Sustainability Strategies Pay Big Dividends for Early Adopters

Sustainability Strategies Pay Big Dividends for Early Adopters

Recent research conducted by Robert Eccles and George Serafeim of Harvard Business School and Ioannis Ioannou of the London Business School shows the positive bottom line impact for early adopters of sustainability programs.
The researchers examined a sample of 180 companies to explore how corporate social and environmental performance goals affected bottom line performance. The key insight the researchers bring to light is a factual counterpoint to the widely held view that maximizing short-term profit should be a principal driver of corporate strategy. The research findings suggest that a laser-like focus on next quarter’s financial results is not necessarily the surest path to corporate greatness.

In the study researchers grouped companies into “high sustainability” and “low sustainability” categories based upon their adoption and practice of corporate performance standards dating from the early 1990s. These standards included environmental impact, human factors, and other considerations. The researchers found that High Sustainability companies are more likely to assign board-level responsibility for achieving sustainability goals than their Low Sustainability competitors. Additionally, High Sustainability firms were more likely to take a long-term business perspective, collect and report on non-financial performance metrics, and have formal mechanisms for stakeholder engagement in place. Most significantly, however, the researchers found that High Sustainability companies outperformed Low Sustainability companies both in terms of returns on assets and returns on equity over the eighteen-year period studied.

The significance of this research finding is potentially far reaching. First, it suggests that corporate sustainability policies are more than a public relations gambit. Indeed, the lack of focus on sustainability metrics suggests a lack of strategic insight in the boardroom and within the ranks of senior management. Second, the study highlights how long-term thinking and a commitment to addressing the interests of non-equity holding stakeholders contributes to financial performance over time. This may suggest that merely assuming away the negative externalities of a corporation’s business activities is no longer a viable option for strategic planners and business executives. Finally, the positive impact of sustainability policies was greatest among those companies in the study sample that sold goods directly to customers, had high rates of natural resource extraction, or competed primarily on brand or reputation.

This paper represents an important advance in our understanding of the underlying sources of sustainable competitive advantage. Corporate policies that increase a company’s accountability for performance beyond near-term financial metrics contribute positively long-term business performance. The advance of corporate sustainability practices will gain greater momentum and acceptance when analysts and investors routinely factor sustainability policies into their assessment of a company’s long-term business prospects.

About the Author – Mark Belcher is a lawyer and economist focusing on international economic and social development. He is a Co-Founder and Director at the Center for Innovation in Social Entrepreneurship.

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