Does corporate sustainability really pay out in the long run? According to a Harvard Business School working paper, companies that have engaged in sustainability initiatives for a long time “exhibit fundamentally different characteristics from a matched sample of firms that adopted almost none of these policies,” including better performance on sustainability measures – and better performance in the stock market.
The companies engaging in long-term sustainability practices are described as having a “culture of sustainability,” that is board directors, senior management, and the rest of the workforce are all engaged in driving sustainability.
According to the paper, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, “high sustainability” companies perform better than those companies that have only engaged in sustainability for a short time or for appearances. The researchers, Robert G. Eccles, Ioannis Ioannou, George Serafeim, explain:
“High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance. The outperformance is stronger in sectors where the customers are individual consumers instead of companies, companies compete on the basis of brands and reputations, and products significantly depend upon extracting large amounts of natural resources.”
Much opposition to corporate sustainability revolves around cost pressure, but, the study shows, that opposition doesn’t make sense – companies engaging in CSR on a cultural level are better off in the long run.
High Sustainability Factors
How do you spot a high sustainability company? According to Eccles, Ioannou, and Serafeim, there are a few key factors in how they behave, compared to low sustainability companies.
1. Board Dedication. High sustainability companies have board members dedicated to sustainability and a board committee for sustainability.
2. Executive Pay Tied to Metrics. According to the researchers, high sustainability companies compensate executives based on performance metrics like environmental, social, and external perception.
3. Stakeholder Engagement Process. The paper explains:
“…risks and opportunities are identified, the scope of the engagement is defined ex ante, managers are trained in stakeholder engagement, key stakeholders are identified, results from the engagement process are reported both internally and externally, and feedback from stakeholders is given to the board of directors.”
4. Long-term Oriented. The researchers explain that high sustainability firms “have an investor base with more long-term oriented investors and they communicate more long-term information in their conference calls with sell-side and buy-side analysts.”
According to the study, high sustainability companies perform better in the stock market in the long-term – which, they posit, is the result of long-term planning, as well as deeper relationships and more transparent communication with all stakeholders.
The report says:
“This finding suggests that companies can adopt environmentally and socially responsible policies without sacrificing shareholder wealth creation. In fact, the opposite appears to be true: sustainable firms generate significantly higher profits and stock returns, suggesting that developing a corporate culture of sustainability may be a source of competitive advantage for a company in the long-run.”
This has as much to do with culture and stakeholder engagement as it does with metrics, they write.
“A more engaged workforce, a more secure license to operate, a more loyal and satisfied customer base, better relationships with stakeholders, greater transparency, a more collaborative community, and a better ability to innovate may all be contributing factors to this potentially persistent superior performance in the long-term.”
Particularly, these better performing companies are the ones that have cultivated culture around sustainability.
“Collectively, the evidence above suggests that sustainable firms are not adopting environmental and social policies purely for public relations reasons. Adoption of these policies is not just cheap talk; rather these policies reflect substantive changes in business processes.”
By mindfully creating a corporate culture based on relationships and long-term planning, rather than short-term transactions, companies perform better.