George Serafeim

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

This new 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 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 Research Analyst and Anne B. Matusewicz, Responsible Investment Strategy at Calvert Research and Management note:

“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 behavior 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.”

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Investors can provide positive impetus.

In recent years, the growth of investor interest in sustainable investing has been remarkable.

Calvert has produced a research paper (in collaboration with George Serafeim, Jakurski Family Associate Professor of Business Administration, Harvard Business School) on environmental, social and governance (ESG) titled Investment Stewardship for Positive Societal Impact which shows that by advocating for collaboration, investors can provide the positive impetus in the many cases where even the best efforts of individual firms are likely to fall short.

Highlights of the paper:

• Companies are increasingly addressing environmental, social and governance (ESG) factors as part of strategic and operating decisions. Firms that perform better in some of those factors subsequently have better financial performance.
• However, there are limits to how much individual companies can accomplish in achieving progress toward environmental, social and governance goals.
• Companies that devote resources to certain environmental, social and governance factors may be at a short-term competitive disadvantage to competitors that do not. Collaboration
• within industries on sustainability issues can alleviate that disadvantage.

This paper proposes that large investors, including index funds, active managers and pension funds can act as “stewards of the commons” by helping build and sustain industry and more broadly systems-level collaborations for ESG issues.

As that interest has grown, the response of corporations has evolved. Early on, companies usually allocated resources towards projects with positive impact for employees, local communities, and other stakeholders. More recently, corporate strategies have become more sophisticated, integrating environmental, social and governance factors at the core of the organization to guide both strategic and operating decisions.

Studies have shown that such moves by companies often enhanced financial performance through cost savings, increased brand value, innovation, employee productivity, and lower cost of financing. Other research has documented that sustainability disclosure by companies is helping drive stock performance, as investors use that information to sharpen valuations relative to industry peers.

However, there are clearly limits to how far corporate self-interest can go in helping foster positive social change. In this paper, we discuss those constraints and offer a new paradigm: investors as stewards of the commons. Investors already routinely engage in constructive advocacy with individual companies for environmental, social and governance goals, and these efforts often influence entire industries.

We show that with the great concentration of assets in large firms, investors are uniquely situated to extend these “win-win” initiatives, while improving the risk/return profile of their portfolios.

By advocating for collaboration, investors can provide the positive impetus in the many cases where even the best efforts of individual firms are likely to fall short.

Calvert Research and Management (Calvert), a subsidiary of Eaton Vance Corp. (Eaton Vance) is a leader in Responsible Investing, with approximately $12.9 billion of assets under management.

Read the full paper.

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