A Harvard Business School “Working Paper” by Robert G. Eccles, Ioannis Ioannou and George Serafeim investigates the effect of a corporate culture of sustainability on multiple facets of corporate behavior and performance outcomes.

The authors find that corporations that voluntarily adopted environmental and social policies by 1993—which they call High Sustainability companies—exhibit fundamentally different characteristics from companies that adopted almost none of these policies – those that they call Low Sustainability companies. They found that High Sustainability companies are more likely to have organized procedures for stakeholder engagement, to be more long-term oriented, and to exhibit more measurement and disclosure of nonfinancial information.

Their article provides yet more evidence that 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, companies compete on the basis of brands and reputation, and in sectors where companies’ products significantly depend upon extracting large amounts of natural resources.

Some of the companies that they consider include:

  • Southwest Airlines – Identified employees and not shareholders as their primary stakeholders.
  • Novo Nordisk – Made the same determination about their patients.
  • Dow Chemical – Setting 10-year goals for the past 20 years, and recently ventured into a goal-setting process for the next 100 years.
  • Natura – the Brazilian personal care, door-to-door sales company that has beaten out Unilever, P&G and Avon for a dominant market share by committing to preserve biodiversity and offering products that have minimal environmental impact.

The working paper takes a deep look at questions that include:

  • Does the governance structure of firms that adopt environmental and social policies differ from that of other firms and, if yes, in what ways?
  • Do such firms have better stakeholder engagement processes and longer time horizons?
  • How do their measurement and reporting systems differ?
  • What are the performance implications of a culture of sustainability?
  • Could meeting other stakeholders’ expectations come at the cost of creating shareholder value?

One of the most insightful issues they dive into is the question of what is the relevant time frame over which economic value is created or destroyed becomes salient. “A short-term focus on creating value exclusively for shareholders may result in the loss of value over the longer term through a failure to make the necessary investments in process and product quality and safety. Such a short-term approach to decision-making often implies both an inter-temporal loss of profit and a negative externality being imposed on stakeholders. That is, managers take decisions that increase short-term profits, but reduce shareholder value over the long term and may hurt other stakeholders.”

The paper also explores the question of whether, and over what time frame, negative (positive) social and environmental externalities are eliminated (rewarded) and how that process affects long term value.

The paper concludes that performance is higher for the High Sustainability group compared to the Low Sustainability group by 4.8% on a value-weighted base, and by 2.3% on an equal weighted-base. They also find that High Sustainability firms perform better when considering rates of return, such as return-on-equity (ROE) and return-on-assets (ROA) and that this outperformance is more pronounced for firms that sell products directly to consumers vs. B-to-B. Consumer-focused companies compete on the basis of brand and reputation, and make substantial use of natural resources. Finally, using analyst forecasts of annual earnings they find that the market underestimated more the future profitability of the High Sustainability firms compared to the Low Sustainability ones.

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