Is Sustainability a Corporate Strategic Advantage?
Alan L. Johnson
The rise of sustainability in businesses has taken a few forms, but most would contend that companies have done it as a differentiator in comparison to their peers or as a strategy of mimicry in the market. Until recently there has been little research as to whether or not sustainability as a corporate strategy goes beyond simply a voluntary initiative to hedge against mounting social pressures or if it truly can be a significant business strategy and value driver.
In the article: “Yes, Sustainability Can Be a Strategy”, authors Ioannis Ioannou and George Serafeim evaluate whether or not the ability for a company to execute on a sustainability strategy is real. They question:
Is the adoption of sustainability practices a form of strategic differentiation that can lead to superior financial performance? Or, is it a strategic necessity that can ensure corporate survival but not necessarily outperformance?
The article goes on to discuss that there is a debate raging as to whether or not there is more of a greenwashing of sorts happening versus a verified differentiated strategy. As a means to test their hypothesis, the researchers took data from MSCI ESG Ratings, the largest provider of ESG data in the world. The team assessed data from the period 2012-2017 for all companies that appear in the MSCI consistently across all years (about 3,802 companies). Through their exploratory analysis of the MSCI ESG Ratings data, Loannis and George discovered that:
...the adoption of strategic sustainability practices is significantly and positively associated with both return on capital and market valuation multiples, even after accounting for the focal firm’s past financial performance. In contrast, the adoption of common sustainability practices is not associated with return on capital, but it is positively associated with market valuation multiples.
What is really amazing about this is the fact that finally someone has taken an analytic look at ESG data to determine if there is a connection between sustainability strategies and organizational growth and performance. While conclusions from the data are just a first pass, there are many interesting thoughts given by Ioannou and Serafeim. It would seem that companies who adopt innovative circular-economy-based business models, or adopt practices that enhance employee recruitment, engagement, and retention do so to differentiate themselves and therefore, occupy an unexploited or under-exploited position through developing a unique strategy that is not easily imitated.
Reality Changing Observations:
Q1. How would you define a sustainable business strategy?
Q2. What are some companies that employ a sustainability business strategy?
Q3. Describe what you believe is a core factor in driving sustainable progress.