The Anna Karenina Principle Applied to Sustainable Finance: Characteristics of a Sustainable firm – an Exploratory Study

Factors that have an impact on the sustainability of a firm are oftentimes intertwined. This is why the Anna Karenina principle provides a different angle and a more holistic approach to the existing research in this field. Derived from the very first sentence of Tolstoy’s novel “All happy families are alike; each unhappy family is unhappy in its own way”, it translates to the overarching question of this paper: Is there a set of financially measurable prerequisites that are key to a sustainable firm and are all sustainable firms similar. Instead of analyzing the effects of isolated factors, a set of prerequisites are identified and analyzed individually and regarding their causal relations with one another. The identified prerequisites are lower tail risk, lower β-factor, higher dividend yield, higher RoE / RoA, and lower WCR. The first part of this question is approached by comparing the mean average of firms with high ESG ratings to firms with low ESG ratings for each prerequisite. Potential interconnections of characteristics are identified under the fsQCA. This methodology also gives way to further classify characteristics as necessary, sufficient and core or peripheral conditions. Under the comparison of the mean average, the results for the analysis of the tail risk are inconclusive. For all the other characteristics, the initial assumptions could be confirmed. Low WCR was identified as a necessary condition. Yet, there are no causal connections between conditions. The second part of the question is tackled by employing a dispersion analysis. The results were mixed. For the β-factor, RoA, and WCR the assumption that sustainable firms are more alike e.g. display lower dispersion could be confirmed. Concerning RoE, there is some evidence for the AKP, when adjusted for the effects of outliers. However, for dividend yields this assumption could not be verified, yet explained by volatility asymmetry. While dividends can, potentially, rise against infinity, they are floored at zero. However, the key finding of this paper, was that sustainable firms are generally more alike and distinct between high and low ESG ratings for certain factors, as described above. Yet, what is striking and remains to be explored in more detail is the key importance of the operational efficiency of a sustainable firm.