A few months ago I posted on the concept of Understanding stakeholder theory and suggested organisations that focus on providing value to stakeholders do better than those focused on short term rewards for shareholders and the associated benefits flowing to executive bonuses.
A new report: From the stockholder to the stakeholder by Arabseque Asset Management and Oxford University supports this contention. The report reviews existing research on environmental, social and governance (ESG) issues. It is a meta-study of over 190 different sources the authors have demonstrated a strong correlation between organizations that take ESG seriously and economic performance. For example:
- 90% of relevant studies show that sound sustainability standards lower the cost of capital;
- 88% of relevant studies show a positive correlation between sustainability and operational performance;
- 80% of relevant studies show a positive correlation between sustainability and financial market performance.
However, to translate superior ESG quality into competitive advantage, sustainability must be deeply rooted in an organisation’s culture and values. The consequences of failing to take ESG seriously continues to be demonstrated by another of my regular topics, BP. The report contains a plot of oil company share prices from 2009 (pre the Deepwater horizon disaster) through to 2014. BP’s share price continues to suffer the consequences of the short sighted cost cutting that precipitated the Gulf of Mexico disaster.
The report concludes that it is in the best economic interests of corporate managers and investors to incorporate ESG considerations into decision-making processes starting at the governance level right down the organisation hierarchy.
The full report can be downloaded from http://www.smithschool.ox.ac.uk/research/library/SSEE_Arabesque_Paper_16Sept14.pdf .