Taking the Long View on Sustainability

By Daniel Mahler
Partner and global coordinator for the Sustainability practice

The term “sustainable” by its nature implies long-term thinking, a trait that doesn’t seem to be valued much in a “what were your earnings last quarter?” business world. Yet as the global economy continues to sputter, it is sustainability-focused companies that are performing better in the financial markets than their industry peers—a sign, perhaps, that the market is redefining value in this uncertain economic environment.

According to a recent study by A.T. Kearney, 99 sustainability-focused companies—those that excel in protecting the environment and promoting social well-being while preserving shareholder value—outperformed the broader market by an average of 10 percent from September to November 2008, and by 15 percent from May to November.¹

It may well be that these 99 companies are outperforming their peers simply because they’re well-run and happen to embrace sustainability—cause and effect are difficult to prove. But digging deep into the data, one gets the strong sense that something more is going on. For years the focus has been on making the “quick buck,” often by borrowing from the future—an attitude that ties not just into the economy but also the environment. Our consumption of natural resources has been built around an assumption that they are of endless supply; similarly, the mortgage crisis was caused by the notion that housing prices would rise endlessly.

Investors seem to be discovering that such a short-term attitude is not sustainable. The major U.S. stock indices are down roughly 50 percent from their October 2007 peaks, and it isn’t clear that they have reached a bottom yet. Investors are looking for safe places to take their money.

Companies with true sustainability initiatives view them not just as philanthropic endeavors, but also as fundamental business strategies. They require long-term vision from particularly bold leadership, because many of the people laying the groundwork will not be with the company by the time the benefits are finally realized. To judge their efforts properly, companies must have the mechanisms to look many years into the future, possibly long after the decision makers have moved on.

One chemical company we worked with used just such a long-term approach to create a stronger base for downturns like this one. This company explored what might happen 10 years into the future, and then created models to bring that data back to the present. The benefits of this will probably go unrealized for many years, but in the long run this company will be stronger.

A focus on long-term health over short-term gains was one of four common characteristics we found in our study of sustainability-focused companies, but the other three—strong corporate governance, sound risk management practices and a history of “green” innovations—seem to be at least partly dependent on the first factor. Much of the investment into environmentally friendly technology—say, new energy-efficient machines, or the introduction of improved packaging made from recycled materials—require huge up-front costs in new infrastructure. Down the road, companies pursuing these initiatives will realize longer-lasting benefits from the savings that come from more efficient processes.

It is hardly surprising with the traditional short-term thinking that there is so much room for infrastructure improvement in the United States. Industries such as automotive and energy have been slow to move to new technologies because profitability from them is so far down the road. It is with the future in mind that President Obama made investment in green technology such an important part of the economic stimulus package.

With the economy still struggling and the near future continuing to look bleak, it seems clear that investors are looking these days for more long-term value from companies. It is not too late for companies to start investing in the future, developing true value that can last in the long term. If companies can keep an eye on their future health while weathering the current storms, they can put themselves in position for long-term success—and maybe even be rewarded today.

¹The 99 firms were selected because of their inclusion on either the Dow Jones Sustainability Index or the Goldman Sachs SUSTAIN focus list. Some companies are on both lists.

Daniel Mahler, Ph.D., is a partner at A.T. Kearney and is the global coordinator of the firm’s Sustainability practice.

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The views expressed in this paper are those of the author(s) and do not necessarily represent the views of A.T. Kearney or the Global Business Policy Council. The views are not meant to suggest specific inducement to make a particular investment or follow a particular strategy, but only as an expression of opinion.