Sustainability and Performance are Correlated!

A.T. Kearney announced a particularly interesting founding in the report “Green Winners: The Performance of Sustainability-focused Companies in the Financial Crisis”. Companies focused on sustainability outperformed their competitors by 15% in average market capitalization. In order to determine this, the report looked at the 99 companies with the greatest Sustainability Index as defined by Goldman Sachs (I understand that this definition of sustainability-focused company is highly arguable).

Still, it is important to outline what all of these companies have in common. In all of them, sustainability goes beyond being just environmentally friendly. Relevant points are: they focus on long term strategies and not just on short term goals, they present strong and responsible corporate governance and they have risk-management practices.

I want to focus a bit now (and probably in future posts) in the fact that these companies were trained in order to face crisis situations. This successful trend is not just a coincidence. Training managers to acquire rapid response skills, having a team working on possible scenarios and action plans associated to them are practices a sustainable company must have. A sustainable business is NOT one that isn’t modified by changes in the environment. Change is inevitable. But we can be prepared when the moment comes. You can’t change the direction of the wind, but you CAN modify the orientation of your sails!

Making your Company Attractive to Investors

Any serious business, lucky enough to be facing the rage of expansion, would be fighting to attract investors. Even if it is less than a million from a minor Venture Capitalist, a couple dozen millions from a Private Equity fund or new stock investors once they went public, every company tries to perform optimally in special issues that investors look at. So, what do shareholders and potential investors look for in a ‘successful’ company? Does this have something to do with the crisis cycle described in the previous post?
Venture Capitalists that fund startups are really concerned on the base structure of the business and its sustainability over time because they generally have monetizing horizons of 5 years or so. But this is not always the case for all investors. If I had a million dollars (which I don’t, but still) and I am going to invest it in the stocks, I just want the better return. So there are all these weird ratios: price to book, price to sales, price to cash flow, etc. which are not really representative of the base structure of the company. Of course, I would do some research on the company, but will I care about the carbon emissions, the long-term strategy, the corporate responsibility? Probably not as much as the dividends accrued by shareholders during the last year.
To make this clear, let’s take the situation to an extreme. Imagine I run a business and what I do is take a huge bank loan and give it to my shareholders as dividends. Of course this would be stupid, but I guess the valuation of my company’s shares will increase when the actual value of my business is the same (or decreased due to the new debt) and this action is clearly the antonym of sustainability.
What I am trying to say is that we have to make sustainability more attractive to investors, which are the main fuel for business growth. In this way, sustainable businesses will dominate the markets making the economy more sustainable. The eternal question will then be, can sustainability be attractive for short-term investors?

The Right Moment for a Change

The world is in shock. Currently everyone is paying attention to the terrific consequences of the financial crisis. Companies just struggling to survive, governments strongly intervening into markets in an unthinkable way even for Keynes himself, entrepreneurship and venture capital activities went down, economies paralyzed. Who can think about sustainability in the middle of this mess? Well, this COULD be the right environment for a deep change.

Some time from now, economies will recover and markets will speed up. Cash will re flow in the financial market, the best investment opportunities will attract lots of capital because everyone wants their cut in apparent easy money, this will make values in the particular investment market (say real estate for example) to increase at an unreasonable pace, much faster than the real economic growth creating a bubble (a term very ‘a la mode’ lately). When the pressure difference between the inside of the bubble and the outside is enough, the bubble bursts and ‘voila’ a new financial crisis. Is this (extremely simplified) model inevitable? Are we doomed to go through this cyclic crisis with euphoric crests and terrible troughs? Wouldn’t it be better to gently walk through a consistent and sustained growth?

If your answers to those three questions were NO, NO, YES then we are on the same page. If you don’t have the answer about how to achieve this but you are willing to look for one, let’s do it together throughout this modest blog posts.

But, how can this be the right moment for a change? Well, let’s use a simple analogy. Imagine that you have your own house and for a long time you’ve been thinking about improving the insulation in all your walls and windows. You KNOW this improvement will mean less energy consumption which is good for the environment and for your pocket; plus, you would get less noise from outside, making your life inside the house a more pleasant experience. Nevertheless, you never improve the insulation either because you can’t afford the initial investment or because between study, work, sports, friends, family, your insulation is placed 101 in a 100 long list of priorities. Now let’s imagine (only imagine, luckily) that a tornado comes and destroys the structure of your house. You are devastated, looking somewhere to sleep. Insulation is number 201 in your list now. But when the first days have gone by and you start thinking about constructing the house again (kind of the moment we are after the financial crisis), the insulated walls come to your mind. It may delay one month the construction, but, if you don’t do it now, you will never do it. Let’s Do It, Now!

Who are you? What is this? Why are you doing it?

Well, those are difficult questions, specially the first one. But let's get started.
I am Santiago, a 21 year old Argentinian, university student majoring in Industrial Engineering and Physics Science. I enjoy idea exchange and discussion in a wide variety of topics. I guess this is enough about me for now, and I hope you get to know me better through the successive posts.
This Blog has as a main objective to discuss topics about sustainability in different fields, focusing on businesses and financial sustainability, although it won't be restricted to those particular points. Of course, the real importance of the blog will not reside in the original posts but in the interaction with and among readers. Therefore, I strongly encourage your participation: comments, recommendations, different points of view, agree, disagree, etc.
Finally, why am I doing this. There are two main reasons. The first one, the idealistic reason, it would be to do my modest but sincere contribution towards a sustainable world. It may not be too much, but I like to think that due to this blog the world will be a better place to live in, at least a little bit, at least for one person, that's enough. The second reason, the pragmatic one, is that I am writing this blog as part of my application to the 13th World Business Dialogue, the world's largest student-run business convention. I strongly recommend all of you to apply for it, you can find all the necessary information in:

http://www.world-business-dialogue.com/

The more students that apply, the more people thinking about sustainability, the closer we are to find a solution (at least a partial one).
I hope you like the idea, and check the blog regularly for updates.
See you soon.