Culture of Sustainability Linked to Strong Performance
Posted on Wednesday, May 16, 2012
By Sara Laks
A recent Harvard Business School working paper adds to the growing evidence linking a corporate culture of sustainability to performance. The study tracked 180 companies over an 18 year period. It found that "High Sustainability" companies-those with "solid commitments to environmental and social performance"-substantially outperformed "Low Sustainability" companies over the long term, both in terms of stock market and accounting performance. Of course, past performance is no guarantee of future results.
The High Sustainability companies were more likely to be engaged with their stakeholders and more likely to tie executive compensation to environmental, social, and "external perception" metrics. In addition, High Sustainability companies had a high level of disclosure of nonfinancial information and, as a whole, were more likely to take a long-term approach to profit maximization.
The evidence contradicts the widely held misconception that more responsibly managed companies necessarily underperform due to self-imposed constraints. Instead, this finding suggests that a corporate culture of social responsibility enhances shareholder value and has a positive impact on corporateperformance. This Harvard study was cited in a subsequent Wall Street Journal opinion piece in which former U.S. Vice President, Al Gore, and former Goldman Sachs CEO, David Blood, urged that "global businesses must adopt 'sustainable capitalism' to create long-lasting value in the face of global challenges such as climate change, poverty, and disease."
Enough with the Short-Termism!
Adopting environmental, social and governance standards improves companies' profitability over the long term and makes them more attractive to investors, Gore and Blood co-wrote.
To improve returns, investors should push companies to stop issuing quarterly earnings guidance that encourages management to prefer short-term gains and instead concentrate on longer-term sustainable value creation, according to Gore and Blood. "The dominance of short-termism in the market fosters general market instability and undermines the efforts of executives seeking long-term value creation."