster a “win–win” scenario for climate action and sustainable development, underscoring the urgency of adopting comprehensive policies to mobilize the necessary resources for these critical investments.

Prof. Tatsuyoshi Saijo, gave his speech, “ Future Design ”, on 11th October 2023. He explored the significant impact of the Haber–Bosch process on human civilization and the environment. Prof. Saijo identifies this process, which synthetically fixed nitrogen from the atmosphere to create ammonia for fertilizers and other products, as the greatest invention from the twentieth century to the present, fundamentally transforming the world’s food production and enabling the global population and industrial activities to expand dramatically. He also discussed the environmental costs of this technological advancement, including increased greenhouse gas emissions, pollution, and contribution to climate change. Prof. Saijo then introduced the concept of “Future Design” as a method to envision and implement sustainable social systems that consider the well-being of future generations. He presented various experiments and case studies from Japan and beyond, showing how incorporating perspectives of imaginary future generations into decision-making processes can lead to more sustainable choices. By doing so, Prof. Saijo suggested that humanity can address the “Intergenerational Sustainability Dilemma” and potentially avoid the ecological overshoot and collapse faced by past civilizations like Easter Island. He called for a redesign of social systems to activate “futurability”, where individuals derive happiness from decisions that benefit future generations, ultimately aiming to ensure the long-term survival of humankind amidst environmental challenges.

4 Summary of published articles

As a result of a rigorous double-anonymized reviewing process, the special issue accepted 19 articles for publication. These studies have investigated the determinants and impacts of CSA adoption. Table 1 in the Appendix summarises the CSA technologies and practices considered in each paper. Below, we summarize the key findings of the contributions based on their research themes.

4.1 Determinants of CSA adoption among smallholders

4.1.1 influencing factors of csa adoption from literature review.

Investigating the factors influencing farmers’ adoption of CSA practices through a literature review helps offer a comprehensive understanding of the multifaceted determinants of CSA adoption. Investigating the factors influencing farmers’ adoption of CSA practices through a literature review helps provide a comprehensive understanding of the determinants of CSA adoption. Such analyses help identify consistent trends and divergences in how different variables influence farmers’ CSA adoption decisions. In this special issue, we collected four papers that reviewed the literature and synthesized the factors influencing farmers’ decisions to adopt CSA.

Li, Ma and Zhu’s paper, “ A systematic literature review of factors influencing the adoption of climate-smart agricultural practices ”, conducted a systematic review of the literature on the adoption of CSA, summarizing the definitions of CSA practices and the factors that influence farmers’ decisions to adopt these practices. The authors reviewed 190 studies published between 2013 and 2023. They broadly defined CSA practices as “agricultural production-related and unrelated practices that can help adapt to climate change and increase agricultural outputs”. Narrowly, they defined CSA practices as “agricultural production-related practices that can effectively adapt agriculture to climate change and reinforce agricultural production capacity”. The review identified that many factors, including age, gender, education, risk perception, preferences, access to credit, farm size, production conditions, off-farm income, and labour allocation, have a mixed (positive or negative) influence on the adoption of CSA practices. Variables such as labour endowment, land tenure security, access to extension services, agricultural training, membership in farmers’ organizations, support from non-governmental organizations (NGOs), climate conditions, and access to information were consistently found to positively influence CSA practice adoption.

Thottadi and Singh’s paper, “ Climate-smart agriculture (CSA) adaptation, adaptation determinants and extension services synergies: A systematic review ””, reviewed 45 articles published between 2011 and 2022 to explore different CAS practices adopted by farmers and the factors determining their adoption. They found that CSA practices adopted by farmers can be categorized into five groups. These included resilient technologies (e.g., early maturing varieties, drought-resistant varieties, and winter ploughing), management strategies (e.g., nutrient management, water management, and pest management), conservation technologies (e.g., vermicomposting and residue management, drip and sprinkler irrigation, and soil conservation), diversification of income security (e.g., mixed farming, livestock, and crop diversification), and risk mitigation strategies (e.g., contingent planning, adjusting plant dates, and crop insurance). They also found that farmers’ decisions to adopt CSA practices are mainly determined by individual characteristics (age, gender, and education), socioeconomic factors (income and wealth), institutional factors (social group, access to credit, crop insurance, distance, land tenure, and rights), behavioural factors (climate perception, farmers’ perception on CSA, Bookkeeping), and factor endowments (family labour, machinery, and land size). The authors emphasized that extension services improved CSA adaptation by reducing information asymmetry.

