In recent years, a growing number of companies around the world have voluntarily adopted and implemented a broad range of sustainability practices.
On the one hand, there are those who argue that sustainability is spreading as a “common practice” and, as such, it may be a necessary condition for survival, but it cannot be a sufficient condition for building a competitive advantage. On the other, there are those who argue that sustainability can be a strategy that generates a competitive advantage and therefore results in above-average performance (i.e., “doing well by doing good”).
The arguments on both sides conceptually relate to Michael Porter’s seminal 1996 article “What Is Strategy?” in which he draws a sharp distinction between operational effectiveness and strategy. He argues that strategy “is about being different” and that “the essence of strategy is choosing a unique and valuable position rooted in systems of activities that are much more difficult to match.”
In a new paper, we find that within most industries, sustainability practices have converged over time. This finding implies that, on average, companies have adopted an increasingly similar set of sustainability practices, raising the possibility that they are becoming common practices and, as such, are less likely to serve as a strategic differentiator. We also find that there is more convergence in industries where environmental and social issues are dominant, rather than issues of governance.
Our exploratory results confirm that the adoption of strategic sustainability practices is significantly and positively associated with both return on capital and market valuation multiples, even after accounting for the focal firm’s past financial performance. In contrast, the adoption of common sustainability practices is not associated with return on capital, but it is positively associated with market valuation multiples.
Some sustainability activities are simply becoming “best practices” and so are a necessity. But the data suggests that some companies are creating real strategic advantage by adopting sustainability measures that their competitors can’t easily match.
(Written by Ioannis Ioannou an associate professor at London Business School and George Serafeim is a professor at Harvard Business School)
