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:

1. Outperformed the “low sustainability” group  by 4.8% on the stock market
2. Exhibited lower volatility than the “low sustainability” group
3. Obtained better ROA and ROE than the “low sustainability” group

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.

To become a High Sustainability company, it is essential to have your basics right. One of the key components is to develop an effective sustainability strategy, that offers you a roadmap for the coming years. Designing an accurate sustainability strategy is not an easy task. We came up with a set of 12 questions to support C-suite and ESG investors in scrutinzing their sustainability programs. Are you capable of answering the 12 questions? Do the check, and have a look at our Slideshare below.

Read the full working paper"The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance" by authors Robert G. Eccles, Ioannis Ioannou & George Serafeim.

Please contact us at hello@finchandbeak.com for more information.

* 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.

Image source: Alessandra Pezzotta, Flickr