Reports by MIT Sloan Management Review, Boston Consulting Group, and McKinsey & Company, are revealing a trend of both investors and corporate executives realizing that there is a direct link between successful corporate sustainability practices and improved long-term corporate financial performance.
A recent study found that 90% of investors are likely to measure a company’s sustainability performance before making any investment decisions. MIT Sloan Management Review and Boston Consulting Group released “Investing for a Sustainable Future,” a report summarizing data from interviews conducted with executive-level investors.
In this case, corporate sustainability is defined as environmental, social and governance (ESG) efforts, and investors are seeing a strong link between such efforts and financial performance. ESG efforts can include auditing and reporting on regulatory compliance, ethical sourcing, supply chain transparency, and many other aspects of sustainability and governance. According to the report, a company showing commitment to sustainability is signaling to investors that they are thinking seriously about long-term growth. In 2014, McKinsey & Company released the report “Profits with Purpose: How organizing for sustainability can benefit the bottom line,” which outlines how exactly sustainability practices can have a “material financial impact” on a company. The report revealed that 89 percent of companies that have a high ESG rating can outperform in the financial market in the medium and long run, compared to companies that have low ESG scores. The research by McKinsey suggests that sustainability yields benefits to companies such as risk mitigation, leading to new business opportunities, and improving returns on capital.
Roughly half of investors said that they would not invest in a company if they have poor sustainability performance. Investors were asked the reasons for which they value sustainability performance, and the top three reasons were: increased potential for long-term value creation, improved revenue potential, and demonstration of operational efficiency.
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