Culture of Sustainability
The authors posit that the evolution of a "culture of sustainability," where environmental and social performance is considered equally important to financial performance, forged a different kind of long term corporate model with its own values and beliefs.
It takes about three years for High Sustainability companies to outperform their counterparts, and it continues to rise after that. "These sustainability issues take time to bed in and it's difficult to see differences over a 1-2 year time horizon. But we see clear outperformance after three years and that increases over time."
Executive compensation in traditional firms is based on short-term metrics, and only on financial ones. That encourages managers to make decisions that deliver short-term performance at the expense of long-term value creation. Consequently, a short-term focus on creating value for shareholders alone may result in a failure to make the necessary strategic investments to ensure future profitability.
"Firms in the High Sustainability group may outperform traditional firms because they are able to attract better human capital, establish more reliable supply chains, avoid conflicts and costly controversies with nearby communities, and engage in more product and process innovations to be competitive under the constraints that the corporate culture places on the organization."
The authors conclude, as so many other studies do, that adopting strong environmental and social practices enhances performance, rather than impedes it. The argument against adopting such practices is often the "high cost" when in fact the opposite is true. Low Sustainability companies face much higher costs over the long run, even if they have strong short term results.
Although the study focuses on large US companies where extensive data exists, the authors say the same could be true for smaller companies. The research findings show tangible value to individual and institutional investors that have long-term return horizons that integrate environmental, social and governance (ESG) factors into their stock selection.
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Rona Fried, Ph.D. is CEO of SustainableBusiness.com
You can read the full study here, which was conducted by researchers at Harvard and London Business Schools: The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance
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