Responsible Investor

Login | Subscribe | Trial

Alpha for ‘high sustainability’ companies after 3 years, says major Harvard/LBS research report

Alpha for ‘high sustainability’ companies after 3 years, says major Harvard/LBS research report

RI talks to the professors behind long-term corporate sustainability findings.

A financial premium for ‘high sustainability’ companies can be perceived after three years and continues to rise after that, according to a significant new report by Harvard Business School and the London School of Business. The findings of the research show tangible value to institutional investors with long-term return horizons that integrate environmental, social and governance (ESG) factors into their stock selection. The report, titled: “The Impact of a Corporate Culture of Sustainability on Corporate Behaviour and Performance” is co-authored by Robert Eccles, Professor of Management Practice at Harvard Business School, George Serafeim, Assistant Professor of Business Administration at Harvard Business School, and Ioannis Ioannou, Assistant Professor of Strategic and International Management at London Business School. From a sample of 180 US-based companies, the research finds that high sustainability companies significantly outperform similar low sustainability companies over the long-term in both stock market and accounting performance. Tracking performance over 18 years, the research finds that investing $1 in the beginning of 1993 in a value-weighted (equal-weighted) portfolio of sustainable firms would have grown to $22.6 ($14.3) by the end of 2010, based on market prices, compared to $15.4 ($11.7) in a portfolio of low sustainability firms. The research report suggests that a corporate culture of sustainability has created a distinct type of corporation that performs better on both financial and social metrics.

Speaking to, Serafeim said: “These sustainability issues take time to bed in and it’s difficult to see differences over a 1-2 year time horizon. But we see clear outperformance after three years and that increases over time.” The academics said the research was designed to test the hypothesis of a performance difference for a ‘sustainable company’, which they said referred to firms that have a clear strategic focus on ESG issues, but without any a priori positive or negative connotation. They said traditional or ‘low sustainability’ companies referred to those without such developed policies. Examples of the environmental policy markers used for the research included carbon emissions reduction action, green supply chain policies and energy and water efficiency strategies. Social policy metrics used included diversity and equal opportunity targets, work-life balance, health and safety improvement, and favouring internal promotion. Policies related to community included corporate citizenship commitments, business ethics, and human rights criteria. Other measurements related to customers included product risk, and customer health and safety. The research aimed to iron out ‘greenwashing’ effects by looking at actual corporate policy implications via interviews with corporate executives. It identified 90 companies that by the late 2000s had adopted almost 50% of the ESG reference policies and then matched each of these with low sustainability companies that had on average, adopted only 10% of the same policies by the late 2000s to create a 180 firm universe. The


Page 1 of 2 | Next »