Authors: Robert G. Eccles (Harvard Business School), Ioannis Ioannou (London Business School), and George Serafeim (Harvard Business School)
Publisher: Harvard Business School Working Paper No. 12-035
Date Published: November 2011
As the number of companies implementing sustainability and other corporate social responsibility (CSR) policies has grown, an increasingly important question is how embracing these policies affects financial performance. Are environmental and social initiatives essentially efforts in public relations — and costly ones at that? Or does creating a corporate culture that focuses on these issues for employees, customers, the community, and the world at large actually add to the bottom line and the price of a share?
This paper’s analysis of 18 years of data in the United States finds strong evidence that firms emphasizing these practices significantly outperform similar firms that do not, as measured by both financial and stock market returns.
High-sustainability firms — the authors’ term for companies that are deeply committed not only to environmental issues but also to a broad range of CSR initiatives — are different as well in their governance structures, placing responsibility for CSR efforts on the board of directors, rather than the CEO or managers farther down the corporate hierarchy, and tying executive compensation to sustainability and other CSR goals. In addition, they engage more meaningfully with stakeholders, have an investor base that is more focused on the long haul, and are more transparent in their nonfinancial disclosures.
“This is an important finding because it suggests that the adoption of these policies reflects a substantive part of corporate culture rather than purely ‘greenwashing’ and cheap talk,” the authors write. “These policies reflect substantive changes in business processes.”
When companies invest in technologies to reduce greenhouse-gas emissions for their products or customers, for example, they could profit down the line by essentially having wagered that regulators would someday place a tax on emissions. Similarly, companies that underwrite the building of schools or other improvements in underdeveloped communities are betting that in the long run, their philanthropic efforts will make them more attractive to potential employees and will create more loyal customers.
On the other hand, some have argued that tightening restrictions on how a company should behave could lead to lower profits. Managers could lose focus by shifting resources and attention to areas outside the company’s core strategy. These firms could generate higher costs in a number of ways: by paying their employees above-market salaries, reducing their environmental impact beyond what regulations require, passing up potentially lucrative but nonsustainable investments, and driving away customers by charging higher prices to cover sustainability initiatives.
To figure out which perspective is correct, the researchers began by identifying firms that have explicitly emphasized a culture of CSR and sustainability since the early to mid-1990s. Research has shown that media references to corporate social responsibility or sustainability are “nearly non-existent before 1994,” the authors write, and became widespread only in the past five to seven years.
The authors sought firms that were early adopters of these policies because such firms would have had time to integrate the policies into their culture, operations, management, and formal corporate practices. Selecting firms that had a longer association also made it less likely that distortions would be introduced into the data via the inclusion of firms that were “greenwashing,” or adopting short-term efforts mostly for public relations reasons.
From the Thomson Reuters ASSET4 database, which provides annual data on the adoption or non-adoption of sustainability and other CSR policies for 775 large companies, the authors separated firms into those that embraced a culture of sustainability and social issues and those that did not.