Investments in sustainability are “shareholder-value enhancing” – new Harvard research

Academic team finds “strong evidence” for benefits of investment in material sustainability issues.

New research from Harvard University has found what is claimed to be “strong evidence” that investing in companies doing well on specifically material sustainability matters leads to strong stock market performance.

“We found strong evidence that investing in firms that are performing well on material sustainability issues yields considerably better future stock market performance compared to other firms,” writes Associate Professor George Serafeim, who conducted the research with colleagues Mozaffar Khan and Aaron Yoon.

The new paper follows Serafeim’s work with Robert Eccles and Ioannis Ioannou (Impact of a Corporate Culture of Sustainability on Corporate Behaviour and Performance) that found that there’s a financial premium for ‘high sustainability’ companies.

On a LinkedIn posting, he continues: “ The interesting thing is that investing in firms that are performing well on immaterial sustainability issues yields no different performance and even a small under-performance compared to other firms.”

The trio set themselves the task of understanding the value implications from sustainability investments. Their main hypothesis is that the existing literature on the issue mostly fails to find strong evidence of the ‘do good do well’ story as it “lumps together” sustainability issues that are both material and immaterial from an investor viewpoint.

“Climate change, employee safety, corruption risk, or product safety all have rather different impact on healthcare, energy, and financial firms,” Serafeim says.So the researchers did three things. First, they followed guidance from the Sustainability Accounting Standards Board (SASB) to classify sustainability issues industry by industry as ‘material’ and ‘immaterial’. Second, the team constructed portfolios of firms with good sustainability performance on material issues and compared them to portfolios of firms with poor sustainability performance on material issues. Then they did the same for immaterial issues.

“Using calendar-time portfolio stock return regressions we find that firms with good performance on material sustainability issues significantly outperform firms with poor performance on these issues, suggesting that investments in sustainability issues are shareholder-value enhancing,” the researchers say in their 34-page paper, titled: Corporate Sustainability: First Evidence on Materiality.

“These results have important implications for how we think about firms’ and investors’ capital allocation decisions,” Serafeim concludes. He reckons that asset managers using aggregate ESG scores “is a bad idea”. A better approach, he says, is to strip out the immaterial issues based on industry classification, which “(at the very least) yields much better performance for the portfolio”. A corollary of this is that companies need to provide high quality information around those issues.
“Asset managers have now a unique opportunity,” he says, “to start developing truly simple to understand, but at the same time, value-enhancing products backed by rigorous research.”