Green companies outperform in times of volatility

It is conventional wisdom that sustainability and corporate social responsibility (S&CSR) programs can improve an organization’s image, morale and recruitment efforts, not to mention make a positive environmental impact.  Yet, many executives remain skeptical that these initiatives can deliver tangible business benefits and are the best use of scare capital and management attention.  Not surprisingly, many firms view the current recession as a time to batten down the hatches and not pursue unnecessary investments.   

This view can now be challenged by hard data. New research from AT Kearney, a consultancy, suggests that executives should think twice about cancelling or deferring sustainability initiatives during recessionary times.  The study showed that companies that are committed to launching and maintaining S&CSR initiatives will outperform their peers in financial returns.

In the second half of 2008, AT Kearney looked at 99 US public companies spanning 18 industries to understand how S&CSR-focused companies fared against sustainability-specific market indices.  Sustainability-based practices were defined as tangible programs that were geared toward protecting the environment, promoting social well-being and driving business results. 

The study’s results were instructive:

Sustainability-focused firms out performed in almost every sector.  Sixteen out of 18 industries awarded better returns to S&CSR-focused companies.  The 2 industries that underperformed were Construction & Materials and Personal & Household goods.

The performance differential was significant.  The difference in shareholder value between companies after 6 months was 15% or an average of $650 million. The industries with the highest 6 month stock price differential were Media, Automobiles & Parts (each 133 vs index), Financial Services (125 vs index) and Industrial Goods & Services (123 vs index)

Why did some companies do better than others?  For one thing, the market could be rewarding a longer term, more comprehensive and genuine commitment to S&CSR and risk management versus more ad hoc efforts.  In particular, sustainability driven innovation, supply chain optimization and green product development will yield higher returns in a firm that treats S&CSR as a strategic priority with proper funding and focus.  In addition, better financial results could be attributed to stringent governance, risk management and compliance efforts needed to fully deploy and manage S&CSR programs.

There are important implications for the poorly performing companies. Half measures with sustainability programs may be a waste of money and effort.  Laggard companies should consider one of three strategic options: 

  1. redouble their S&CSR investment and focus to catch up to leading competitors;
  2. look for market or supply chain ‘white space’ where they can leapfrog competition;
  3. abandon all sustainability efforts (except what is government-mandated) and direct their capital elsewhere.

For existing high performers, staying the course can be very rewarding.  Firms should consider increasing their sustainability focus if they deem it to be a major driver of competitiveness and market differentiation.

Despite some clear findings, managers should treat these results cautiously. The second half of 2008 was an atypical period in the public markets.  Likely many of the findings would be different during a more stable economic period.

For more information on our work and services, please visit the Quanta Consulting Inc. web site.


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