Consensus continues to build in the corporate community that in delivering total shareholder return (TSR) for their investors, businesses must also consider the impact they will have on society in doing so. The Boston Consulting Group (BCG) calls this total societal impact (TSI). TSI is not a single metric; it is a collection of measures and assessments that capture the economic, social, and environmental impact (both positive and negative) of a company’s products, services, operations, core capabilities, and activities. Adding the TSI lens to strategy naturally leads companies to leverage their core business to contribute to society in a way that enhances TSR over the long term.

One of the reasons for this rising consensus is a rapidly growing body of research that shows a positive relationship between financial performance and a company’s nonfinancial performance on the environmental, social, and governance (ESG) issues that are material to its sector and strategy. The qualifier of “material” is important. In developing a corporate strategy through the TSI lens, a company must identify those ESG issues that affect returns from either a downside risk or upside opportunity perspective. No company can satisfy the demands of all of its stakeholders since tradeoffs exist, although they can be reduced or even reversed through innovation.

BCG’s new study provides further confirmation of a positive relationship between financial and nonfinancial performance at an even deeper level. Starting with the work of the Sustainability Accounting Standards Board (SASB) and augmented by input from sector experts, I joined the BCG team in examining the relationship between financial and nonfinancial performance in four industries: retail and business banking, biopharmaceuticals, consumer packaged goods, and oil and gas. We also studied the tech sector but data were not available to conduct this quantitative analysis.

We found that in each sector, the top performers for combined performance for the material issues, most of which were related to downside and risk, had higher valuation multiples (when all other measures were equal) than the median performers. The valuation multiple premium was 3% for banking; 12% for biopharmaceuticals; 11% for consumer packaged goods; 12% for biopharmaceuticals; and 19% for oil and gas.

In addition to the quantitative analysis, BCG also conducted interviews with over 200 people at more than 20 companies and spoke with dozens of investment professionals. These interviews confirmed that—despite the amounting evidence of how a TSI approach to strategy can contribute to financial performance—companies remain skeptical that their efforts will be fully recognized by the investment community. In turn, investors feel that the corporate community still has a great deal of work to do in better communicating its TSI strategy and performance and how it is contributing to TSR. The work of The International Integrated Reporting Council and the International <IR> Framework can be very helpful in this regard.

The good news for the corporate community: the investment community, particularly the world’s largest asset owners and asset managers, is increasingly recognizing how TSI contributes to TSR over the long term. An important factor here is the 17 Sustainable Development Goals (SDGs) where investors see opportunities to both earn returns and help to create a world where they can continue to earn these returns.

Source link for this article