Data on the connection between sustainable business practices and financial performance is maturing rapidly in two ways.
At a 2008 forum of academics and managers, I discussed why research on the business case for sustainability often fails to resonate with managers. I came to these conclusions after conducting an extensive systematic review of the body of knowledge on Valuing Sustainability.
Need for Specificity
Most research focuses on the overall relationship between social performance and financial performance. It fails to address the specific activities companies engage in and the resulting benefits. It’s great to tell business leaders whether CSR investments pay off, but that doesn’t tell them which specific investments do so, or what tools they can use to assess the monetary value of their sustainability activities.
Measure what Matters
Also, much of the research examining the business case for sustainability did not consider why the financial pay-off existed. Researchers classically looked at accounting and market measures, cash flows and analysts’ perceptions rather than variables more meaningful to managers such as debt costs, employee engagement, and an innovative culture.
Research Is Becoming More Relevant
The good news is, in the years since I conducted the systematic review, research examining the business case for sustainability has started closing these gaps. Data on the connection between sustainable business practices and financial performance is maturing rapidly in two ways.
1. Examining the Conditions that Make CSR Pay
First, more researchers are starting to examine the specific processes by which investments in sustainability impact firm performance. For example, Janney and Gove use reputation theory to examine how stakeholders react to a scandal within the firm. Dixon and Clifford examine not only revenue benefits of ecopreneurship, but the cost and regulatory effects as well – providing a robust picture of the business case.
2. Examining When CSR Pays
Second, the literature is moving away from the Yes/No question “Does sustainability pay?” to the question “When does sustainability pay?” We see this in Muller and Kolk’s study, where they examine how an existing reputation for sustainability interacts with short-term disaster response efforts. And in our January 22 newsletter, an important article by Barnett and Salomon shows CSR investments have a positive or negative impact on financial performance depending how far along a company is in its sustainability journey. They find that, although firms with exceptionally high corporate social performance do better financially than any other firm, companies with low social performance are more profitable than those with moderate social performance.
Collectively, these insights and others available through the NBS Knowledge portal give managers the opportunity to build their own business case, and researchers the opportunity to frame their research within these recent trends.
For evidence that supports the Business Case for Sustainability, read the Top 8 Research Findings on Whether CSR Pays.