Naveen, Datta, Behera and Rahut’s paper, “ Climate-Smart Agriculture in South Asia: Exploring Practices, Determinants, and Contribution to Sustainable Development Goals ”, offered a comprehensive systematic review of 78 research papers on CSA practice adoption in South Asia. Their objective was to assess the current implementation of CSA practices and to identify the factors that influence farmers’ decisions to adopt these practices. They identified various CSA practices widely adopted in South Asia, including climate-resilient seeds, zero tillage, water conservation, rescheduling of planting, crop diversification, soil conservation and water harvesting, and agroforestry. They also identified several key factors that collectively drive farmers’ adoption of CSA practices. These included socioeconomic factors (age, education, livestock ownership, size of land holdings, and market access), institutional factors (access to information and communication technology, availability of credit, input subsidies, agricultural training and demonstrations, direct cash transfers, and crop insurance), and climatic factors (notably rising temperatures, floods, droughts, reduced rainfall, and delayed rainfall).

Wang, Wang and Fu’s paper, “ Can social networks facilitate smallholders’ decisions to adopt Climate-smart Agriculture technologies? A three-level meta-analysis ”, explored the influence of social networks on the adoption of CSA technologies by smallholder farmers through a detailed three-level meta-analysis. This analysis encompassed 26 empirical studies, incorporating 150 effect sizes. The authors reported a modest overall effect size of 0.065 between social networks and the decision-making process for CSA technology adoption, with an 85.21% variance observed among the sample effect sizes. They found that over half (55.17%) of this variance was attributed to the differences in outcomes within each study, highlighting the impact of diverse social network types explored across the studies as significant contributors. They did not identify publication bias in this field. Among the three types of social networks (official-advising network, peer-advising network, and kinship and friendship network), kinship and friendship networks are the most effective in facilitating smallholders’ decisions to adopt climate-smart agriculture technologies.

4.1.2 Socioeconomic factors influencing CSA adoption

We collected three papers highlighting the diverse forms of capital, social responsibility awareness, and effectiveness of digital advisory services in promoting CSA in India, China and Ghana. These studies showcase how digital tools can significantly increase the adoption of CSA technologies, how social responsibility can motivate CSA practices and the importance of various forms of capital in CSA strategy adoption.

Sandilya and Goswami’s paper, “ Effect of different forms of capital on the adoption of multiple climate-smart agriculture strategies by smallholder farmers in Assam, India ”, delved into the determinants behind the adoption of CSA strategies by smallholder farmers in Nagaon district, India, a region notably prone to climate adversities. The authors focused on six types of capital: physical, social, human, financial, natural, and institutional. They considered four CSA practices: alternate land use systems, integrated nutrient management, site-specific nutrient management, and crop diversification. Their analyses encompassed a dual approach, combining a quantitative analysis via a multivariate probit model with qualitative insights from focus group discussions. They found that agricultural cooperatives and mobile applications, both forms of social capital, play a significant role in facilitating the adoption of CSA. In contrast, the authors also identified certain barriers to CSA adoption, such as the remoteness of farm plots from all-weather roads (a component of physical capital) and a lack of comprehensive climate change advisories (a component of institutional capital). Furthermore, the authors highlighted the beneficial impact of irrigation availability (a component of physical capital) on embracing alternate land use and crop diversification strategies. Additionally, the application of indigenous technical knowledge (a component of human capital) and the provision of government-supplied seeds (a component of institutional capital) were found to influence the adoption of CSA practices distinctly.

Ye, Zhang, Song and Li’s paper, “ Social Responsibility Awareness and Adoption of Climate-smart Agricultural Practices: Evidence from Food-based Family Farms in China ”, examined whether social responsibility awareness (SRA) can be a driver for the adoption of CSA on family farms in China. Using multiple linear regression and hierarchical regression analyses, the authors analyzed data from 637 family farms in five provinces (Zhejiang, Shandong, Henan, Heilongjiang, and Hebei) in China. They found that SRA positively impacted the adoption of CSA practice. Pro-social motivation and impression management motivation partially and completely mediated the relationship between SRA and the adoption of CSA practices.

