This is Part 3 in a 3-Part series. You can read Part 1: Planet vs. Profit and Part 2: Putting Sustainability to Work.
Just as corporate environmental initiatives help clear the smog away, so too are shareholders now starting to better see the light of corporate sustainability and the value it provides. As discussed earlier, many think that corporate social responsibility places shareholders second because it is perceived to be counterproductive to maximizing income. While this belief is held by many, it too has been found to conflict with reality. (Eccles et al., 2011; Henisz, Dorobantu, & Nartey, 2011; Ernst & Young, 2012).
In a recent study conducted by the GA Institute, documented in the article ESG/ Sustainability/ Responsibility Reporting: Does it Matter?, it was found that in 2012 over 53% of S & P 500 companies were releasing sustainability reports, compared to just 19% in 2010 (Clark & Master, 2013). As shareholders push for this transformation, companies that do not publish sustainability reports are now in the minority. In the same study by Ernest and Young it was found that 66% of the 247 survey respondents have seen an increase in inquiries from investors and shareholders regarding sustainability issues. These inquiries range from disclosure of topics relating to greenhouse gas emission goals of the company, to efforts in energy reduction, workers’ rights, supply chain risks, and toxic chemicals used in production (Ernst & Young, 2012).
One of the greatest links between sustainability and financial value can be best understood with short-term event studies and the perception of negative events on stock price performance (Koehler, & Hespenheide, 2012). Political protests, labor disputes, consumer issues with product quality, and negative environmental events, have been shown to negatively affect the price of stock by approximately 1.12%, on average (2012). While conversely, corporations that are known to proactively manage ESG risk have been found to have a “reputation force field” known as the ESG Halo effect, shielding them from negative publicity when things go wrong (2012).
Research also suggests that companies that release more non–financial information are more likely to be deemed less risky. Thus, they may also enjoy a lower cost of capital compared to similar corporations with none of these policies (Dhaliwal, Oliver, & Tsang, 2012). This is an important proposition because many traditional financial models omit the uncertainty over what is known as “above ground” risks, or ESG risk, even while it is known to have a material impact on the value of the company when negative ESG events occur. These companies may also be better able to retain key employees and induce greater productivity when they are perceived as socially responsible (Henisz et al., 2011).
Equating sustainable initiatives to financial performance has been one of the key hurdles to overcoming the omnipresent doubt that corporate sustainability provides value to shareholders. According to Eccles and others (2011), during the 18 year period they tracked corporate performance, sustainable firms outperformed traditional firms in both the stock market and accounting performance. Investing $1 in 1993 in a value weighted portfolio of stocks comprised of sustainable companies would have grown to $22.6 by the end of 2010 (2011). The same dollar in a value weighted portfolio of traditional firms would have grown to only $15.4 over the same period (2011)--demonstrating that corporate sustainability may, in fact, be very prolific--not only environmentally, but financially as well.
Walt Disney Corporation--one the “World’s Most Admired Companies” in 2013 (Fortune, 2013), committed to, and planned very ambitious long-term sustainability goals in 2009. These included: sending zero waste to landfills, having a net positive impact on the ecosystems, and achieving zero net direct greenhouse gas emissions, just to name a few. With the inception of these long-term goals, the company also set medium to short-term goals--65 in total for 2012, to be exact. Only two of these did not achieve their objectives. Through 2012, Disney was able to reduce solid waste to landfills by over 50% from its baseline year in 2006 (Walt Disney Company, 2013). During this same period Disney has been able to reduce its absolute net electricity consumption by 10.4% (2013). What’s most impressive is that the company was able to accomplish these goals all while growing sales 23.3% and net income by 68% over the same period (2013). Over the past 5 years Disney was also able to outpace the S&P 500 return—twelve-fold! (2013). With success like this, other companies will be enticed to follow suit. In the words of Walt Disney himself, “Allour dreams can come true, if we have the courage to pursue them” (n.d.).
“Sustainability data can help reduce financial risks and increase investment opportunities, while simultaneously dispelling distrust in the capital markets, reducing excessive speculation and short-termism, and averting, moderating, or shortening national emergencies caused by financial crises or corporate misdeed.” (Lydenberg, S., 2012)
While the link between sustainability and financial performance is still developing, organizations such as the Global Reporting Initiative, that just released its 4th generation (G4) of sustainability reporting guidelines, are starting to harmonize engagement with a growing body of stakeholders and with standards from organizations such as SASB (Sustainable Accounting Standards Board) in an attempt to create the next gold standard for sustainability reporting. In the wake of events in the past decade that gave rise to two major financial legislative initiatives, SOX and Dodd-Frank, corporations may now have to work harder than ever to gain investor trust. Financial information alone may no longer be sufficient to assure trust in capital markets. Instead, investors may not just desire environmental, social, and corporate governance information, they will likely demand it. And it may be exactly what is necessary to restore and sustain trust in a system that must always remain true to protecting investors (Lydenberg, S., 2012).
Beyond the research, the value proposition for many sustainable companies is simple--companies that take their ESG policies seriously are not just verbalizing their commitment to doing the right things with your capital, they are also more inclined to actually do the right things for your capital. They appear to be well ahead of inevitable legislation and regulation; and they remain focused on long-term goals that aren’t sacrificed for short-term gains. Down the road, this puts more money in the pockets of shareholders, showing that these companies and their shareholder’s portfolio provide proof that doing well by doing good has never been more right.
Clark, K. & Master, D. (2013). 2012 Corporate ESG/Sustainability/Responsibility Reporting – Does it Matter? G & A Governance and Accountability Institute. Retrieved from http://www.ga-institute.com/fileadmin/user_upload/Reports/SP500_-_Final_12-15-12.pdf
Dhaliwal, D. , Zhen Li, O., & Tsang, A. (2010). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. University of Arizona and The Chinese University of Hong.
Disney, W. (n.d.).
Eccles, R., Ioannou, I., & Serafeim, G. (2011). The impact of corporate culture of sustainability on corporate behavior and performance. Harvard Business School. Retrieved from http://hbswk.hbs.edu/item/6865.html
Ernst and Young, (2012). Six growing trends in corporate sustainability. Retrieved from http://www.ey.com/Publication/vwLUAssets/Six_growing/$FILE/SixTrends.pdf
Fortune. (2013). World’s most admired companies. Retrieved from http://money.cnn.com/magazines/fortune/most-admired/?iid=wma_lp_header
Henisz, W. J., Dorobantu, S., & Nartey, L. (2011). Spinning Gold: The Financial Returns to External Stakeholder Engagement. The Wharton School, University of Pennsylvania. Retrieved from http://www-management.wharton.upenn.edu/henisz/hdn.pdf
Koehler, D.A. & Hespenheide, E. J.. (2012).Finding the value in environmental, social, and governance performance. Deloitte Review, 12. Retrieved from http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Deloitte%20Review/Deloitte%20Review%2011%20-%20Winter%202012/us_deloittereview_finding_the_value_in_Jan13.pdf.pdf
Lydenberg, S. (2012). On materiality and sustainability: The value of disclosure in the capital markets. Manuscript submitted for publication, Initiative for Responsible Cambridge, MA, Retrieved from http://www.sasb.org/wp-content/uploads/2012/10/On-Materiality-and-Sustainability.pdf
Walt Disney Company. (2013). 2012 Disney Citizenship Performance Summary. Retrieved from http://thewaltdisneycompany.com/sites/default/files/reports/DisneyCitizenshipSummary_FINAL.pdf