Impact of a corporate culture of sustainability
Harvard proves positive correlation between High Sustainability companies and performance.Recently, HBS tested the performance of a sample of 90 companies that had adopted sustainability policies since the early 1990s when CSR was still at nascent stage, against a control peer group of 90 companies that only adopted sustainability more recently. Next, they used selected SAM/Dow Jones Sustainability Index data and found several interesting correlations.
The key finding of the research was that in the 18-year period studied, the High Sustainability firms* dramatically outperformed the Low Sustainability ones in terms of both stock market and accounting measures. More specifically, the observation was that High Sustainability firms:
Other key findings of the research were:
(a) High Sustainability companies have a better governance structure to manage sustainability
Here, HBS primarily looked at whether the Board has formal responsibility for the company’s sustainability strategy and whether top management incentives were linked to some environment / social performance metrics. Overall, the results suggest that firms included in the High Sustainability group are characterized by a distinct governance structure: responsibility over sustainability is more likely to be directly assigned to the board of directors and also top management compensation is more likely to be a function of a set of performance metrics that critically includes sustainability metrics.
(b) High Sustainability companies are better at engaging constructively with their stakeholders
Based on the SAM stakeholder engagement data, HBS found that High Sustainability corporations are characterized by a distinct corporate governance model that focuses on a wider range of stakeholders as part of their corporate strategy and business model. These firms are also more likely to adopt a greater range of stakeholder engagement practices and initiate more productive, long-term dialogue. High Sustainability corporations are more likely to adopt practices of stakeholder engagement for all three phases of the process (prior, during and after) compared to Low Sustainability ones.
(c) Companies in the “high sustainability” group have long-term time horizons and a more long-term oriented investor base
HBS looked at quarterly calls between Investor Relations and Analysts to estimate the time horizon discussed in communications to capital markets and calculated the difference between the percentages of shares held by dedicated investors vs. transient investors to identify companies with a long-term oriented investor base. The research shows that firms with a corporate culture of sustainability are more likely to have conversations with analysts and conference call discussions whose content is relatively more long-term focused as opposed to short-term. In sum, the findings suggest that High Sustainability firms are effective communicators of their culture, their strategies, and their long-term approach: not only do they speak in those terms but, in fact, they are convincing long-term investors to invest in their equity.
(d) High Sustainability companies integrate environmental and social information in their financial reporting
Reporting on performance measures, which are often nonfinancial regarding sustainability topics, is an essential element of corporate governance. Quality, comparability and credibility of information, and whether a company has adhered to a set of measurement or behavioral standards is enhanced by internal and external audit procedures which verify the accuracy of this information. External reporting of performance is how the company communicates to shareholders and other stakeholders how productively it is using the capital and other resources they have provided to the corporation. HBS found that 25.7% of the High Sustainability firms integrate social information and 32.4% integrate environmental information. In contrast, 5.4% of the Low Sustainability firms integrate social information and 10.8% integrate environmental information.
Read the full working paper "The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance".
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Robert G. Eccles, Ioannis Ioannou, George Serafeim*In this article companies were classified as High Sustainability firms because they adopted long ago policies regarding solid commitments to environmental and social performance while another 90 were classified as Low Sustainability firms because they had not. The Low Sustainability firms correspond to the traditional model of corporate profit maximization in which social and environmental issues are predominantly regarded as externalities created by firm actions.