Asante, Ma, Prah and Temoso’s paper, “ Promoting the adoption of climate-smart agricultural technologies among maize farmers in Ghana: Using digital advisory services ”, investigated the impacts of digital advisory services (DAS) use on CSA technology adoption and estimated data collected from 3,197 maize farmers in China. The authors used a recursive bivariate probit model to address the self-selection bias issues when farmers use DAS. They found that DAS notably increases the propensity to adopt drought-tolerant seeds, zero tillage, and row planting by 4.6%, 4.2%, and 12.4%, respectively. The average treatment effect on the treated indicated that maize farmers who use DAS are significantly more likely to adopt row planting, zero tillage, and drought-tolerant seeds—by 38.8%, 24.9%, and 47.2%, respectively. Gender differences in DAS impact were observed; male farmers showed a higher likelihood of adopting zero tillage and drought-tolerant seeds by 2.5% and 3.6%, respectively, whereas female farmers exhibited a greater influence on the adoption of row planting, with a 2.4% probability compared to 1.5% for males. Additionally, factors such as age, education, household size, membership in farmer-based organizations, farm size, perceived drought stress, perceived pest and disease incidence, and geographic location were significant determinants in the adoption of CSA technologies.

4.1.3 Climate-smart villages and CSA adoption

Climate-Smart Villages (CSVs) play a pivotal role in promoting CSA by significantly improving farmers’ access to savings and credit, and the adoption of improved agricultural practices among smallholder farmers. CSV interventions demonstrate the power of community-based financial initiatives in enabling investments in CSA technologies. In this special issue, we collected two insightful papers investigating the relationship between CSVs and the adoption of CSA practices, focusing on India and Kenya.

Villalba, Joshi, Daum and Venus’s paper, “ Financing Climate-Smart Agriculture: A Case Study from the Indo-Gangetic Plains ”, investigated the adoption and financing of CSA technologies in India, focusing on two capital-intensive technologies: laser land levelers and happy seeders. Conducted in Karnal, Haryana, within the framework of Climate-Smart-Villages, the authors combined data from a household survey of 120 farmers, interviews, and focus group discussions with stakeholders like banks and cooperatives. The authors found that adoption rates are high, with 77% for laser land levelers and 52% for happy seeders, but ownership is low, indicating a preference for renting from Custom-Hiring Centers. Farmers tended to avoid formal banking channels for financing, opting instead for informal sources like family, savings, and money lenders, due to the immediate access to credit and avoidance of bureaucratic hurdles. The authors suggested that institutional innovations and governmental support could streamline credit access for renting CSA technologies, emphasizing the importance of knowledge transfer, capacity building, and the development of digital tools to inform farmers about financing options. This research highlights the critical role of financing mechanisms in promoting CSA technology adoption among smallholder farmers in climate-vulnerable regions.

Asseldonk, Oostendorp, Recha, Gathiaka, Mulwa, Radeny Wattel and Wesenbeeck’s paper, “ Distributional impact of climate‑smart villages on access to savings and credit and adoption of improved climate‑smart agricultural practices in the Nyando Basin, Kenya ”, investigated the impact of CSV interventions in Kenya on smallholder farmers’ access to savings, credit, and adoption of improved livestock breeds as part of CSA practices. The authors employed a linear probability model to estimate a balanced panel of 118 farm households interviewed across 2017, 2019, and 2020. They found that CSV interventions significantly increased the adoption of improved livestock breeds and membership in savings and credit groups, which further facilitated the adoption of these improved breeds. The findings highlighted that community-based savings and loan initiatives effectively enable farmers to invest in CSA practices. Although there was a sustained positive trend in savings and loans group membership, the adoption of improved livestock did not show a similar sustained increase. Moreover, the introduction of improved breeds initially benefited larger livestock owners more. However, credit availability was found to reduce this inequity in ownership among participants, making the distribution of improved livestock more equitable within CSVs compared to non-CSV areas, thus highlighting the potential of CSV interventions to reduce disparities in access to improved CSA practices.

4.1.4 Civil-society initiatives and CSA adoption

Civil society initiatives are critical in promoting CSA by embedding its principles across diverse agricultural development projects. These initiatives enhance mitigation, adaptation, and food security efforts for smallholder farmers, demonstrating the importance of varied implementation strategies to address the challenges of CSA. We collected one paper investigating how civil society-based development projects in Asia and Africa incorporated CSA principles to benefit smallholder farmers and local communities.

