New research reveals companies that integrate sustainability into their core business strategy financially outperform firms that don’t. And five key traits drive these companies’ increased financial performance.
In the study, Robert Eccles and George Serafeim of Harvard University and Ioannis Ioannou of London Business School identified firms that had adopted sustainability policies by the mid-1990s. The policies included waste reduction initiatives, support for employee training and use of environmental criteria in selecting suppliers. These policies, tied directly to core business strategy, distinguished the companies from firms who might have adopted sustainability related activities at the margins of their business.
The researchers paired 90 firms they labeled “high sustainability” with 90 firms labeled “low sustainability.” Annually, they tracked the difference between the pairs’ financial performance from 1992 to 2010.
Over the long term, high sustainability firms significantly outperformed their counterparts on financial metrics such as Return on Assets and Return on Equity as well as stock price volatility. For example, an investment of $1 in high sustainability firms at the start of 1993 grew to $22.60 by the end of 2010. The same $1 invested in low sustainability firms grew to only $15.40 in the same period.
“Tying environmental and social concerns to their core business strategies, (high sustainability firms)
During this period, high sustainability firms also showed lower stock price volatility, with monthly standard deviations of 1.43 for high sustainability firms compared to 1.72 for low sustainability firms. Accounting-based performance measures of ROA and ROE showed similar outperformance for high sustainability firms.
The greatest difference in financial performance between the high and low sustainability firms occurs in sectors where:
- Consumers (versus companies) are the primary customers. This is likely because individuals have higher sensitivity to companies’ public profiles.
- Competition is based on reputation and branding. Sustainability can be an effective differentiator in categories where products are similar.
- Operations are highly dependent on natural resources. Firms in these sectors rely heavily on their “social license to operate” – in other words, they depend upon the ongoing approval of local or cause-related stakeholders, such as environmental groups, to maintain their operations.
The authors believe high sustainability firms outperform others financially because they possess cultures of sustainability. Tying environmental and social concerns to their core business strategies, these companies foster stronger stakeholder relationships and, ultimately, long-term success. The researchers reveal that high sustainability firms (i.e. firms with cultures of sustainability) share the following five traits:
- Strong Governance: High sustainability companies have board of director and senior executive incentives tied to environmental and social performance.
- Comprehensive Stakeholder Engagement: High sustainability companies train local managers on stakeholder management practices, enable stakeholders to voice their concerns, and provide feedback to stakeholders.
- Long-Term Perspectives: High sustainability companies take a long-term focus in communications with analysts and other stakeholders, and as a result attract more longterm investors, such as institutions.
- Detailed Measurement: High sustainability companies are more likely to measure key indicators such as employee injuries, suppliers’ environmental and social performance, and firm performance against international standards.
- High Degree of Transparency: High sustainability firms share their measures with stakeholders, integrate social and environmental performance into financial reporting, and engage external sustainability auditors.
Although the research provides reasonable evidence for a causal link between sustainability and financial performance, future research could more directly address this link at a company or industry level. Future research could also examine the conditions under which firms adopt a culture of sustainability and the mechanisms by which that culture grows.
Eccles, R.G., Ioannou, I. & Serafeim, G. 2011. The Impact of a Culture of Corporate Sustainability on Corporate Behavior and Performance. Working paper 12-035, Harvard Business School.
Chelsea Hicks and the NBS team