Corporate Sustainability, that's a term that has caught a lot of tailwind in the past couple of years. But what is it? Does it refer to the financial health of a company and its ability to offer sustainable growth for the long-term future? Is it referring to a company's ability to be environmentally responsible? Is corporate sustainability responsible for good policy-making regarding stakeholder engagement? The answer is surprisingly yes to all of these. At least it is according to the little school simply known as the Harvard School of Business. But what do they know? Corporate Sustainability policies create a damper on earnings and they provide distractions amongst management when it comes to focusing on the core competencies of the business, right? This notion of corporate sustainability has never been more prevalent amongst investors today, and it has never been more wrong. (Harvard Business Article)
Using a sample of 180 companies, mixed with "High" Sustainability and "Low" sustainability companies, Harvard has found a substantial character difference between these companies. Mainly they find that the boards of directors of these companies are much more likely to be responsible for sustainability and top executive incentives more likely linked to sustainability metrics. These companies also exhibit better organization for stakeholder engagement, tendency to be more long-term oriented and display better measurement and disclosure of non-financial information, as well as outperform those less sustainable. Being sustainable isn't just some liberal agenda slapped onto a company's strategic initiatives; it has strong fundamentals behind it. Policies such as performing energy audits on existing buildings, reducing waste, recycling materials, and making all new buildings LEED certified (Leadership in Energy and Environmental Design) all have sound economic reasoning behind them. They don't just help reduce CO2 emission or waste, they also create valuable cost reductions and operational efficiencies for the company in the long run.
"High" sustainable companies are more likely found to make compensation bonuses linked to a function of environmental, social, and external perceptions. This is important because it links executive pay with the image they impose, to customers, on the company and not the just income they produce. They also find it much more important to discuss long-term information and evaluate information related to key stakeholders such as employees, customers and suppliers. Going along with their long-term approach, sustainable firms disclose more data related to non-financial information than others. This is an important strategic dimension to determine the effectiveness of strategy execution.
So how does all this relate to creating value for shareholders and more importantly your portfolio? Many think that corporate responsibility places shareholders as secondary stakeholders and takes on strategies counterproductive to maximizing income. Well according to Harvard, over the 18 year period they tracked corporate performance, sustainable firms outperformed traditional firms in both the stock market and accounting performance. Investing $1 in 1993 in a value weighted portfolio of sustainable stocks would have grown to $22.6 by the end of 2010. The same dollar in a value weighted portfolio of traditional firms would have grown to only $15.4 ending 2010.
In essence, the "what goes around comes around" philosophy relates perfectly to what corporate sustainability means for company profits in the future. Sacrificing today not only improves a company's image today but can also put more money in your pocket down the road. The eco-conscious consumer has shown their willingness to pay between "10-25% more for purchases in order to account for their impacts on biodiversity and the ecosystem" (TEEB Report for Business).
Socially Responsible Investing (SRI)
As an investor, you may own some of these companies and not even know it. Household names like Microsoft (MSFT), AOL (AOL), eBay (EBAY), Apple (AAPL), and Whole Foods (WFM) are all on the cusp of the sustainability trend. eBay, for example, has won multiple awards for its Cradle-to-Cradle eco-friendly boxes and has reduced energy usage by 33% in one of its data centers, as well as start a "Green Team" within the company to focus on improving sustainability efforts/behaviors and educating those in the local communities.
One investment company that has recognized this trend is Huntington Bancshares (HBAN). Through Huntington Strategy Shares, the company has created the first of its kind ecologically focused ETF, the Huntington EcoLogical Strategy ETF (HECO). This actively managed fund seeks to invest at least 80% of its net assets in securities of ecologically focused companies.
HECO top 5 holdings (as of 04/02/2013)
- eBay 5.91% - Provides online marketplaces for the sale of goods and services, as well as other online commerce platforms and online payment solutions to individuals and businesses in the United States and internationally.
- Hain Celestial Group (HAIN) 4.74% - Together with its subsidiaries, manufactures, markets, distributes, and sells natural and organic food, and personal care products in the United States and internationally.
- Whole Foods Market 4.17% - Engages in the ownership and operation of natural and organic food supermarkets.
- Qualcomm (QCOM) 3.77% - Engages in the design and manufacturing of semiconductors and marketing digital wireless technologies.
- Borg-Warner (BWA) 3.27% - Engages in the manufacture and sale of engineered automotive systems and components primarily for power train applications worldwide that aid in boosting automobile efficiency.
The fund is focused on searching for companies that are good stewards of the environment, and most importantly good stewards of capital, hence the capital "L" in EcoLogical. Their approach to screening for potential investments looks at a company's triple bottom line, with no one portion (people, planet, profit) taking precedence over the others. Unlike many SRI funds, HECO does not simply look to invest in nascent green technologies like wind and solar or other green technologies that may prove speculative. Instead it looks to provide a sustainable return to investors by making fundamentally sound and logical green investments. Since the fund's inception on June 18, 2012, HECO has returned 15.25% and 10.85% YTD, relatively in line with the overall market.
The value proposition for many sustainable companies, and those listed in this article, is that they are doing the right things with your capital and for your capital. They are well ahead of the game when it comes to environmental regulation and capturing eco-consumer trends. If you're a short term investor, sustainable investing may not be for you, if however you are long-term oriented, the right sustainable companies can safely provide you with solid performance you can feel good about.
If you are interested in learning more about your portfolio's sustainability efforts, many companies issue their efforts in annual Social Responsibility or Sustainability Reports which can typically be found under the company's "About" section on their homepage (Borg Warner Social Responsibility).