A new study by researchers at Harvard Business School and London Business School concludes that companies which have voluntarily embraced a sustainable business culture over many years “significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.”
The study compares a portfolio of 90 “High Sustainability” organizations that have adopted a substantial number of environmental and social policies since the early to mid-1990s with a similar number of “Low Sustainability” companies that have adopted almost none of those policies. Financial performance of the two groups is tracked for an 18-year period through the end of 2010.
“We document that sustainable firms are fundamentally different from their traditional counterparts with respect to their governance structure, the extent of stakeholder engagement, the extent of long-term orientation in corporate communications and investor base, and the measurement and disclosure of nonfinancial information and metrics,” the study says. “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 study – “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance” – was authored by Robert G. Eccles, Professor of Management Practice at Harvard Business School; Ioannis Ioannou, Assistant Professor of Strategic and International Management at London Business School; and George Serafeim, Assistant Professor of Business Administration at Harvard Business School.
The authors report that an investment of $1 in the beginning of 1993 in a value-weighted portfolio of High Sustainability firms would have grown to $22.6 by the end of 2010, based on market prices. In contrast, a similar investment in a value-weighted portfolio of Low Sustainability firms would have grown to only $15.4 by the end of 2010.
Using Return-on-Equity (ROE) accounting metrics, the study finds that an investment of $1 in the beginning of 1993 in book value of equity in a value-weighted portfolio of High Sustainability firms would have grown to $31.7 by the end of 2010, compared to only $25.7 for Low Sustainability firms.
Using Return-on-Assets (ROA) analysis, a $1 investment would have resulted in assets in a value-weighted portfolio of sustainable firms growing to $7.1 over an 18-year-period, compared to only $4.4 for a portfolio of traditional firms.
An equal-weighted portfolio of High Sustainability firms also outperformed a portfolio of traditional firms, according to the financial analysis.