Sustainability: where it pays to be different

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A recent research study by George Serafeim, from Charles M. Williams Professor of Business Administration at Harvard Business School, conducted in collaboration with Calvert Research and Management, examined about 3,800 companies across 65 industries from 2012 to 2017. It showed it pays to be different.

The research, titled “When sustainable practices yield sustainable profits: The path to a strategic edge”, found that while sustainability practices have converged across companies within most industries, differentiated sustainability practices were associated with higher return on capital (ROC).

The report presents data indicating that companies appear to be adopting an increasingly similar set of sustainability practices. This may imply that these common practices are more likely to be survival necessities than strategic differentiators.

However, sustainability practices least susceptible to convergence are those conveying strategic competitive advantages, and these practices are associated statistically and economically with a positive return on capital (ROC). Results found that persistent leaders – those that remained ahead of the industry average throughout the sample period – gained the most in terms of increased ROC.

The study concludes that systematically understanding which practices are becoming common and which are differentiated can provide important insights into corporate strategy and building a persistent strategic advantage.

Daniel Rourke, vice president and ESG senior esearch analyst, and Anne Matusewicz, ‘Responsible Investment Strategy’ at Calvert Research and Management said: “We believe that the distinction between strategic and common sustainability practices is key for managers, investors and other stakeholders.

“Aligning with the findings of the Serafeim study, Calvert believes companies that distinguish themselves through their behaviour and operations may outperform over the long term.

“Through a robust research system maintained by sector specialists and monitored by the broader environmental, social and governance (ESG) team, Calvert analysts are able to take data from an array of sources and rate and rank issuers in accordance with what we consider best practices at the subindustry level. This is designed to identify strategic differentiation that can both inform our position sizing and engagement efforts, with the goal of helping our various strategies outperform their respective benchmarks.

“Our research process allows Calvert ESG analysts to rate and rank issuers relative to their peer groups so that we can differentiate between sustainability leaders and average performers (or common practices). This helps generate a more holistic view — one that encompasses how companies affect, and are affected by, social and environmental factors, and the resulting impact on financial performance.”

– G.B.

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