Saints Beat Sinners for Sustainable Investing: Stock Chart
Data by Eccles, Ioannou & Serafeim / Harvard Business School
For most investors, "sustainability" isn't about doing the right thing. The conversation has evolved. It's about doing the smart thing. This demands an answer to the fundamental question: Does it pay to invest in sustainability?
Early results are in.
This chart, drawn from a Harvard Business School study, tracks the performance of 180 companies over 18 years. The 90 firms that adopted environmentally and socially responsible policies significantly outperformed their peers. Every dollar invested in a portfolio of sustainable companies (blue line) in 1993 would have grown to $22.60 by 2011. That beats the rise to $15.40 for a portfolio of companies less focused on sustainability (purple line).
The Harvard report, first released in November, is the most rigorous attempt yet to identify which companies were transforming themselves in sustainable ways before sustainability was "cool." It's also the first study to follow companies' performance for decades -- the kind of time frame needed to evaluate transformative long-term strategies -- authors Robert Eccles and George Serafeim said in an interview.
"These things take time to pay off," Serafeim said. "If you are short-term oriented, is this a good strategy? No, it won't pay off. But if you are patient, it will."
The pressures on the planet are vast. The global middle class is set to nearly triple to 4.9 billion consumers in 2030. That's a lot of stuff people will buy and use and throw away. The challenge to companies and governments is how to satisfy the new markets without using up strategic resources or breaking the tenuous balance between humans and the environment.
Measuring corporate sustainability is tough; the long-term pressures from resource constraints are unique to every business. Many attempts to rank sustainability efforts have underperformed. In the last decade, the gold standard Dow Jones Sustainability World Index has climbed 41 percent, falling short of the 70 percent gain for the Standard & Poor's 500 Index.
The Harvard study took some unusual steps to determine which companies were enacting sustainable strategies in their formal policies and corporate cultures. They scoured company filings, websites and sustainability reports and interviewed executives. They weighed dozens of metrics, including whether companies had policies to reduce emissions, used environmental criteria in choosing suppliers, took steps to improve energy or water efficiency, and tied environmental performance to executive compensation.
They even analyzed old conference calls to find the ratio of references to time periods of more than a year to those of less than a year to determine whether a company was more focused on long- or short-term prospects. Corporate sustainability means investing for the future. Such investments can reduce margins and weigh on performance in the short term.
In some ways, the challenge of identifying and measuring sustainability is harder today than it was 20 years ago, Harvard's Serafeim said. "In the current space, it's difficult to identify companies that are really doing something in terms of sustainability rather than claiming to do something and really doing nothing," he said.
The business case for sustainability is at the heart of a report released yesterday by Generation Investment Management -- and authored by former U.S. Vice President Al Gore and former Goldman Sachs executive David Blood. Drawing in part from the Harvard study, Gore and Blood recommend investors identify “stranded assets” whose value could change significantly under certain scenarios, such as a price being set for carbon or for water. They say investors should use environmental, social and governance data like those used in the Harvard study to augment the financial data typically used to value companies.
Gore draws an analogy between climate change and the subprime mortgage crisis: “These subprime carbon assets have an asserted value based on the assumption that it’s perfectly OK to put 90 million tons of global warming pollution into the atmosphere every 24 hours,” Gore told Bloomberg News reporter Simon Clark. “Actually it’s not.”
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