Paper Title
Profits, Information and the Linkage Between Sustainability and Corporate Profits
Start Date
13-7-2012 2:45 PM
End Date
13-7-2012 3:45 PM
Description
Growing social demands for companies to operate in a “sustainable” manner have stimulated an increased focus in the literature on how sustainable behavior can be promoted in the private sector (Delmas and Toffel, 2004). It is broadly acknowledged that increased profitability can be an important incentive for companies to implement more sustainable business practices (Nguyen and Slater, 2010). Indeed, it is increasingly argued that innovation tied to sustainability initiatives can be an important new source of competitive advantage for companies (Port and Vander Linde, 1995; Hall and Wagner, 2012). However, empirical studies seeking to identify the relationship between corporate sustainability and corporate profitability provide mixed results (Russo and Fout, 1997; Eccles, Ioannou and Serafin, 2011). In particular, available studies do not identify a consistent relationship between increased sustainability and increased corporate profitability.
A number of scholars have suggested that the mixed evidence regarding the empirical linkage between sustainability and profitability reflects a failure in the market for information surrounding the actual sustainability practices of companies (Windolph, 2011). Specifically, claims made by companies about their sustainable business practices will not be believed by stakeholders unless they are ratified by independent third parties. While there are numerous third-party information intermediaries supplying data about companies to various stakeholders, primarily through sustainability league tables, they are not considered to be effective suppliers of information for various reasons discussed below (Graafland, Eijffinger and Smid, 2004; Windolph, 2011).
We argue in this paper that strengthening the linkage between sustainability and profitability obliges companies not only to integrate sustainability initiatives into conventional business strategies, but also to communicate to stakeholders’ credible information about improved corporate performance in areas such as reductions in energy usage. Such communication should reflect the different ways in which stakeholders interface with companies with regard to environmental and other corporate practices. In this context, third party information should be viewed by managers as a complement to corporate information. In short, given inconsistencies and other shortcomings of third-party rating services, perhaps the biggest strategic challenge to companies seeking to profit from sustainability initiatives is to address the information credibility gap between companies and stakeholders.
To be sure, other scholars also argue that a strong and consistent linkage between corporate sustainability and profitability requires companies to integrate sustainability policies into modified business models (Hall and Wagner, 2012). Alternative suggestions have been made about how to undertake this integration, in particular how broadly the integration should be undertaken across the various functional areas of the firm. However, there has been little discussion in the literature about how companies can address informational market failures as part of the effort to link sustainability initiatives to business strategies.
The paper proceeds as follows. In the next section, we describe what we view as the “standard” model of the linkage between sustainability and profitability as it has been embodied in empirical studies of the linkage. We then outline a more complex model that acknowledges the integration of sustainable management with “conventional” business strategy, as well as the role of pro-actively supplied company information. Section 3 discusses the linkage between environmental sustainability and profitability with a specific focus on consumers as stakeholders. Section 4 focuses on other stakeholders as mediators of the linkage between environmental sustainability and profitability. Some evidence on the degree to which information intermediaries are likely to moderate the relationship between environmental management and profitability is discussed in Section 5, while section 6 provides some statistical evidence bearing upon the importance of integrating environmental management into other corporate activities to enhance the profitability of environmental initiatives. A summary and conclusions are provided in the final section.
COinS
Profits, Information and the Linkage Between Sustainability and Corporate Profits
Growing social demands for companies to operate in a “sustainable” manner have stimulated an increased focus in the literature on how sustainable behavior can be promoted in the private sector (Delmas and Toffel, 2004). It is broadly acknowledged that increased profitability can be an important incentive for companies to implement more sustainable business practices (Nguyen and Slater, 2010). Indeed, it is increasingly argued that innovation tied to sustainability initiatives can be an important new source of competitive advantage for companies (Port and Vander Linde, 1995; Hall and Wagner, 2012). However, empirical studies seeking to identify the relationship between corporate sustainability and corporate profitability provide mixed results (Russo and Fout, 1997; Eccles, Ioannou and Serafin, 2011). In particular, available studies do not identify a consistent relationship between increased sustainability and increased corporate profitability.
A number of scholars have suggested that the mixed evidence regarding the empirical linkage between sustainability and profitability reflects a failure in the market for information surrounding the actual sustainability practices of companies (Windolph, 2011). Specifically, claims made by companies about their sustainable business practices will not be believed by stakeholders unless they are ratified by independent third parties. While there are numerous third-party information intermediaries supplying data about companies to various stakeholders, primarily through sustainability league tables, they are not considered to be effective suppliers of information for various reasons discussed below (Graafland, Eijffinger and Smid, 2004; Windolph, 2011).
We argue in this paper that strengthening the linkage between sustainability and profitability obliges companies not only to integrate sustainability initiatives into conventional business strategies, but also to communicate to stakeholders’ credible information about improved corporate performance in areas such as reductions in energy usage. Such communication should reflect the different ways in which stakeholders interface with companies with regard to environmental and other corporate practices. In this context, third party information should be viewed by managers as a complement to corporate information. In short, given inconsistencies and other shortcomings of third-party rating services, perhaps the biggest strategic challenge to companies seeking to profit from sustainability initiatives is to address the information credibility gap between companies and stakeholders.
To be sure, other scholars also argue that a strong and consistent linkage between corporate sustainability and profitability requires companies to integrate sustainability policies into modified business models (Hall and Wagner, 2012). Alternative suggestions have been made about how to undertake this integration, in particular how broadly the integration should be undertaken across the various functional areas of the firm. However, there has been little discussion in the literature about how companies can address informational market failures as part of the effort to link sustainability initiatives to business strategies.
The paper proceeds as follows. In the next section, we describe what we view as the “standard” model of the linkage between sustainability and profitability as it has been embodied in empirical studies of the linkage. We then outline a more complex model that acknowledges the integration of sustainable management with “conventional” business strategy, as well as the role of pro-actively supplied company information. Section 3 discusses the linkage between environmental sustainability and profitability with a specific focus on consumers as stakeholders. Section 4 focuses on other stakeholders as mediators of the linkage between environmental sustainability and profitability. Some evidence on the degree to which information intermediaries are likely to moderate the relationship between environmental management and profitability is discussed in Section 5, while section 6 provides some statistical evidence bearing upon the importance of integrating environmental management into other corporate activities to enhance the profitability of environmental initiatives. A summary and conclusions are provided in the final section.