Davila, Jacobs, Nadeem, Kelly and Kurimoto’s paper, “ Finding climate smart agriculture in civil-society initiatives ”, scrutinized the role of international civil society and non-government organizations (NGOs) in embedding CSA principles within agricultural development projects aimed at enhancing mitigation, adaptation, and food security. Through a thematic analysis of documentation from six projects selected on the basis that they represented a range of geographical regions (East Africa, South, and Southeast Asia) and initiated since 2009, the authors assessed how development programs incorporate CSA principles to support smallholder farmers under CSA’s major pillars. They found heterogeneous application of CSA principles across the projects, underscoring a diversity in implementation strategies despite vague definitions and focuses of CSA. The projects variedly contributed to greening and forests, knowledge exchange, market development, policy and institutional engagement, nutrition, carbon and climate action, and gender considerations.

4.2 Impacts of CSA adoption

4.2.1 impacts of csa adoption from literature review.

A comprehensive literature review on the impacts of CSA adoption plays an indispensable role in bridging the gap between theoretical knowledge and practical implementation in the agricultural sector. In this special issue, we collected one paper that comprehensively reviewed the literature on the impacts of CSA adoption from the perspective of the triple win of CSA.

Zheng, Ma and He’s paper, “ Climate-smart agricultural practices for enhanced farm productivity, income, resilience, and Greenhouse gas mitigation: A comprehensive review ”, reviewed 107 articles published between 2013–2023 to distill a broad understanding of the impacts of CSA practices. The review categorized the literature into three critical areas of CSA benefits: (a) the sustainable increase of agricultural productivity and incomes; (b) the adaptation and enhancement of resilience among individuals and agrifood systems to climate change; and (c) the reduction or avoidance of greenhouse gas (GHG) emissions where feasible. The authors found that CSA practices significantly improved farm productivity and incomes and boosted technical and resource use efficiency. Moreover, CSA practices strengthened individual resilience through improved food consumption, dietary diversity, and food security while enhancing agrifood systems’ resilience by mitigating production risks and reducing vulnerability. Additionally, CSA adoption was crucial in lowering Greenhouse gas emissions and fostering carbon sequestration in soils and biomass, contributing to improved soil quality.

4.2.2 Impacts on crop yields and farm income

Understanding the impact of CSA adoption on crop yields and income is crucial for improving agricultural resilience and sustainability. In this special issue, we collected three papers highlighting the transformative potential of CSA practices in boosting crop yields, commercialization, and farm income. One paper focuses on India and the other concentrates on Ghana and Kenya.

Tanti, Jena, Timilsina and Rahut’s paper, “ Enhancing crop yields and farm income through climate-smart agricultural practices in Eastern India ”, examined the impact of CSA practices (crop rotation and integrated soil management practices) on crop yields and incomes. The authors used propensity score matching and the two-stage least square model to control self-selection bias and endogeneity and analyzed data collected from 494 farm households in India. They found that adopting CSA practices increases agricultural income and paddy yield. The crucial factor determining the adoption of CSA practices was the income-enhancing potential to transform subsistence farming into a profoundly ingrained farming culture.

Asante, Ma, Prah and Temoso’s paper, “ Farmers’ adoption of multiple climate-smart agricultural technologies in Ghana: Determinants and impacts on maize yields and net farm income ”, investigated the factors influencing maize growers’ decisions to adopt CSA technologies and estimated the impact of adopting CSA technologies on maize yields and net farm income. They considered three CSA technology types: drought-resistant seeds, row planting, and zero tillage. The authors used the multinomial endogenous switching regression model to estimate the treatment effect of CSA technology adoption and analyze data collected from 3,197 smallholder farmers in Ghana. They found that farmer-based organization membership, education, resource constraints such as lack of land, access to markets, and production shocks such as perceived pest and disease stress and drought are the main factors that drive farmers’ decisions to adopt CSA technologies. They also found that integrating any CSA technology or adopting all three CSA technologies greatly enhances maize yields and net farm income. Adopting all three CSA technologies had the largest impact on maize yields, while adopting row planting and zero tillage had the greatest impact on net farm income.

