Are corporate social responsibility (CSR) initiatives a costly distraction or a source of increased profit? Although social and environmental objectives have become an established norm in the business world, shareholders may still worry about financial performance – but they shouldn’t, in fact they should be reassured, as evidence from multiple studies demonstrates.
While sustainability has been on the corporate world’s agenda for decades now, there’s still a bit of fear attached to it. It’s all very nice for firms to implement initiatives in response to environmental emergencies and to support social development, but isn’t all that green, touchy-feely stuff going to weaken the bottom line? And, in turn, make a dent in shareholder wealth? After all, it’s fair to wonder whether, for example, investments to reduce greenhouse gas emissions during the production process incur higher costs. Or whether more expensive biodegradable packaging materials will harm sales. And what about impact investment instruments – how long will their boom last?
I answered all these questions in detail in my impact paper titled “Should Shareholders Be Afraid of Sustainability Practices?” and published as part of ESCP Business School’s Better Business: Creating Sustainable Value series. Drawing evidence from a whole raft of studies, I examine the links between corporate sustainability and financial performance on the one hand, and corporate sustainability and shareholder wealth on the other hand.
Companies that aim for durable value perform well
I first took a look at the effects of corporate sustainability on financial performance. Indeed, profit generation in firms is of high importance as it is the source of income for its shareholders, materialized as dividend payments. While certain sustainability initiatives do result in increased costs in the short run – for instance, shifting to ecologically-sourced materials – the effect on sales revenue is more complex. Will consumers’ personal values drive them to explicitly make a choice of buying or increasing their purchases from sustainable firms? Will company efforts result in customer loyalty?
The answer seems to be a clear “yes”. The research carried out by Deloitte into the changing patterns of consumer buying behaviour revealed the growing influence of sustainability among consumers of all ages, especially Millennials. This study demonstrated that 2 out of 3 consumers have reduced their usage of single-use plastics, 43% of consumers are already actively choosing brands due to their environmental values and 34% of consumers choose brands based on their ethical credentials. The effect depends on a variety of factors; the nature of the sustainability initiatives, market and industry factors, income and level of economic development of a country, cultural factors, ethical factors, and more.
Still, the evidence seems overwhelming. A large majority of the more than 2,000 empirical studies carried out over the past four decades, including meta-studies combining the findings of some 2,200 individual studies, found a positive correlation between robust sustainability practices and operational performance.
A booming market for ethical financial instruments
I analysed the effect of sustainability on market capitalization, positing that the objective of shareholder’s wealth maximization is achieved when the market value of the company increases in the long run at an expected annual rate. The assumption is one of efficient capital markets, whereby the market value of a company closely reflects the company’s fundamental value: the one generated by the sale of goods and services.
What has been observed is that the market for Sustainable, Responsible and Impact (SRI) Investing has demonstrated an exponential growth over the last decade, in several markets on average, exceeding the growth of the whole market within the same asset classes. Not only have SRI investing instruments been outperforming other assets in the same class, the increased attention of investors is expected to accelerate in the next years. A recent investment survey by BlackRock, based on responses from 425 investors in 27 countries representing US$25 trillion in Assets Under Management (AUM), revealed that investors are planning to double their sustainable AUM in the next 5 years.
I also found that over the past decade, the proportion of SRI Investment relative to all AUM has increased to one third in the U.S., close to half in Europe, and nearly two thirds (63% in 2018) in Australia and New Zealand, according to the Global Sustainable Investment Alliance. The orientation toward long-term SRI investing, towards seeking to target the instruments issued by firms with robust sustainability practices, brings an effective alignment between creation of the long-term financial return for investors and shareholders as well as the broader objectives of society.
A now standard business practice
Taking a broader perspective, sustainability has become an integral part of the new ethical, social and corporate order. Such global and national yardsticks as the UN-backed Principles for Responsible Investment (2006), the Corporate Human Rights Benchmark (2013) and the UK Companies Act (2006) have turned corporate sustainability into a “normal” business practice. This trend is likely to accelerate in the future, with backing from influential business associations and major asset managers.
I encourage shareholders to not be afraid of sustainability practices, as they are not incompatible with financial performance goals. On the contrary, over the past ten years, the wealth of shareholders in businesses involved in sustainability initiatives has grown, so they should actively support these practices.
BIO
Wioletta Nawrot serves as Assistant Professor in the Law, Economics and Humanities Department at ESCP Business School, delivering courses in Economics and Capital Markets. She is also the Local Academic Director of BSc in Management on the London campus. Wioletta is author of 6 books in the field of capital markets and has published numerous articles in academic and business journals and newspapers. She received her PhD in Economic Science from Université Paris 1 Panthèon-Sorbonne in 2002. She also spent two years as Post-PhD Economics and Finance Scholar at IESE Business School in Barcelona and participated in economics and capital markets programmes at the US universities: University of Chicago and Purdue University. Wioletta is affiliated with CASE – Centre for Social and Economic Research, a leading Eastern European economic policy and research think-tank. She also worked a number of years in financial audit, capital markets, and as an economist.
 initiatives a costly distraction or a source of increased profit? Although social and environmental objectives have become an established norm in the business world, shareholders may still worry about financial performance – but they shouldn’t, in fact they should be reassured, as evidence from multiple studies demonstrates.){kind=link}