Integrate Sustainability

Why pursue sustainability?

That’s what champions do.

Firms with the highest sustainability have, on average, an ROA 11 percentage points higher than companies with only average sustainability.

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The relationship between sustainability and financial performance is U-shaped. However, this relationship is noticeably asymmetrical.

Firms with the highest sustainability have, on average, a return on assets (ROA) 11 percentage points greater than companies with only average sustainability. The trend is similar for net income.

Notably, firms with average sustainability scores perform worst financially. Why do firms with lowest sustainability outperform the middle-of-the-pack? Researchers suggest it is because they conserve resources that might otherwise go to charity.

Source: Barnett, M.L., & Salomon, R.M. 2012. Does it pay to be really good? Addressing the shape of the relationship between social and financial performance. Strategic Management Journal, 33: 1304–1320
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Infographic

Gain competitive advantage by building the capacity to influence stakeholders.

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There are reputational and financial benefits.

Sustainability contributes to a good reputation and correlates positively with corporate financial performance.

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In a review of 52 studies spanning three decades, Ortlitzky, Schmidt and Rynes found that a 13% change in corporate financial performance (CFP) can be attributed to sustainability. That means if CFP goes up, 13% can be attributed to increasing sustainability.

Researchers pointed out that sustainability improves financial performance by mostly building reputation. They measured sustainability using indicators in formal reporting, reputation ratings, social audits, donation amounts, company principles and values with respect to corporate social responsibility. CFP was defined as a company’s financial viability, or the extent to which each company achieved its economic goals.

Researchers also noted that social activities were more closely linked to bottom line benefits than environmental activities.

Takeaway
Sustainability works and it’s not only about being green. Social initiatives, such as good managerial principles and fair hiring practices, will help build a positive reputation that can lean to financial gains.
Source: Orlitzky, M., Schmidt, F. L., & Rynes, S. L. 2003. Corporate social and financial performance: A meta-analysis. Organizational Studies, 24(3): 403-441.
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How to pursue business sustainability effectively?

Consistency trumps spurts of sustainability.

Firms with consistent sustainability practices demonstrate an average increase of 53% in market performance.

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Of 622 firms listed on the S&P 500 and the DSI 400, even firms with low, yet consistent levels of sustainability have higher market performance than firms with occasional spikes in sustainability. Firms with consistently high levels of sustainability over time and across stakeholders such as client, employee and shareholder groups, have the highest market values.

Researchers defined sustainability as CSR using KLD data in five areas: community, diversity, employee relations, environment and product. Competitors find it difficult to replicate consistent CSR in these areas, giving high performing firms an edge.

Takeaway
Build on your previous successes. Not letting past efforts go to waste will help you remain competitive.
Source: Wang, H. & Choi, J. 2013. A New Look at the Corporate Social-Financial Performance Relationship: The Moderating Roles of Temporal and Interdomain Consistency in Corporate Social Performance. Journal of Management. 39-2: 416–441.
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Framework

Use the Valuing Sustainability framework
to improve valuation and measure sustainability with effective metrics.