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For Companies, It’s Not Easy Being Green

Companies that implement socially and environmentally responsible strategies tend to profit—but the benefits take time to show.

(originally published by Booz & Company)

Bottom Line: Leading companies that have implemented sustainable initiatives along their supply chains have seen a corresponding boost in their financial performance. But there’s no reward for a halfhearted implementation—companies that instituted only one aspect of a corporate responsibility program lost more money than they gained.  

More and more, firms are investing heavily to improve their corporate social responsibility (CSR) practices. But the debate on the green approach continues to swirl: Does it just burnish a company’s reputation, or does it actually result in a more robust bottom line? According to a new study, companies can indeed make more green by going green, but only if they take a patient, holistic approach that includes both environmental and social endeavors. Making a halfhearted attempt by focusing on only one aspect of CSR can actually backfire, wasting time and money, the authors warn.

In the past 20 years, corporate sustainability has come to be defined as an outlook that takes future generations into account and forces companies to manage the “triple bottom line” of economic, social, and environmental factors. The economic factor is obvious: Make money for shareholders. Social concepts build from that, and include ensuring the health and safety of workers, contributing to the local community, and meeting the wishes of a broad range of stakeholders. Environmental supply chain practices can be put in place upstream (by taking a green approach to purchasing, supplier development, and inbound transportation), at headquarters (by advocating environmentally conscious manufacturing and management systems), or all the way downstream (by implementing green marketing strategies and outbound logistics).

Since 2009, Newsweek’s Green Rankings report has ranked the 500 largest publicly traded firms in the United States on several dimensions of their CSR efforts. But this new study from Zhihong Wang and Joseph Sarkis is the first to use such a database to empirically document the relationship between firms’ corporate sustainability practices along their supply line and their financial performance.

The study tracked the 411 companies that made the Newsweek list from its inception through 2011 and analyzed their subsequent return on both assets and equity. These firms represent numerous industries and provide an excellent gauge of how the latest CSR strategies—applied across extensive supply chains and in the face of intense stakeholder pressure—affect financial performance, the authors write.

The analysis showed that on average, firms that implemented both environmental and social supply chain management practices performed well financially, and experienced marked upgrades in their fiscal returns—especially through 2011. But the study also highlighted a powerful signal that managers must bide some time to see their CSR groundwork bear fruit. Corporate financial performance typically improved a full two years after a firm implemented the twin CSR initiatives.

Managers must bide some time to see their CSR groundwork bear fruit.

The study also found that a CSR strategy must be thoroughly devised and implemented—companies that instituted only half of the CSR approach did not reap rewards. In particular, firms that launched an environmental stand-alone program, without the corresponding social component, found that the costs of revamping their supply chain actually outweighed any financial recompense.

On the surface, the authors write, this latter finding seems surprising, because implementing social and environmental endeavors at the same time would obviously be more expensive to companies than launching just one program. But environmental initiatives can be especially costly, especially for firms new to grappling with the challenges posed by managing a global supply chain. When firms essentially go all out and concentrate on both prongs of the CSR strategy, “the incremental cost of implementing these two programs may be less on average than an individual program, while accruing the full benefits of both programs,” the authors write.

One explanation may be that some of the financial returns companies saw from CSR initiatives came from consumers, who were appreciative of the firms’ efforts to be more environmentally and socially friendly. Indeed, previous research has shown that increased customer satisfaction tends to follow implementation of a CSR approach.

Another possible explanation: A firm’s capacity for learning and adjusting to the new programs may be enhanced when the two parts are put in place simultaneously, signaling to its employees that a cultural shift is taking place. On a more prosaic level, the authors posit, administrative and training costs may be lessened when the parent company, its suppliers, and its subsidiaries overcome the “processes, pitfalls, and barriers” that can arise, when a company embraces the environmental and social aspects of CSR at the same time.

“Companies seeking to implement these types of programs should consider joint implementation to take advantage of complementarity effects and spreading the costs over more programs,” the authors write. “In addition, companies should realize that the payback of many of these programs may not occur immediately or in the short run.”

Source: Investigating the Relationship of Sustainable Supply Chain Management with Corporate Financial Performance, Zhihong Wang and Joseph Sarkis (both Clark University), International Journal of Productivity and Performance Management, Winter 2013, vol. 62, no. 8

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

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