Sustainable Strategies Pay Off in the Longrun
HBS professors discuss the importance of innovation
In this article, Harvard Business School Professors Robert G. Eccles and George Serafeim, cochairs of Innovating for Sustainability, discuss the latest trends in sustainability, the importance of innovation, and how the program prepares corporate leaders to position today’s firms for future success.
How does having a sustainable strategy pay off?
Eccles: We recently completed a paper that shows dramatically different financial performance between two groups of companies—high-sustainability and low-sustainability firms. What’s interesting about the performance difference is that it’s across a broad set of financial metrics, including accounting and stock market metrics.
Serafeim: We identified companies with a clear culture of sustainability, whose corporate policies raise concerns for employees, products, communities, and the environment. Next, we tracked their performance over the last 20 years or so. Also, we identified another group of firms within the same sector that don’t have any of those policies. We made sure that back in the early 1990s they exhibited exactly the same characteristics in terms of performance. Then, we tried to understand what happened to them after 20 years. What you see is that the firms with environmental and social policies in place—those that have embedded sustainability in their strategy and operations—clearly outperform their peers.
There are multiple reasons for this. They have superior stakeholder engagement and better measurement and disclosure of nonfinancial information related to employees, customers, and suppliers. They also have more of a long-term orientation. We did an analysis of conference calls between senior management and sell-side and buy-side analysts. What we found is that companies with sustainability embedded in their strategy and operations talk more about the future. As a result, their investor base becomes more long-range oriented and less likely to expect profits in the next quarter.
Eccles: So, our research demonstrates two clear benefits for companies that adopt sustainable strategies. First, they have superior financial performance, but not at the expense of meeting the needs and expectations of other stakeholders. Second, they have a longer-term mind-set among their investor base.
What is integrated reporting, and why is it important?
Serafeim: Integrated reporting is the idea of embedding social, environmental, and governance information within financial reporting. The goal is to show the link between financial and nonfinancial performance and identify the material social, environmental, and governance metrics. With integrated reporting, companies adopt a more disciplined approach to identifying, measuring, and managing the essential components of their business strategy.
Eccles: This is different from the common practice today, which is to have a financial report and a completely separate corporate social responsibility (CSR) sustainability report. It provides a more holistic view. This relates to the distinction between a sustainable strategy and a sustainability strategy. The best way to communicate a sustainable strategy is through integrated reporting. Right now, there’s only one country in the world—South Africa—that has adopted integrated reporting as a mandate. It’s enforced through a listing requirement on the Johannesburg Stock Exchange, which has about 450 companies listed. In our program, Innovating for Sustainability, we discuss some leading companies that have adopted integrated reporting on a completely voluntary basis. These are companies in different industries and different countries.
Innovating for Sustainability is a program focused on helping companies develop innovative products, processes, and business models to meet both financial and nonfinancial objectives.
