Are sustainable companies more valuable? Research on the topic of sustainability and its impact on the performance of businesses has become increasingly prominent over the last several decades, especially as corporations seek to improve their financial health through sustainability-oriented measures. One such measure is corporate social responsibility (CSR), which is defined by the Financial Times lexicon as a “business approach that contributes to sustainable development by delivering economic, social and environmental benefits for all stakeholders.”
My personal interest in the impact of CSR investment relates to how, if at all, these investments have led to tangible, positive differences in the financial performance of firms. In this blog, I will look at the impact of sustainability investments on stock price by reviewing the studies and results of several articles I found while conducting research to support Dr. Omar Rodríguez-Vilá in my role as a 2017-18 Scheller College of Business Sustainability Fellow.
The first article found that investing in CSR can help firms weather financial crises by leading to higher stock returns compared to low-CSR firms. The second article discovered that during mergers, high-CSR acquiring firms outperformed low-CSR acquiring firms in several key financial statistics. The final article found that shareholders devalue companies with high environmental risk as well as companies that engage in green investments that do not create tangible financial value.
The first study I will look at focused on the value of trust on the financial performance of companies during the Financial Crisis of 2008. Written by Karl V. Lins, Henri Servaes, and Ane Tamayo in 2017, “Social Capital, Trust, and Firm Performance: The Value of Corporate Social Responsibility during the Financial Crisis” examines whether high-CSR firms were more resistant to the infamous 2008-2009 market crash than low-CSR firms. The study hypothesized that CSR activities go hand-in-hand with trust. Trust in corporations was at a low point during the financial crisis. The lost faith translated to stakeholders pulling their money from the stock market, which drove down stock prices of many companies. However, this chain reaction may not have applied in the same way to firms that invest in CSR activities. According to the article, high-CSR companies are better equipped for market crashes because “stakeholders are more likely to help high social capital firms weather a crisis…given that such firms displayed greater attention to, and cooperation with, stakeholders in the past.” The results of the study reflect this theory, showing that during the financial crisis, high-CSR firms outperformed low-CSR firms in stock returns by at least four percentage points. The takeaway? While financial crises are not necessarily frequent, it is better to be a company that stakeholders trust during a crisis than a firm that the public associates with scandal or passivity. If we consider CSR participation as a marker of trustworthiness, then investing in CSR is a worthwhile pursuit.
Another article also shows that CSR matters for firms during mergers. “Corporate Social Responsibility and Stakeholder Value Maximization: Evidence from Mergers,” published in 2013 by Xin Deng, Jun-koo Kang, and Buen Sin Low, observes the difference in post-merger stock returns between low-CSR acquirers and high-CSR acquirers. They found that if the acquiring firm during a merger has high CSR, the firm outpaces low-CSR acquirers during mergers in the following areas: (1) “higher announcement stock returns for acquirers,” (2) “larger increases in long-term operating performance and stock returns,” and (3) “higher likelihood and shorter duration of deal completion.” One of the main takeaways from this study is that firm value can be derived from the managerial choice to invest in CSR, which benefits stockholders in the firm in the long run.
The final article, “Corporate Environmental Policy and Shareholder Value: Following the Smart Money” (2017), examines the effect of corporate sustainability policies and investments on shareholder value. Chitru S. Fernando, Mark P. Sharfman, and Vahap B. Uysal write with the view that sustainability policies and investments benefit stakeholders when they actively “mitigate the likelihood of ‘bad’ outcomes by reducing the exposure of firms to environmental risk.” Shareholders devalue firms with high environmental risk in large part because of their higher probability of encountering a lawsuit or paying damages from causing environmental harm. These events are highly costly for firms, which pushes down their stock price and causes shareholders to sell off holdings in the risky companies.
Companies can also invest in “greenness”; this is manifested in investments such as clean technology and renewable energy. The writers’ argument is that being “green” alone does not push the needle for shareholders; in fact, they write that green investments that do not align with legal requirements or tangibly create financial value for the investing company are shunned by institutional investors. Between firms with high environmental risk and firms invested in greenness, the study finds that the stock price devaluation by institutional investors for the former is more severe.
While the results of Fernando et al.’s study cast doubt from a financial perspective on shareholder value in green investment, I believe it is important to look to the future. At the ClimateCAP summit I attended in March 2018 at Duke University, a panel of institutional investors generally shared the belief that their choice to invest in companies with green investments is rooted in financial performance. Essentially, these investors ask themselves: Do our investments in green companies register as good value—and not just as a good for the environment? The key difference between the panel and the findings of the writers is that the panelists believed that green investments, when assessed correctly, signal future financial gains through company growth. I share the view of the panelists: Investing in green companies is a massive profit opportunity for those institutional investors willing to take the risk, and it can increase shareholder value. While the study may have found that past investors have not favored green companies, I believe this will change as new innovators find ways to turn climate change and limited natural resources into big-time profit.
Overall, this blog post is just a brief look at some of the studies I encountered during my research. While some studies may point to the contrary, there is considerable evidence that sustainable investments engineered from the top down in a firm can have a profitable impact on the firm’s stock price and overall value to shareholders. I believe that future years will show that more and more firms will invest in sustainability—not necessarily for that good feeling we get when we help the environment, but rather for being a sound financial decision.
Braden Beaudreau is a student in the Evening MBA Program at the Scheller College of Business. He was a 2017-18 Scheller College Sustainability Fellow.