Mburu, Mburu, Nyikal, Mugera and Ndambi’s paper, “ Assessment of Socioeconomic Determinants and Impacts of Climate-Smart Feeding Practices in the Kenyan Dairy Sector ”, assessed the determinants and impacts of adopting climate-smart feeding practices (fodder and feed concentrates) on yield, milk commercialization, and household income. The authors used multinomial endogenous switching regression to account for self-selection bias arising from observable and unobservable factors and estimated data collected from 665 dairy farmers in Kenya. They found that human and social capital, resource endowment, dairy feeding systems, the source of information about feeding practices, and perceived characteristics were the main factors influencing farmers’ adoption of climate-smart feeding practices. They also found that combining climate-smart feed concentrates and fodder significantly increased milk productivity, output, and dairy income. Climate-smart feed concentrates yielded more benefits regarding dairy milk commercialization and household income than climate-smart fodder.

4.2.3 Impacts on crop yields

Estimating the impacts of CSA adoption on crop yields is crucial for enhancing food security, improving farmers’ resilience to climate change, and guiding policy and investment towards sustainable agricultural development. In this special issue, we collected one paper that provided insights into this field.

Singh, Bisaria, Sinha, Patasaraiya and Sreerag’s paper, “ Developing A Composite Weighted Indicator-based Index for Monitoring and Evaluating Climate-Smart Agriculture in India ”, developed a composite index based on a weighted index to calculate the Climate Smart Score (CSS) at the farm level in India and tested the relationship between computed CSS and farm-level productivity. Through an intensive literature review, the authors selected 34 indicators, which were then grouped into five dimensions for calculating CSS. These dimensions encompassed governance (e.g., land ownership, subsidized fertilizer, and subsidized seeds), farm management practices (mulching, zero tillage farming, and inter-cropping and crop diversification), environment management practices (e.g., not converting forested land into agricultural land and Agroforestry/plantation), energy management (e.g., solar water pump and Biogas digester), and awareness and training (e.g., knowledge of climate-related risk and timely access to weather and agro-advisory). They tested the relationship between CSS and farm productivity using data collected from 315 farmers. They found that improved seeds, direct seeding of rice, crop diversification, zero tillage, agroforestry, crop residue management, integrated nutrient management, and training on these practices were the most popular CSA practices the sampled farmers adopted. In addition, there was a positive association between CSS and paddy, wheat, and maize yields. This finding underscores the beneficial impact of CSA practices on enhancing farm productivity.

4.2.4 Impacts on incomes and benefit–cost ratio

Understanding the income effects of CSA adoption is crucial for assessing its impact on household livelihoods, farm profitability, and income diversity. Quantifying income enhancements would contribute to informed decision-making and investment strategies to improve farming communities’ economic well-being. In this special issue, we collected two papers looking into the effects of CSA adoption on income.

Sang, Chen, Hu and Rahut’s paper, “ Economic benefits of climate-smart agricultural practices: Empirical investigations and policy implications ”, investigated the impact of CSA adoption intensity on household income, net farm income, and income diversity. They used the two-stage residual inclusion model to mitigate the endogeneity of CSA adoption intensity and analyzed the 2020 China Rural Revitalization Survey data. They also used the instrumental-variable-based quantile regression model to investigate the heterogeneous impacts of CSA adoption intensity. The authors found that the education level of the household head and geographical location determine farmers’ adoption intensity of CSAs.CSA practices. The higher levels of CSA adoption were positively and significantly associated with higher household income, net farm income, and income diversity. They also found that while the impact of CSA adoption intensity on household income escalates across selected quantiles, its effect on net farm income diminishes over these quantiles. Additionally, the study reveals that CSA adoption intensity notably enhances income diversity at the 20th quantile only.

Kandulu, Zuo, Wheeler, Dusingizimana and Chagund’s paper, “ Influence of climate-smart technologies on the success of livestock donation programs for smallholder farmers in Rwanda ”, investigated the economic, environmental, and health benefits of integrating CSA technologies —specifically barns and biogas plants—into livestock donation programs in Rwanda. Employing a stochastic benefit–cost analysis from the perspective of the beneficiaries, the authors assessed the net advantages for households that receive heifers under an enhanced program compared to those under the existing scheme. They found that incorporating CSA technologies not only boosts the economic viability of these programs but also significantly increases the resilience and sustainability of smallholder farming systems. More precisely, households equipped with cows and CSA technologies can attain net benefits up to 3.5 times greater than those provided by the current program, with the benefit–cost ratios reaching up to 5. Furthermore, biogas technology reduces deforestation, mitigating greenhouse gas emissions, and lowering the risk of respiratory illnesses, underscoring the multifaceted advantages of integrating such innovations into livestock donation initiatives.

