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Apr242015

Sustainability and performance -- data challenges conventional wisdom

A paper written by a team of professors from the Harvard Business School and the London Business School argues that companies can institute high social and environmental standards without sacrificing shareholder value. In fact they go further than this, stating that "high sustainability" companies achieve greater returns for their shareholders, suggesting that this is a long-term competitive advantage.

We provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance"

Adopting high sustainability standards has implications for corporate operations and governance. The researchers found that the boards of directors of these companies are more likely to be formally responsible for sustainability and top executive compensation incentives are more likely to be a function of sustainability metrics.

Looking at the cumulative stock market performance of a portfolio of high sustainability companies compared to the performance of a control group portfolio of "low sustainability" companies, the researchers found that the high sustainability group "significantly outperform" the others. Further, the data suggests that high sustainability companies in the consumer-facing business sectors benefit relatively more than those in the B2B sectors.

The paper explores possible explanations for this result. They suggest that while companies adopting high sustainability standards are more constrained in their actions, they may outperform the control group because they are able to :

  1. Attract better human capital
  2. Establish more reliable value chains
  3. Avoid certain costly conflicts and controversies
  4. Be at the forefront of product and process innovations that align with high social and environmental standards

This work looks at important issues associated with our exploration of the Economics of Mutuality, and suggests many interesting areas for further exploration.

-- Clara Shen

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