Old Habits Slow Progress in Sustainability

By Carol Pierson Holding

The Sustainability Accounting Standards Board (SASB) just announced a new credential for accountants charged with analyzing sustainability issues that impact the bottom line.  “More and more companies are disclosing sustainability information. In 2011, only about 20 percent of S&P 500 companies produced a sustainability report, while in 2014 that number jumped to 75 percent.”

Should this make us jump for joy? I’d hoped for more.  By now, we were supposed to have one overall reporting scheme that integrated financial results with quantified sustainability measures.

I remember how participants cheered at the 2007 Socially Responsible Investment (SRI) Conference when piles of the Wall Street Journal’s special section “A Smarter Approach to SRI” were distributed. The section acknowledged SRI investors, data analysts and portfolio managers as a valid segment of investing, chronicling SRI’s shift from a sin-avoidance screen (no tobacco, liquor or firearms) to a philosophy that doing good in the world produces great financial results.

We thought we could see the end of a need for SRI. After all, if a strategy is producing better returns, wouldn’t everyone jump on the bandwagon? Wouldn’t accounting standards incorporate sustainability factors into their reporting requirements? Wouldn’t financial analysts demand access to standardized sustainability measurement?

Yet here we are, eight years later, and we’re no closer to sustainability integration. The SEC requires financial reporting on climate change and conflict minerals to account for their risk, but that was put in place in 2010 and has only been minimally enforced. The U.S. has not required sustainability reporting seen in other countries, and the U.S. accounting board (FASB) leaves sustainability reporting to independent organizations, removing FASB’s responsibility to put sustainability factors side by side with financial reports.

Sustainability data, also called CSR, is available – in fact, CSRHub, sponsor of this blog, posts some of its data online for free. But none have been used to establish standards that can be enforced.

Despite these roadblocks, some investors have figured out how to incorporate sustainability performance into their investment strategies, and they’ve had remarkable success. This month’s The Atlantic reports on Al Gore’s phenomenal performance with sustainable investing: his firm earned 12.1 percent annually over ten years, an astounding 5 percentage points over the average managed account.

Gore’s results are substantiated by studies from Oxford University and the Wharton School. So why are supposedly rational investors not enrolling in droves?

Bank of England’s Chief Economist Andrew Haldane has considered this behavior irrational as well. The Atlantic piece explains:

“…this is known as the ‘$20 bill paradox’: An economist sees some money lying on the sidewalk and says, ‘That can’t be a $20 bill, because if it were, someone would have picked it up.’ But Haldane’s analysis shows a persistent market failure because of habits of mind, compensation structure, and other real-world factors that make investors undervalue long-term returns.”

A perfect example comes courtesy of this month’s Harvard Business Review’s “Best-performing CEOs in the World.” For 2015’s report, the authors factored in 20 percent sustainability performance with its standard financial measures, profit and change in stock value. Eight years after the Wall Street Journal endorsed sustainability, Harvard has come around too. Should be great news right?

Predictably, Jeff Bezos, founder of Amazon, was first last year. Also predictably given Amazon’s abysmal sustainability record, Bezos dropped to 87th this year.

But the market didn’t punish Bezos at all. The week the rankings were released, Amazon’s price was unaffected, bouncing around within its normal range. Even more telling, when the company’s “bruising workplace’” was excoriated by the New York Times then universally critiqued for weeks on end, the stock barely budged. Sustainability affects long term returns, which just don’t matter to most investors.

So what’s the news here?

By adding sustainability as a factor to its Best Performing CEOs ranking, HBS is supporting its mission to “Educate Leaders Who Make a Difference in the World. Yet the market’s “habits of thought” are to value short term over long term returns and reward ambitious leaders who fail to understand the inter-connectedness of the world.

You have to applaud the change in CEO ranking criteria, celebrate the SASB credential and admire those who proselytize sustainable investing. But we still have a long way to go to change real world habits.

Photo courtesy of Andy Blackledge via Flickr CC.

Carol Pierson Holding is President and Founder, Holding Associates. Carol serves as Guest Blogger for CSRHub. Her firm has focused on the intersection of brand and social responsibility, working with Cisco Systems, Wilmington Trust, Bankrate.com, the US EPA, Yale University’s School of Environmental Sciences, and various non-profits. Before founding Holding Associates, Carol worked in executive management positions at Siegel & Gale, McCann Erickson, and Citibank. She is a Board Member of AMREF (African Medical and Research Foundation). Carol received her AB from Smith College and her MBA from Harvard University.

CSRHub provides access to corporate social responsibility and sustainability ratings and information on 15,000+ companies from 135 industries in 132 countries. Managers, researchers and activists use CSRHub to benchmark company performance, learn how stakeholders evaluate company CSR practices and seek ways to change the world.