In recent years, the perception that companies that integrate sustainability in their corporate strategy and operations will do so at the cost of financial performance has finally been put to rest. As a recent study by mainstream investment advisory firm RBC Asset Managers concludes, investors “can pursue a program of socially responsible investing with the expectation that investment returns will be similar to traditional investment options.”
The real challenge in attracting mainstream investor interest in sustainability, however, is not to simply prove that sustainability is not a drag on financial performance, but rather that it enables companies to financially outperform their industry peers.
A new study from McKinsey released last month suggests just this, showing how outperforming companies across industry sectors are using environmental, social and governance (ESG) tools to help drive growth, improve returns on capital and manage risk. The study, Profits with purpose: How organizing for sustainability can benefit the bottom line, looked at 40 companies from different industry sectors that had outperformed their peers in both financial and sustainability metrics. Senior McKinsey analysts Sheila Bonini and Steven Swartz show how these outperforming firms use ESG to drive performance improvements that create measurable financial value. The researchers found the companies they studied pursued sustainability not simply as a stakeholder management exercise, but because they see ESG having a direct material and financial impact on the business. These companies look to sustainability to ensure more efficient use of resources and return on capital, and to drive growth and product innovation. They embed sustainability in their corporate culture and use accurate indicators and metrics tied to the business to measure performance.
The leading companies in the study were 3-5 times more likely than their peers to follow these sustainability management practices.
- A unified sustainability strategy fully integrated with business goals and clearly articulated strategic priorities (no more than 3-5 focus areas).
- Strong senior leadership support (including that of the board), and involvement of a broad leadership coalition in shaping or co-creating the sustainability strategy, goals and milestones.
- Aggressive publicly communicated external targets or goals for their sustainability initiatives and reporting on performance against them.
- Aggressive internal sustainability targets or goals and consistent tracking of performance against those goals.
- Ensuring that the financial benefits of sustainability are clearly understood and measured across the organization.
This study is an important breakthrough in moving the sustainability conversation into the value creation agenda that is at the heart of business. The next step will be translating sustainability into a set of standardized performance metrics that management can use when communicating the expected returns from its sustainability investments to investors, and that investors can incorporate into their valuation model. Working with the Journal of Applied Corporate Finance (JACF), this will be a key focus of our work at the High Meadows Institute in the coming months.