Is there a financial payoff for companies that prioritize ecological and social performance?
December 15, 2011
When does ESP pay off?
In the paper ‘A Triptych Inquiry: Rethinking Sustainability, Innovation, and Financial Performance’, authors Dr. Timo Busch (Department of Management, Technology and Economics ETH Zurich), Dr. Bryan Stinchfield (Department of Business, Organization and Society Franklin & Marshall College US) and Dr. Matthew S. Wood (Department of Management Cameron School of Business US) push this question into new territory and call for a newly-‘balanced’ approach to assessing the impact of ESP on CFP. The two factors the team focuses upon, new to this long-lasting debate, are time (for example, what is short term vs. long term CFP in companies with a strong ESP orientation) and innovation (low-level vs. high level (‘radical’) innovations in product or process).
ESP and CFP: Time is on our side
To effect their research, the team developed hypotheses to test the relationship between ESP and CFP over the long and short term, and to test the relationship between innovation and long or short term CFP. Their findings – based on data derived from 231 organizations - indicate that if managed correctly, with a view to both environmental integrity and social equity, innovative companies that invest in increasing their ESP will experience positive CFP in the long term.
High levels of ESP – for example, new environmentally improved products that require substantial investments in research and development – can result in a negative impact on short term CFP. This negative impact, however, will be moderated by the firm’s innovativeness and may become positive over time.
“The purpose of the triptych inquiry of ESP, innovation, and corporate financial performance was to empirically explore when it pays for firms to address the first two challenges of sustainability – environmental integrity and social equity,” say the authors. “We have expanded upon previous work in this area ... results indicate that it pays to increase a firm’s level of ESP when firms have the ability to innovate and when the financial goals are not limited to short-term planning horizons.”
Lecturer Sustainability and Technology, ETH Zurich
Assistant Professor, Franklin & Marshall College
Assistant Professor of Management, University of North Carolina Wilmington