Report urges new approach to valuing businesses
For many years there have been inconclusive attempts to prove that improved ESG (environmental, social, governance) performance positively affects overall business performance. Now a new report from a European research team proposes that companies and investors should focus instead on core elements of non-financial performance.
The researchers say that these core elements of non-financial performance, which reflect wider ESG factors, make improved performance easier to isolate and identify. The research team led by the Doughty Centre for Corporate Responsibility at Cranfield School of Management brought together academics from SDA Bocconi School of Management in Milan and Vlerick Leuven Gent Management School in Belgium.
The report - "Sustainable Value" - looks in detail at how ESG performance impact business success, how companies explain these linkages to investors, and how the investment community treats this data. It goes on to argue that growing sustainability pressures are likely to make these linkages more important in the future.
The report also notes how the traditional focus on narrowly defined "shareholder-value" poses a set of obstacles to assessing the value of ESG activities due to factors such as:
- Limited or non-existent data suitable for cross-company comparison
- Lack of evidence for linking ESG performance with general performance
- Confusion of terminology and shifting definitions between actors
- Lack of incentives to present positive ESG impacts
- Disconnects between ESG specialists and Investor Relations experts within companies
To overcome these obstacles, the report proposes that value be redefined as ‘sustainable value; and sets out a ‘Value Creation Framework' which can be used both by business and the investment community. An operationalised management version of it has been developed by the parallel European Alliance for CSR laboratory (http://www.investorvalue.org/), run with the support of CSR Europe.
A number of organisations have expressed strong interest in collaboration on implementation of the Value Creation Framework and / or providing access for follow-up research opportunities. Consequently, the report explores how collaboration might evolve over the next 1-2 years, creating a critical mass of pioneer companies and investors using the Value Creation Framework to explain risks associated with not embedding sustainability, and the opportunities potentially accruing to businesses from doing so; and how this can be factored into investor valuation models.
In view of this, the report asserts that corporate CEOs whose companies have already started to embed CR and sustainability and are seeing improved ESG performance, should be engaged to champion such linkages and results. Further, there needs to be a change in the mindset of the mainstream investment community. This requires investor training and changes to how investors (individually and institutionally) are measured and incentivised / rewarded, as well as a change in time-frames from a fixation with quarterly earnings to a more sustainable model.
This is the final report from a two-year research project funded by the Corporate Founding Partners of EABIS (European Academy for Business in Society): IBM, Johnson & Johnson, Microsoft, Shell and Unilever; with additional support from Lloyds Banking Group and Telecom Italia who have also led the European Alliance for CSR Laboratory.
The research report and associated papers are available from the project website at http://www.investorvalue.org/valuingBusiness.htm.
The European Academy of Business in Society (EABIS) is a unique alliance of companies, business schools and academic institutions that is, with the support of the European Commission, committed to integrating business in society issues into the heart of business theory and practice in Europe.
About the European CSR Alliance laboratory:
The laboratory was created in 2007 as part of the European Alliance for CSR. It has been led by John Swannick from Lloyds Banking Group and Paolo Nazzaro from Telecom Italia, and supported by CSR Europe and Sodalitas.
About the research team:
David Grayson is professor of Corporate Responsibility and director of the Doughty Centre for Corporate Responsibility in the Cranfield School of Management.
Kenneth Amaeshi is a lecturer in the Doughty Centre for Corporate Responsibility in the Cranfield School of Management.
Hager Jemel is a PhD candidate in the University of Lille, France.
Celine Louche is assistant professor at the Vlerick Leuven Gent Management School, Belgium.
Francesco Perrini is professor of Management and CSR, SIF Chair of Social Entrepreneurship at the Institute of Strategy, Department of Management, Università Bocconi, Milan. He is also Senior Professor of Corporate Finance and Real Estate at SDA Bocconi School of Management.
Antonio Tencati is assistant professor of Management and CSR at Università Bocconi, Milan. He is a Senior Researcher at SPACE Bocconi and a member of the Institute of Technology and Innovation Management and of the CSR Unit, Department of Management, Università Bocconi.
Additional academics have worked on particular papers. Specifically, Malcolm Arnold, Cranfield; Angeloantonio Russo & Clodia Vurro, SDA Bocconi School of Management; and David Bourghelle, Lille.
Malcolm Arnold completed his PhD at Cranfield School of Management.
Angeloantonio Russo is assistant professor, Parthenope University and Università Bocconi.
Clodia Vurro is researcher with grant, Università Bocconi.
David Bourghelle is assistant professor, University of Lille - Institute of Business Administration.
22 September 2009