There is a clear link between corporate sustainability and financial results, but which one is the trigger? Well, the link can actually run both ways.

1. Sustainability and financial performance: the
chicken or the egg dilemma
January 2013
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2. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
Contacts:
Romeu Gaspar
romeu.gaspar@thisisxy.com
UK: +44 (20) 3239 5245 | PT: +351 210 961 834
Skype: xypartners
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3. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
Sustainability and financial performance: the
chicken or the egg dilemma
There is a clear link betw een lead to increased investments in
corporate sustainability and sustainability? In this article we
financial results, but w hich explore the issue of causality between
one is the trigger? W ell, the sustainability and financial
link can actually run both performance, and what it means for
w ays. various stakeholders.
Little doubt remains about the The relationship between sustainability
correlation between improved and financial performance is a
sustainability practices and better complex one. To begin with, there is
financial results: Exhibit 1 compiles the not a standard metric for measuring
results of close to 160 research sustainability, since it covers a broad
papers, most of which found a positive number of socio-economic and
correlation between these two environmental issues. Financial
benefits. But which one is the trigger? performance, although narrower in
In other words, do better sustainability scope, can also be measured in
practices lead to improved financial different ways, from share price to
results, or does the availability of funds profits. Even after selecting concrete
Exhibit 1 – Results of 159 studies from 1972 to 2008, analyzing the correlation between
sustainability and financial performance
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4. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
Exhibit 2 – Stock market returns of the CDLI and Global 500 indexes (2005-2012)
metrics and identifying a clear includes Siemens, Coca-Cola,
correlation, one question remains: is Microsoft and many other industry
that correlation causal? Take Exhibit 2, leaders with an above-average stock
for instance, which compares the stock performance that is likely the result of
performance of companies in the CDLI several best practices, some directly
(Carbon Disclosure Leadership Index) related to sustainability, others not.
with the Global 500 Index. The CDLI
Exhibit 3 – Suggested virtuous cycle of good management, sustainable practices and
increased financial performance
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5. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
Exhibit 4 – Results of 159 studies from 1972 to 2008, analyzing the correlation between
sustainability and accounting/market metrics
Recent studies have shed some light Employees: You can have the cake
onto this issue, suggesting that both and eat it too
sustainable practices and solid
For a job seeker or employee, a
financial performance stem from good
company that is both sustainable and
management, causing a virtuous
financially strong is a keeper,
cycle: actions to increase sustainability
irrespectively of what is the driver and
trigger good financial performance,
what is the result. Companies with
which allows for additional investments
stronger financials are more likely to
in sustainability, which again improves
provide attractive remuneration
financial performance (Exhibit 3).
packages, and offer better job security.
So it looks to be a “chicken or the egg” Sustainable companies often provide
sort of dilemma. Does it matter what is better working environments and
the chicken and what is the egg? If clearer career development paths.
you are a prospective employee
Investors: Look at mediating
looking for the best company to work
metrics
for, it probably doesn’t. But if you are
an investor, a senior manager or a For an investor however, it is key to
policy maker, it can indeed matter: understand if enhanced sustainability
practices are an indicator of future
strong financials, or merely the result
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6. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
of past financial slack. This often revenues, but not between
involves identifying a more direct link environmental costs and profits.
between the two factors: as supported Whenever possible, it is therefore
by Exhibit 4, it is more likely to find a preferable to drill down further, looking
correlation between sustainability and for correlations between sustainability
accounting metrics than between and mediating metrics such as energy
sustainability and market metrics. For consumption, process efficiency or
instance, efficiency improvements to waste production.
the manufacturing process of a
For Venture Capital (VC) and Private
pharmaceutical company will have a
Equity (PE) investors, a
more direct impact on the company’s
complementary strategy might be to
operating margin than on its share
analyze the relationship between
price, because the latter depends on
sustainability and innovation. A study
additional variables.
from Deloitte (Exhibit 5) has found that
Furthermore, different sustainability sustainability leaders are 4 to 6 times
actions can impact accounting metrics more likely to become top innovators.
differently. For instance, recent Likelihood increases with time,
research of the Japanese Electronics reinforcing that sustainability is indeed
sector has found a strong causal link one of the pillars of innovation.
between environmental costs and Incidentally, the reverse – top
Exhibit 5 – Bi-directional correlation between sustainability and innovation
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7. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
Exhibit 6 – Payback period for sustainability initiatives, as reported in 2012 by members of the
Carbon Disclosure Project
The
innovators becoming sustainability
actions described in Exhibit 6, for
leaders – also happens, but is less
instance, are all environmentally
prevalent.
beneficial but have very different
payback periods.
Senior Management: Investing in
sustainability will not solve broader
Policy Makers: Minimum
financial problems
sustainability requirements are
valuable but should not be
The argument made in Exhibit 3 can
overwhelming
be mirrored: bad management can
lead both to misguided investments in
From a legislative perspective,
sustainability and to poor financial
minimum sustainability requirements
results. This suggests that sustainable
can be valuable, forcing inattentive
investments are not a silver bullet for
companies to look into the benefits of
bad financial performance, and can
sustainability. However, these policies
even worsen matters. Furthermore, as
should not be overwhelming, as to not
discussed in a previous article,
risk overburdening financially
sustainable investments need to be
distressed companies with additional
individually analyzed from both an
investments. It can also be argued that
economical and a sustainability
very strict sustainability requirements
standpoint, in order to strike a good
are unnecessary, as the market itself
balance between these two factors.
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8. X&Y Partners
Sustainability and financial performance: the chicken or the egg dilemma
will push for a higher level of and reduction targets. Most members
conformity. The World Business of these two voluntary schemes go
Council for Sustainable Development considerably further than what is
(WBCSD), for instance, includes close mandated by the sustainability
to 200 global members and 1500 requirements in place for the countries
regional members. The Carbon they operate on.
Disclosure Project includes more than
500 companies that publicly disclose
information about their carbon footprint
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