Companies that fully integrate social responsibility into their business operations are well placed for healthy financial returns on their investments, a new study shows.

Research and consulting firm IO Sustainability has been studying the business case for sustainability, or CSR (corporate social responsibility), and has been able to map specific advantages obtained by companies that are serious about it. The firm's latest deep dive looked at companies with CSR programs being managed separately from the rest of the company's operations, and compared them with companies fully integrating CSR into their operations. The study found that integration brings enormous advantages.

The winning strategy looks like this: a company identifies areas of social impact that fit with its core strategy, products or services, and operations. It makes a commitment, dedicating resources to these social impact projects that are material to the company. It manages and measures social impact performance with clear key performance indicators. And it connects and engages with stakeholders for full effect.

According to the research, companies sticking to the IO Sustainability roadmap of integrating social impact into their business were able to:

  • enhance sales by as much as 20%
  • increase productivity by 13%
  • reduce employee turnover by half
  • protect against litigation risk at a value equivalent to the cost of insurance worth up to 4% of the company's value
  • increase the company's share price by up to 6%
  • create a "reputation dividend' worth up to 11% of market capitalization
  • reduce financial risk, the cost of equity, and the cost of borrowing.

The study showed that companies not integrating their CSR programs into the business could still earn a reputation advantage, but not much else. A CSR program on the sidelines that does not involve employees, for example, would not affect employee turnover rates.

Sales

Companies fully integrating CSR were able to increase sales and prices. Other research confirms this idea, particularly as millennials seek ways to make their purchasing reflect their values. Customers pay attention to the way brands react to social and political issues and are ready to boycott when a company's values appear to conflict with their own, or instead to line up to buy to applaud a company's activism. Never before has it been so important for companies to make their values clear and take stands. In a polarized world, taking a middle ground doesn't work well anymore. According to IO Sustainability's research, customers of companies integrating CSR fall increasingly into two categories: "aspirationals," who think of a brand as part of the cultural fabric they identify with (a company today can hope to attract 39% of customers into this category), and "advocates," who proactively promote a brand and support its values (a successful company can count on up to 20% of its customers as advocates, helping the brand on social media and with peer referrals).

Understanding this truth, Aspiration Bank, an online bank targeting socially conscious savers, has a new app ranking brands on social and environmental performance. When an account holder of the bank uses her debit card to purchase an Apple product, for example, she gets an alert on the app that Apple has a "People" score of 86 and a "Planet" score of 92 (reflecting the company's commitment to renewable energy). She might be interested to know how a local business near her scores, and send its name into the app for a full review and ranking.

Reputation

A company can cultivate a reputation for great products, for being innovative, for offering a great place to work, for good governance, for good corporate citizenship, and for showing leadership on important issues. The IO research shows estimated percentage increases to things like market capitalization that a good reputation can bring. In fact, over the last half century, the  stock market value of companies has shifted from being mostly equal to the value of its brick and mortar assets and inventories, to being based on mostly intangible assets such as patents or reputation. Well-known brands today are worth vastly more than the sum of the value of the footwear or cloud servers or soft drinks they peddle.

In order to fully integrate sustainability into a company's purpose, culture, and operations, it's important to fully engage with stakeholders. The general idea is to shift the focus of corporate strategy from short-term results and quick profitability for investors, to longer-term thinking and value creation for all stakeholders, including for example employees, the community, and the planet. The longer-term approach works better for longer-term investors, too, such as individuals saving for retirement.

More and more prominent voices are calling for a shift to a longer-term horizon in management, and to value creation for all stakeholders. JP Morgan Chase CEO Jamie Dimon teamed up with Warren Buffett recently to call for an end to quarterly earnings forecasting, in order to push the focus of corporate managers towards the longer term, joining Blackrock's Larry Fink who has repeatedly called for long-term thinking and attention to environmental, social and governance factors in his annual letter to CEOs.

Integration of sustainability into operations is a winning strategy that will set the stage for a much-needed cultural shift for corporate America.

Published on: Jul 24, 2018