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Sustainability’s Influence on Stock Value

| Monday March 28th, 2011 | 1 Comment

Political discourse over sustainability, in the USA, always seems to debate this single notion: that implementing sustainability initiatives – whether those are to increase the use of renewable energy, or to introduce any form of environmental regulation – are costs which put businesses at a competitive disadvantage resulting in job losses. The camps for and against this argument are fiercely polarized, rendering only glacial political progress – if indeed, any progress at all.

In such a capitalist system then, let the market decide. In this case, the stock market. It goes without saying that many companies are already addressing sustainability, be it in their product portfolios, or their Corporate Social Responsibility (CSR) initiatives. So what view does the stock market take of such measures? As GreenBiz asks – do markets actually respond to corporate sustainability efforts?

The three researchers who sought to answer this took the approach of gauging the market’s reaction to specific types of announcements made about a company’s sustainability efforts. They found:

1) The markets reacted to only 3 types of announcement: Philanthropy, voluntary emissions reductions and ISO 14001 certification

2) There was no significant difference in the reaction between self-reported announcements versus announcements by third parties

3) Positive market reactions resulted from announcements of both philanthropy and ISO 14001 certification, but negative reactions resulted upon announcements of voluntary emissions reductions

What’s behind these results? The authors suggest that philanthropy is a relatively small investment but garners substantial goodwill, while the widely recognized ISO 14001 certification bolsters value because it’s often a prerequisite for trade. Conversely, emissions reductions, beyond regulatory requirements, may not be in shareholders best interests and could hurt a firm’s performance – presumably because of an opportunity cost of capital. This latter point somewhat supports the aforementioned notion that sustainability investment is an unnecessary and damaging cost.

However I’m still left questioning the usefulness of these study findings. After all, a key point of implementing sustainable practices is the long-run value they bring over the myopic focus short term thinking brings. And you cannot really get a shorter term horizon than measuring a reaction to an announcement. Also, consider the period studied, 2004 – 2006. Five years on, does the markets react to sustainability the same way?

Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, offers more recent insight. Bloomberg provides ESG data free-of-charge to it’s 300,000 customers, who now get to see it alongside the rest of the usual Wall Street indicators. And it’s being used. Bloomberg says the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well managed. Perhaps more importantly, however, the data points straight to the bottom line. Information on carbon emissions, as an example, is becoming increasingly important, especially for multi-national businesses operating in Europe. Here,  there is a cost on carbon, so if you’re not doing something about your emissions, you’re not running your business well.

Furthermore, companies are more vigilantly collecting environmental data specifically because it helps them find ways to cut costs – such savings are measured in hundreds of millions of dollars. And for further evidence of the financial benefits of sustainability, Newsweek’s top 100 ranked green companies were found to outperform the S&P 500 by 6.8% in 2009, which of course was a period when the recession was in full swing. These are clear indications that sustainability efforts really are not costs, but reap net benefits to businesses.

Bloomberg’s sustainability director, Curtis Ravenel, would love to see ESG data as part of company SEC filings and though they are not required today, Bloomberg has clout in the market. This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability efforts.


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  1. December 29, 2011 at 8:09 am PDT | Scott writes:

    American history and economics lean towards Adam Smith’s “Wealth of Nations” and herein lies a disconnect.  I have always like Adam Smith and considered is writings of both “Wealth of Nations” and “Moral Sentiment” to add to the disconnect we teach in schools that ethics and doing moral and responsible behavior is need for healthy society and yet in capital markets it is thrown out completely.  As consumer we disconnect- I have at times argued for this separation in the past and see now where that was wrong and misguided. Today I would encourage everyone no matter how you look at business and economics or climate change to simply embrace a more responsible position.  Do what you can at home and the office to be more sustainable and responsible human.  Reuse, recycle, reduce and respect others. Why? Because stewardship matters.

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