For example, environmental policies could include a firm’s seeking to improve energy or water efficiency and the use of ecological criteria in determining how to set up a supply chain. Employee-based efforts included improving work–life balance, favoring internal promotions, and creating policies that encouraged diversity and equal opportunity. Policies related to the community included pledges of corporate citizenship and the strengthening of business ethics. Customer-oriented initiatives might focus on reducing product risk and improving service.
After eliminating 100 financial institutions because their business and regulatory models differ from those of the other firms, the authors analyzed the remaining 675 companies based on their sustainability and other CSR policies as reflected in the database. To further track firms’ history with CSR, the authors incorporated media accounts, companies’ annual reports, and reports on sustainability, and interviews that they conducted with more than 200 executives.
In the end, the authors pinpointed 90 organizations that had enacted a substantial number of social and environmental procedures in the early to mid-1990s. In that early period, this “high sustainability” group had adopted an average of 40 percent of the policies identified in the database, and by the late 2000s had introduced 50 percent. In contrast, low-sustainability firms had implemented only 10 percent, on average, by the end of the 2000s.
To produce a group of control firms as similar as possible to the high-sustainability companies, the researchers matched up firms beginning in 1993, because that was the earliest year that any of the firms in the high-sustainability group adopted CSR policies. The researchers used a series of factors — including total assets as a proxy for size, returns on investment, and market value of equity over book value of equity — to match up similar high-sustainability and low-sustainability firms in the same industries.
On average, high-sustainability firms had total assets of US$8.6 billion and return on assets of 7.9 percent; low-sustainability companies had total assets of $8.2 billion, with a return on assets of 7.5 percent. “The two groups are nearly identical in terms of sector membership, size, operating performance, capital structure, and growth opportunities...and have very similar risk profiles,” the authors write.
The authors examined differences in governance by analyzing proprietary data for fiscal year 2009 from Sustainable Asset Management, a Zurich-based international investment company that performs an independent sustainability assessment of approximately 2,250 of the largest corporations worldwide.
They found that 53 percent of firms with a strong sustainability culture assigned formal CSR responsibility to the board, whereas only 22 percent of the low-sustainability firms did the same. Similarly, 41 percent of companies in the high-sustainability group formed a separate board committee to assist managers with strategy and periodically review CSR performance, but only 15 percent of low-sustainability firms did so. Moreover, companies with a culture of sustainability were more likely to tie executive compensation to meeting metrics related to the environment, community efforts, and customer satisfaction.
Because CSR-related efforts often depend on understanding the needs and expectations of stakeholders, the authors found that high-sustainability firms were more likely to train their local managers in maintaining good relations with customers and subcontractors, particularly with regard to redressing grievances or pursuing targets more in line with their stakeholders’ concerns. The authors also found that roughly a third of high-sustainability firms provided feedback from stakeholders to their board or other key departments, and 20 percent turned the results of the engagement process over to the public, making them “more proactive, more transparent, and more accountable in the way they engage with their stakeholders,” the authors write.
As a result of their vision concerning sustainability and social issues, these firms have a more future-oriented investor base and communicate more long-term information in their conference calls with analysts, the authors found. They are also more inclined to increase the credibility of their corporate sustainability reports by using third-party auditing procedures. These firms also disclose more data on nonfinancial issues: 41 percent of the high-sustainability firms issue a global sustainability report compared with only 8.3 percent of the low-sustainability firms.