4.2.5 Impacts on factor demand and input substitution

Estimating the impacts of CSA adoption on factor demand and input substitution is key to optimizing resource use, reducing environmental footprints, and ensuring agricultural sustainability by enabling informed decisions on efficient input use and technology adoption. In this field, we collected one paper that enriched our understanding in this field. Understanding the impacts of CSA adoption on factor demand, input substitution, and financing options is crucial for promoting sustainable farming in diverse contexts. In this special issue, we collected one paper comprehensively discussing how CSA adoption impacted factor demand and input substitution.

Kehinde, Shittu, Awe and Ajayi’s paper, “ Effects of Using Climate-Smart Agricultural Practices on Factor Demand and Input Substitution among Smallholder Rice Farmers in Nigeria ”, examined the impacts of agricultural practices with CSA potential (AP-CSAPs) on the demand of labour and other production factors (seed, pesticides, fertilizers, and mechanization) and input substitution. The AP-CSAPs considered in this research included zero/minimum tillage, rotational cropping, green manuring, organic manuring, residue retention, and agroforestry. The authors employed the seemingly unrelated regression method to estimate data collected from 1,500 smallholder rice farmers in Nigeria. The authors found that labour and fertilizer were not easily substitutable in the Nigerian context; increases in the unit price of labour (wage rate) and fertilizer lead to a greater budget allocation towards these inputs. Conversely, a rise in the cost of mechanization services per hectare significantly reduced labour costs while increasing expenditure on pesticides and mechanization services. They also found that most AP-CSAPs were labour-intensive, except for agroforestry, which is labor-neutral. Organic manure and residue retention notably conserved pesticides, whereas zero/minimum tillage practices increased the use of pesticides and fertilizers. Furthermore, the demand for most production factors, except pesticides, was found to be price inelastic, indicating that price changes do not significantly alter the quantity demanded.

4.3 Progress of research on CSA

Understanding the progress of research on CSA is essential for identifying and leveraging technological innovations—like greenhouse advancements, organic fertilizer products, and biotechnological crop improvements—that support sustainable agricultural adaptation. This knowledge enables the integration of nature-based strategies, informs policy, and underscores the importance of international cooperation in overcoming patent and CSA adoption challenges to ensure global food security amidst climate change. We collected one paper in this field.

Tey, Brindal, Darham and Zainalabidin’s paper, “ Adaptation technologies for climate-smart agriculture: A patent network analysis ”, delved into the advancements in technological innovation for agricultural adaptation within the context of CSA by analyzing global patent databases. The authors found that greenhouse technologies have seen a surge in research and development (R&D) efforts, whereas composting technologies have evolved into innovations in organic fertilizer products. Additionally, biotechnology has been a significant focus, aiming to develop crop traits better suited to changing climate conditions. A notable emergence is seen in resource restoration innovations addressing climate challenges. These technologies offer a range of policy options for climate-smart agriculture, from broad strategies to specific operational techniques, and pave the way for integration with nature-based adaptation strategies. However, the widespread adoption and potential impact of these technologies may be hindered by issues related to patent ownership and the path dependency this creates. Despite commercial interests driving the diffusion of innovation, international cooperation is clearly needed to enhance technology transfer.

5 Summary of key policy implications

The collection of 19 papers in this special issue sheds light on the critical aspects of promoting farmers’ adoption of CSA practices, which eventually help enhance agricultural productivity and resilience, reduce greenhouse gas emissions, improve food security and soil health, offer economic benefits to farmers, and contribute to sustainable development and climate change adaptation. We summarize and discuss the policy implications derived from this special issue from the following four aspects:

5.1 Improving CSA adoption through extension services

Extension services help reduce information asymmetry associated with CSA adoption and increase farmers’ awareness of CSA practices’ benefits, costs, and risks while addressing their specific challenges. Therefore, the government should improve farmers’ access to extension services. These services need to be inclusive and customized to meet the gender-specific needs and the diverse requirements of various farming stakeholders. Additionally, fostering partnerships between small and medium enterprises and agricultural extension agents is crucial for enhancing the local availability of CSA technologies. Government-sponsored extension services should prioritize equipping farmers with essential CSA skills, ensuring they are well-prepared to implement these practices. This structured approach will streamline the adoption process and significantly improve the effectiveness of CSA initiatives.

