By Mike Mulvihill
Corporate Social Responsibility or Sustainability programs require investment and oversight. They cost money. So a reasonable question to ask is, “Do companies engaged in sustainability programs financially underperform companies that are not engaged in sustainability programs?”
The answer is a resounding NO according to a new Harvard Business School paper, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance. The paper’s authors tracked the performance of 180 companies between 1993 and 2010. Half of the companies were identified as High Sustainability companies and the other half (traditional companies with no focused Corporate Responsibility Program) were labeled as Low Sustainability. The study found that:
- A $1 invested in a portfolio of these High Sustainability companies in the beginning of 1993 would have grown to $22.60 by the end of 2010. While a $1 invested in a comparable portfolio of Low Sustainability companies grew to just $15.40. In addition, the High Sustainability group exhibited lower stock price volatility during this time period.
- From an operating performance standpoint, a $1 of High Sustainability company assets at the beginning of 1993 grew to $7.10 by the end of 2010. Meanwhile, $1 of assets in the Low Sustainability companies grew to $4.40.
The study found some common characteristics among the High Sustainability group that are noteworthy and worth emulating:
- Their boards were directly involved in sustainability issues and executive compensation is linked to sustainability objectives
- External communications focuses on longer time horizon issues, which creates deeper stakeholder engagement and more long-term focus investors
- Their workforce is more engaged due to greater attention to nonfinancial measures
- There is greater focus on setting and monitoring environmental and social performance metrics for suppliers
- And there is a higher level of transparency in disclosing nonfinancial information
Sustainable firms are not adopting environmental and social policies solely for public relations reasons (although doing well by doing good does make for successful public relations efforts). Rather, these policies reflect substantive changes in a company’s business processes. Like Siemens generating €20 billion in 2010 revenues from its environmental portfolio. Or, Dow Chemical, which set its first 10-year sustainability goals in 1996 starting with a focus on energy efficiency leading to savings of almost $5 billion due to energy efficiency. And Philips, where product innovation based on its environmental commitments has led to energy efficient light bulbs and solar power successes.
Another reasonable question to ask is if companies with better financial performance are simply more likely to engage in sustainability programs, thereby making the study’s outcome a self-fulfilling prophecy. While that topic may be worthy of greater discussion, the study did find that both High and Low Sustainability company groups had very similar financial performance in the early 1990s. It is certainly a valid assumption that more profitable companies have more resources to invest in seemingly “non-core” business practices. Conversely, it is difficult for a marginally profitable business to find time or money to invest in much beyond their immediate survival.
But this study is evidence that sustainability practices are core to more successful business operations and financial performance. Sustainability leads to more loyal, satisfied customers, more engaged employees, greater innovation, higher profits and an increased stock price. What company wouldn’t want more of all of this?