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The Dollar Payoff from CSR and Sustainability

Finally, the researchers tracked the financial health of firms in both the high- and low-sustainability groups from 1993 to 2010, examining both stock market performance and general financial performance. They found that a $1 investment at the start of 1993 in a value-weighted portfolio of high-sustainable firms would have swelled to $22.60 by the end of 2010, based on stock market prices. For low-sustainability firms, on the other hand, a $1 investment would have grown to only $15.40. The high-sustainability firms also exhibited lower stock volatility.

The authors used return on assets as one measure of a company’s profitability. They found that $1 in assets at the beginning of 1993 in a portfolio of high-sustainability firms would have grown to $7.10 by the end of 2010; in contrast, $1 of assets in a portfolio of low-sustainability firms would have increased to just $4.40 over the same period.

“This finding suggests that companies can adopt environmentally and socially responsible policies without sacrificing shareholder wealth creation,” the authors conclude. “In fact, the opposite appears to be true: sustainable firms generate significantly higher profits and stock returns, suggesting that developing a corporate culture of sustainability may be a source of competitive advantage for a company in the long-run.”

Bottom Line:
Firms that embrace corporate social responsibility practices significantly outperform rivals that don’t embrace those practices, as measured by both financial and stock market returns. Firms with a history of commitment to sustainability and social issues also boast more long-term investors and place a greater emphasis on making nonfinancial disclosures.

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