Corporate Sustainability, that's a term that has caught a lot of
tailwind in the past couple of years. But what is it? Does it refer
to the financial health of a company and its ability to offer
sustainable growth for the long-term future? Is it referring to a
company's ability to be environmentally responsible? Is corporate
sustainability responsible for good policy-making regarding
stakeholder engagement? The answer is surprisingly yes to all of
these. At least it is according to the little school simply known
as the Harvard School of Business. But what do they know? Corporate
Sustainability policies create a damper on earnings and they
provide distractions amongst management when it comes to focusing
on the core competencies of the business, right? This notion of
corporate sustainability has never been more prevalent amongst
investors today, and it has never been more wrong. (
Harvard Business Article
Using a sample of 180 companies, mixed with "High"
Sustainability and "Low" sustainability companies, Harvard has
found a substantial character difference between these companies.
Mainly they find that the boards of directors of these companies
are much more likely to be responsible for sustainability and top
executive incentives more likely linked to sustainability metrics.
These companies also exhibit better organization for stakeholder
engagement, tendency to be more long-term oriented and display
better measurement and disclosure of non-financial information, as
well as outperform those less sustainable. Being sustainable isn't
just some liberal agenda slapped onto a company's strategic
initiatives; it has strong fundamentals behind it. Policies such as
performing energy audits on existing buildings, reducing waste,
recycling materials, and making all new buildings LEED certified (
Energy and Environmental Design)
all have sound economic reasoning behind them. They don't just help
reduce CO2 emission or waste, they also create valuable cost
reductions and operational efficiencies for the company in the long
"High" sustainable companies are more likely found to make
compensation bonuses linked to a function of environmental, social,
and external perceptions. This is important because it links
executive pay with the image they impose, to customers, on the
company and not the just income they produce. They also find it
much more important to discuss long-term information and evaluate
information related to key stakeholders such as employees,
customers and suppliers. Going along with their long-term approach,
sustainable firms disclose more data related to non-financial
information than others. This is an important strategic dimension
to determine the effectiveness of strategy execution.
So how does all this relate to creating value for shareholders
and more importantly your portfolio? Many think that corporate
responsibility places shareholders as secondary stakeholders and
takes on strategies counterproductive to maximizing income. Well
according to Harvard, over 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 sustainable
stocks would have grown to $22.6 by the end of 2010. The same
dollar in a value weighted portfolio of traditional firms would
have grown to only $15.4 ending 2010.
In essence, the "what goes around comes around" philosophy
relates perfectly to what corporate sustainability means for
company profits in the future. Sacrificing today not only improves
a company's image today but can also put more money in your pocket
down the road. The eco-conscious consumer has shown their
willingness to pay between "10-25% more for purchases in order to
account for their impacts on biodiversity and the ecosystem" (TEEB
Report for Business).
Socially Responsible Investing ((
As an investor, you may own some of these companies and not even
know it. Household names like Microsoft (
), AOL (
), eBay (
), Apple (
), and Whole Foods (WFM) are all on the cusp of the sustainability
trend. eBay, for example, has won multiple awards for its
Cradle-to-Cradle eco-friendly boxes and has reduced energy usage by
33% in one of its data centers, as well as start a "Green Team"
within the company to focus on improving sustainability
efforts/behaviors and educating those in the local communities.
One investment company that has recognized this trend is
Huntington Bancshares (HBAN). Through Huntington Strategy Shares,
the company has created the first of its kind ecologically focused
ETF, the Huntington EcoLogical Strategy ETF (HECO). This actively
managed fund seeks to invest at least 80% of its net assets in
securities of ecologically focused companies.
HECO top 5 holdings (as of 04/02/2013)
- eBay 5.91% - Provides online marketplaces for the sale of
goods and services, as well as other online commerce platforms
and online payment solutions to individuals and businesses in the
United States and internationally.
- Hain Celestial Group (HAIN) 4.74% - Together with its
subsidiaries, manufactures, markets, distributes, and sells
natural and organic food, and personal care products in the
United States and internationally.
- Whole Foods Market 4.17% - Engages in the ownership and
operation of natural and organic food supermarkets.
- Qualcomm (QCOM) 3.77% - Engages in the design and
manufacturing of semiconductors and marketing digital wireless
- Borg-Warner (BWA) 3.27% - Engages in the manufacture and sale
of engineered automotive systems and components primarily for
power train applications worldwide that aid in boosting
The fund is focused on searching for companies that are good
stewards of the environment, and most importantly good stewards of
capital, hence the capital "L" in EcoLogical. Their approach to
screening for potential investments looks at a company's triple
bottom line, with no one portion (people, planet, profit) taking
precedence over the others. Unlike many SRI funds, HECO does not
simply look to invest in nascent green technologies like wind and
solar or other green technologies that may prove speculative.
Instead it looks to provide a sustainable return to investors by
making fundamentally sound and logical green investments. Since the
fund's inception on June 18, 2012, HECO has returned 15.25% and
10.85% YTD, relatively in line with the overall market.
The value proposition for many sustainable companies, and those
listed in this article, is that they are doing the right things
with your capital and for your capital. They are well ahead of the
game when it comes to environmental regulation and capturing
eco-consumer trends. If you're a short term investor, sustainable
investing may not be for you, if however you are long-term
oriented, the right sustainable companies can safely provide you
with solid performance you can feel good about.
If you are interested in learning more about your portfolio's
sustainability efforts, many companies issue their efforts in
annual Social Responsibility or Sustainability Reports which can
typically be found under the company's "About" section on their
Borg Warner Social Responsibility
I am long [[EBAY]], [[AOL]].
Business relationship disclosure:
I have previously worked for Huntington Bancshares. I am no longer
affiliated with Huntington or will receive any compensation from
them for writing this article. This article is an expression of my
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