Does sustainable development lead to sustainable business?

This article is available in Bulgarian.

Over the last years a certain outlook has become trendy. It goes something like this: the application of universal policies, indicators and criteria for the sustainable development of companies and the decisions of their investors is a sure way to create long-term business success. At this point in time we have enough practical experience with this way of thinking so as to be able to gauge how true it is.

The 2015 annual HBR ranking of the most effective and successful directors now includes two indicators – financial success and company sustainability. Considering that most of the 907 ranked directors have served for over 10 years, it would be reasonable to expect a positive correlation between the two factors. The results, however, show the opposite. In actuality there is a negative correlation – the higher a company’s sustainability criteria, the weaker its long-term financial results.  

Figure 1 – The 100 best performing directors for 2015 according to HBR

There are also investment indeces that choose companies on the basis of similar criteria, the most famous being the Dow Jones Sustainability Index (DJSI). The results, however, do not meet the expectations – companies on the DJSI don’t perform better than market average – just like most ethical and sustainable funds. Actually, its results are tragic when we compare it with MSCI All country.

The DJSI has many problems. For example, in September of 2015 DJSI declared VW as “the most sustainable automobile group”, and a month later they removed VW from their index because of the diesel emissions scandal. Something similar happened with BP – in 2009 they were a “sustainable leader in the extraction of oil and gas” and in 2010 they were removed from the index due to the spill in the Mexican Gulf. In both cases the index suffered huge losses because it unloaded shares from the companies after they had lost significant value.   

The situation in the technological sector is the most shocking. For many years in a row Nokia was the favorite brand of eco-activists and ethical investors – it occupied the top positions of most classifications, from the Green Peace green electronics index to the DJSI. At the same time Apple was scraping the bottom. In 2009 DJSI named Nokia as “the most sustainable company in the technology sector” while they suffered a 70% drop in their share prices after the release of the iPhone in 2007. Nokia is still part of the DJSI, but where are their phones today? How come industry leaders like Apple, Google, Amazon and Facebook have never been on the DJSI? Why is it that the commonly accepted criteria for sustainability are so shortsighted and result in bad company decisions and point ethical investors in a losing direction?      

It’s simple – the most commonly accepted and official criteria used to define sustainable development are wrong. An example – the precautionary principle, which is at the foundation of these criteria, is the most effective killer of innovation. How could you pull off a technological leap if the precautionary principle is at the core of your company politics? Kodak knows the answer – they have been on the DJSI from 2001 until today. When was the last time you saw a Kodak camera?

There is only one way to measure sustainability – it is the ability of a company to survive on the market and provide value to its customers in the long term, so that they will choose it over its competitors. This path is very unique in every individual case and every company has to find its own way. Simple moral principles such as upholding the freedom of the individual, understanding the market and listening to your stakeholders are the clearest pointers to achieving sustainability. Submitting to trendy political ideas, malicious pressure from various groups or universal recipes for success, leads to investments that have no financial returns or reputation benefits.     

If there is one simple rule when it comes to this matter, it goes like this: give the market policies, commitments, improvements and efficiency – and you will be praised; give the market decisions that change the world – people will buy and brilliant minds will work for you. Everything comes down to being able to do the latter over and over again. And this is extremely hard.

The original publication appeared in Forbes Blgaria

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