5.2 Facilitating CSA adoption through farmers’ organizations

Farmers’ organizations, such as village cooperatives, farmer groups, and self-help groups, play a pivotal role in facilitating farmers’ CSA adoption and empowering rural women’s adoption through effective information dissemination and the use of agricultural apps. Therefore, the government should facilitate the establishment and development of farmers’ organizations and encourage farmers to join those organizations as members. In particular, the proven positive impacts of farmer-based organizations (FBOs) highlight the importance of fostering collaborations between governments and FBOs. Supporting farmer cooperatives with government financial and technical aid is essential for catalyzing community-driven climate adaptation efforts. Furthermore, the successful use of DAS in promoting CSA adoption underscores the need for government collaboration with farmer groups to expand DAS utilization. This includes overcoming usage barriers and emphasizing DAS’s reliability as a source of climate-smart information. By establishing and expanding digital hubs and demonstration centres in rural areas, farmers can access and experience DAS technologies firsthand, leading to broader adoption and integration into their CSA practices.

5.3 Enhancing CSA adoption through agricultural training and education

Agricultural training and education are essential in enhancing farmers’ adoption of CSA. To effectively extend the reach of CSA practices, the government should prioritize expanding rural ICT infrastructure investments and establish CSA training centres equipped with ICT tools that target key demographics such as women and older people, aiming to bridge the digital adoption gaps. Further efforts should prioritize awareness and training programs to ensure farmers can access weather and agro-advisory services. These programs should promote the use of ICT-based tools through collaborations with technology providers and include regular CSA training and the establishment of demonstration fields that showcase the tangible benefits of CSA practices.

Education plays a vital role in adopting CAPs, suggesting targeted interventions such as comprehensive technical training to assist farmers with limited educational backgrounds in understanding the value of CAPs, ultimately improving their adoption rates. Establishing robust monitoring mechanisms is crucial to maintaining farmer engagement and success in CSA practices. These mechanisms will facilitate the ongoing adoption and evaluation of CSA practices and help educate farmers on the long-term benefits. Centralizing and disseminating information about financial products and subsidies through various channels, including digital platforms tailored to local languages and contexts, is essential. This approach helps educate farmers on financing options and requirements, supporting the adoption of CSA technologies among smallholder farmers. Lastly, integrating traditional and local knowledge with scientific research and development can effectively tailor CSA initiatives. This integration requires the involvement of a range of stakeholders, including NGOs, to navigate the complexities of CSA and ensure that interventions are effective but also equitable and sustainable. The enhanced capacity of institutions and their extension teams will further support these CSA initiatives.

5.4 Promoting CSA adoption through establishing social networks and innovating strategies

The finding that social networks play a crucial role in promoting the adoption of CSA suggests that implementing reward systems to incentivize current CSA adopters to advocate for climate-smart practices within their social circles could be an effective strategy to promote CSA among farmers. The evidence of a significant link between family farms’ awareness of social responsibility and their adoption of CSA highlights that governments should undertake initiatives, such as employing lectures and pamphlets, to enhance family farm operating farmers’ understanding of social responsibility. The government should consider introducing incentives that foster positive behavioural changes among family farms to cultivate a more profound commitment to social responsibility. The government can also consider integrating social responsibility criteria into the family farm awards and recognition evaluation process. These measures would encourage family farms to align their operations with broader social and environmental goals, promoting CSA practices.

Combining traditional incentives, such as higher wages and access to improved agricultural inputs, with innovative strategies like community-driven development for equipment sharing and integrating moral suasion with Payment for Ecosystem Services would foster farmers’ commitment to CSA practices. The finding that technological evolution plays a vital role in shaping adaptation strategies for CSA highlights the necessity for policy instruments that not only leverage modern technologies but also integrate them with traditional, nature-based adaptation strategies, enhancing their capacity to address specific CSA challenges. Policymakers should consider the region’s unique socioeconomic, environmental, and geographical characteristics when promoting CSA, moving away from a one-size-fits-all approach to ensure the adaptability and relevance of CSA practices across different agricultural landscapes. They should foster an environment that encourages the reporting of all research outcomes to develop evidence-based policies that are informed by a balanced view of CSA’s potential benefits and limitations.

