Creating Value in Operations and Supply Chains through Sustainability Efforts
What are the most interesting, novel, and/or profound findings of your research?
Highlight #1. Sustainability initiatives can create real value for firms and their shareholders but the context is important to consider.
As evidenced by the explosive growth of Environmental, Social and Governance (ESG)-themed funds, investors are betting on sustainability as a potential source of differentiation and competitive advantage for firms. But companies can’t just declare themselves sustainable, they need to take concrete actions to achieve it – initiatives like energy and water conservation, voluntarily reducing emissions, introducing eco-friendly products, or collecting and recycling end-of-life products. By rigorously examining stock price reactions to specific initiatives or events, we can determine which types of initiatives create value, and in which contexts it is most valued by investors. Our findings tell us that investors are selective, reacting positively to many initiatives, negatively to some, and not at all to others. Initiatives seen as window dressing or green-washing are not valued. Instead, initiatives need to fit well with the firm’s business model and have material impact. For example, investors know that energy conservation at an aluminum smelter creates more value than similar measures at an office complex. It’s also important to remember that conditions change over time as the norms and values of society evolve. Initiatives that were laudable (and valuable) in the 2000s might be business-as-usual today and so result in no stock price reaction.
Highlight #2. Good sustainability performance is not a substitute for business basics.
The evidence is pretty clear that sustainability performance is not a substitute for other good business practices. For manufacturing firms, productivity and operational efficiency are foundational. Without those capabilities, a focus on sustainability can actually be harmful to financial performance. For productive firms, sustainability can be complementary in boosting financial performance, the proverbial win-win scenario. If we think about a firm that’s good at improving processes and reducing waste, it’s natural to expect that they can use similar capabilities and resources to improve sustainability measures. But non-productive firms face a choice between sustainability performance and financial performance, usually finding it difficult or impossible to succeed at both. Before firms can cost-effectively address sustainability issues, they must master the basic blocking-and-tacking of everyday operations.
Highlight #3: Market forces are powerful but they are not sufficient to right all the potential wrongs.
Many people believe that market forces can fix all issues, including those that are sustainability-related. Although I’m a big believer in market efficiency, I’ve learned that market failures are not uncommon, particularly in regards to sustainability. For instance, we’d like to think that market forces reward firms that engage in responsible sourcing from ethical, green suppliers, and punish those that do not. But the evidence suggests otherwise. In a study of Western apparel retailers that sourced from the infamous Rana Plaza factories (where 1,133 workers were killed in a 2013 building collapse), investors judged the buying companies would suffer no adverse impact. For important societal issues like this, market forces are insufficient substitutes for regulations and enforcement. Although the market is good at determining the value of sustainability efforts, it’s important to remember that investors are focused on legal and financial responsibility more so than moral responsibility.
Why are these findings important? To whom?
This research has important implications for many groups. If companies can learn to be more sustainable without harming their bottom line, all of us – individuals, companies, shareholders, and society – can benefit. The correct choice of voluntary sustainability initiatives can add value, competitive advantage, and differentiation for firms while also bettering society and the environment. However, voluntary efforts alone are insufficient. Governments and regulators still have an important role to play due to market failures. Given that it’s not always clear when the private or public sectors (or both) should take action, our work also highlights the important need for activists, NGOs, and the general public, who can effectively apply pressure both to companies and governmental agencies when required.
What specific application points, tips, or advice do you offer to stakeholders, managers, leaders, and policy makers in light of these findings?
Managers, first be sure that your house is in order, and your core business is operating effectively and efficiently. If not, there are plenty of skilled resources that can help. If so, then good sustainability performance can add value to your organization and become a source of competitive advantage. Stay away from window-dressing but instead choose sustainability initiatives that are a good fit with your business, and that have the potential to have real material impact to your bottom line. When sustainability goals are not being met by private industry, governments and regulators should be asking what market mechanisms are (or are not) in place to address them. It’s important for all of us that regulators recognize sustainability-related market failures so that appropriate regulations can be developed and enforced where needed. For investors and the general public, it should be encouraging that productive, well-managed firms can tackle difficult sustainability issues to help improve our environment and society, without harming their financial bottom line.