Sustainable stocks outperform – of course they do, they’re sustainable

 

In a landmark study conducted by Harvard Business Review (Eccles, et al) with a sample of 180 companies studied over 18 years, it was found that corporations that voluntarily adopted sustainable practices had significantly outperformed their counterparts. But is that so surprising?

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Let’s have a think about this and dig a little deeper.

What does sustainability mean? In the context of the HBR study it refers to companies that place a high level of emphasis on employees, customers, products, the community, and the environment as part of their business model and core strategy. Let’s have a look at what each of these parts are and how they relate to sustainability.
Employees – a policy for diversity and equal opportunity, work-life balance, health and safety improvement, and favouring promotion.
Diversity and equal opportunity has been demonstrated to improve team performance with improved decision-making and problem-solving processes, higher creativity and innovation with above average profitability. Equal opportunity reinforces diversity while elevating employee satisfaction (Guver & Motschnig, 2017; Creary, et al, 2019; Hunt, et al, 2018).

Work-life balance has been well documented to improve productivity, engagement, and creativity whilst reducing sick days leading to improved financial performance (Whillians, 2018; Buckingham & Goodall, 2019; Vadnai-Tolub, 2019).
Products – product and service quality and product risk.
Product quality enables service quality and reduces product risk by improving performance and reliability, resulting in reducing service burden and enabling extended warranties that in turn increases competitive ability. Service quality strengthens the customer relationship, improves repeat business, and promotes positive brand association (Takeuchi & Quelch, 1983; Aragon, et al, 2017; Buck, R., Laubli, et al, 2016).
Community – corporate citizenship commitments, business ethics, and recognising human rights.
Responsible corporate citizenship, high standards of ethics, and upholding human rights improves brand image, employee engagement, talent acquisition and reducing risk of fines and penalties leading to improved financial performance (Henisz, et al, 2019; Bower, 2020; Puri, 2019).
Environment – policies for reducing emissions, using environmental criteria in selecting suppliers, and seeking to improve energy and or water efficiency.
Reducing emissions, evaluating environmental standards of suppliers, and improving resource efficiency reduces costs, improving financial performance while increasing brand reputation (Rubel, et al, 2017; Beal, 2019; Stuchtey, 2015). Pollution means inefficiency. Research published by Harvard Business Review (Porter & van der Linde, 1995) found that when “scrap, harmful substances, or energy forms are discharged into the environment as pollution, it is a sign that resources have been used incompletely, inefficiently, or ineffectively.” They examined 181 ways of preventing waste in chemical plants and found that only one of them “resulted in a net cost increase.” Here, process innovation was found to more than offset costs in 180 out of 181 cases.

Being sustainable means being efficient, reducing risk and building brand image.

As demonstrated above, being sustainable is not a burden for some extraneous effort towards transcendence, it is a sensible, logical manner to conduct business. It’s about cutting waste, improving productivity and employee engagement. It’s about building a positive brand image and creating reliable revenue streams. These are simply good business practices. It’s not a surprise that companies pursuing sustainability outperform in the long-term – it’s inevitable.

References

Aragon, A., Makarova, E., Ragani, A.F., Rutten, P., 2017. “Manufacturing quality today: Higher quality output, lower cost of quality.” McKinsey & Company.

Beal, D., Lind, F., Young, D., 2019. “What companies can learn from world leaders in societal impact.” Boston Consulting Group.

Buckingham, M., Goodall, A., 2019. “Engaging employees.” Harvard Business Review.

Bower, T., 2020. “Why boards should worry about executive’s off-the-job behavior.” Harvard Business Review.

Creary, S.J., McDonnell, M.H., Ghai, S., & Scruggs, J., 2019. “When and why diversity improves your board’s performance.” Harvard Business Review.

Eccles, R.G., Ioannou, I., & Serafeim, G., 2014. “The impact of corporate sustainability on organisational processes and performance.” Journal of Management Science.

Guver, S. & Motschnig, R., 2017. “Effects of Diversity in Teams and Workgroups: A Qualitative Systematic Review.” International Journal of Business, Humanities and Technology. Vol 7, No 2.

Henisz, W., Koller, T., Nuttall, R., 2019. “Five ways ESG creates value.” McKinsey & Company.

Hunt, V., Lareina, Y., Prince, S., & Dixon-Flye, S., 2018. “Delivering through diversity.” McKinsey & Company. Retrieved from: https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity

Laubli, D., Ottink, N., 2016. “The quest for quality in fresh-food retailing.” McKinsey & Company.. Retrieved from: https://www.mckinsey.com/industries/retail/our-insights/the-quest-for-quality-in-fresh-food-retailing

Puri, S., 2019. “Your star salesperson lied. Should he get a second chance? Harvard Business Review.

Porter, M.E., Van Der Linde, V., 1995. “Green and competitive: Ending the stalemate.” Harvard Business Review.

Rubel, H., Schmidt, M., Meyer zum Felde, A., 2017. “The urgency – and the opportunity – of smart resource management.” Boston Consulting Group.

Stuchtey, M., 2015. “Rethinking the water cycle.” McKinsey & Company.

Takeuchi, H., Quelch, J., 1983. “Quality is more than making a good product.” Harvard Business Review.

Vadnai-Tolub, G., 2019. “More than work-life balance, focus on your energy.” McKinsey & Company Organisation Blog. Retrieved from:

https://www.mckinsey.com/business-functions/organization/our-insights/the-organization-blog/more-than-work-life-balance-focus-on-your-energy

Whillans, A.V., 2018. “Time poor and unhappy.” Harvard Business Review.

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