Finally, governance is critical in creating an enabling environment for CSA adoption. Policies should support CSA practices and integrate environmental sustainability to enhance productivity and ecosystem health. Development programs must offer financial incentives, establish well-supported voluntary schemes, provide robust training programs, and ensure the wide dissemination of informational tools. These measures are designed to help farmers integrate CAPs into their operations, improving economic and operational sustainability.

6 Concluding remarks

This special issue has provided a wealth of insights into the adoption and impact of CSA practices across various contexts, underscoring the complexity and multifaceted nature of CSA implementation. The 19 papers in this special issue collectively emphasize the importance of understanding local conditions, farmer characteristics, and broader socioeconomic and institutional factors that influence CSA adoption. They highlight the crucial role of extension services, digital advisory services, social responsibility awareness, and diverse forms of capital in facilitating the adoption of CSA practices. Moreover, the findings stress the positive impact of CSA on farm productivity, income diversification, and resilience to climate change while also pointing out the potential for CSA practices to address broader sustainability goals.

Significantly, the discussions underline the need for policy frameworks that are supportive and adaptive, tailored to specific regional and local contexts to promote CSA adoption effectively. Leveraging social networks, enhancing access to financial products and mechanisms, and integrating technological innovations with traditional agricultural practices are vital strategies for scaling CSA adoption. Furthermore, the discussions advocate for a balanced approach that combines economic incentives with moral persuasion and community engagement to foster sustainable agricultural practices.

These comprehensive insights call for concerted efforts from policymakers, researchers, extension agents, and the agricultural community to foster an enabling environment for CSA. Such an environment would support knowledge exchange, financial accessibility, and the adoption of CSA practices that contribute to the resilience and sustainability of agricultural systems in the face of climate change. As CSA continues to evolve, future research should focus on addressing the gaps identified, exploring innovative financing and technology dissemination models, and assessing the long-term impacts of CSA practices on agricultural sustainability and food security. This special issue lays the groundwork for further exploration and implementation of CSA practices, aiming to achieve resilient, productive, and sustainable agricultural systems worldwide and contribute to the achievements of the United Nations Sustainable Development Goals.

Data availability

No new data were created or analyzed during this study. Data sharing is not applicable to this article.

The conference agenda, biographies of the speakers, and conference recordings are available at the ADBI website: https://www.adb.org/news/events/climate-smart-agriculture-adoption-impacts-and-implications-for-sustainable-development .

Profile of Prof. Edward B. Barbie: http://www.edwardbbarbier.com/ .

Google Scholar of Prof. Tatsuyoshi Saijo: https://scholar.google.co.nz/citations?user=ju72inUAAAAJ&hl=en&oi=ao .

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Acknowledgements

We want to thank all the authors who have submitted papers for the special issue and the reviewers who reviewed manuscripts on time. We acknowledge the Asian Development Bank Institute (ADBI) for supporting the virtual international conference on “ Climate-smart Agriculture: Adoption, Impacts, and Implications for Sustainable Development ” held on 10-11 October 2023. Special thanks to the invited keynote speakers, Prof. Edward Barbier and Prof. Tatsuyoshi Saijo. Finally, we would like to express our thanks, gratitude, and appreciation to the session chairs (Prof. Anita Wreford, Prof. Jianjun Tang, Prof. Alan Renwick, and Assoc. Prof. Sukanya Das), ADBI supporting team (Panharoth Chhay, Mami Nomoto, Mami Yoshida, and Raja Rajendra Timilsina), and discussants who made substantial contributions to the conference.

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Department of Global Value Chains and Trade, Faculty of Agribusiness and Commerce, Lincoln University, Christchurch, New Zealand

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Dil Bahadur Rahut

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Ma, W., Rahut, D.B. Climate-smart agriculture: adoption, impacts, and implications for sustainable development. Mitig Adapt Strateg Glob Change 29 , 44 (2024). https://doi.org/10.1007/s11027-024-10139-z

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Received : 08 April 2024

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Published : 29 April 2024

DOI : https://doi.org/10.1007/s11027-024-10139-z

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