A Tale of Two Stories: Sustainability and the Quarterly Earnings Call

Robert G. Eccles; George  Serafeim

Article | Journal of Applied Corporate Finance | Summer 2013

A Tale of Two Stories: Sustainability and the Quarterly Earnings Call

by Robert G. Eccles and George Serafeim

Abstract

One of the challenges companies claim to face in making sustainability a core part of their strategy and operations is that the market does not care about sustainability, either in general or because the time frames in which it matters are too long. The response of investors who say they care about sustainability—and their numbers are large and growing—is that companies do a poor job in providing them with the information they need to take sustainability into account in their investment decisions. Whatever the merits of each view, the fact remains that an effective conversation about sustainability requires the participation of both sides of the market. There are two main mechanisms for companies to communicate to the market as a way of starting this conversation: mandated reporting and quarterly conference calls. In this paper, the authors argue that neither companies nor investors can be seen as taking sustainability seriously unless it is integrated into the quarterly earnings call. Until that happens, the core business and sustainability are two separate worlds, each of which has its own narrator telling a different story to a different audience. The authors illustrate their argument using the case of SAP, the German software company. SAP was the first company to host an "ESG Briefing," a conference call for analysts and investors held on July 30, 2013 in which the company discussed both its sustainability performance and how its sustainability initiatives were contributing to its financial performance. The narrative of this call was very similar to the narrative of the company's first "integrated report," which was issued in 2012 and presented the company's sustainability initiatives in the context of its operating and financial performance. However, the contents of the "ESG Briefing" and those of its traditional quarterly earnings conference calls were very different—and so were the audiences. Whereas the quarterly call was attended mainly by sell side analysts—and the words "sustainability" or "sustainable" failed to receive a single mention—the ESG briefing was delivered to an investor audience made up exclusively of the "buy side."

Keywords: sustainability; Communication; Integrated Corporate Reporting; Investment; Environmental Sustainability;

Format: Print

Read Now

Citation:

Eccles, Robert G., and George Serafeim. "A Tale of Two Stories: Sustainability and the Quarterly Earnings Call." Journal of Applied Corporate Finance 25, no. 3 (Summer 2013): 66–77.

While there has been significant progress in the measurement of an organization’s environmental and social performance, metrics to evaluate the impact of products once they come to market lag far behind. In this paper we provide a framework for systematic measurement of product impact in monetary terms and delve into the rationale for the framework’s seven elements. We then apply the whole framework to two competitor companies and elements of the framework across companies in different sectors of the economy to show the feasibility of measuring product impact and the actionability of the framework. Not only does this application demonstrate feasibility, it also indicates the value of impact-weighted financial statement analysis. We see our results as a first step, rather than a definitive answer, towards more systematic measurement of product impact in monetary terms that can then be reflected in financial statements with the purpose of creating impact-weighted financial accounts.

In the fall of 2018, Hiro Mizuno, the Chief Investment Officer (CIO) of GPIF, the Japanese Government Pension Fund, was reflecting on his efforts to integrate Environmental, Social and Governance (ESG) issues into every aspect of GPIF’s portfolio. His efforts ranged from constructing new stock market indices based on ESG data, changing the compensation and incentives of active investment managers and passive funds, pushing for more corporate sustainability reporting and integrated reporting, and establishing collaborations with other asset owners to drive systems level change. He was convinced that the only way to meet his responsibilities to his beneficiaries was to improve the performance of the entire economy through a focus on improving corporate governance, increasing inclusion in the workplace and gender diversity and reducing environmental damage and progress towards tackling climate change. The early results from his efforts were promising, but was there more he could do?

Case | HBS Case Collection | January 2020

SK Group: Social Progress Credits

George Serafeim, Ethan Rouen and David Freiberg

SK Group was one of the largest companies South Korea. A family-run conglomerate consisting of around 120 subsidiaries and employing more than 100,000, SK was tightly knit into the fabric of Korean society. SK viewed their future success as contingent upon the strength of the societal ecosystem in which they operated. As such, the company had a long history of philanthropic giving. However, SK questioned if their donations were producing the desired impact, as many of the societal issues they, and the rest of Korean society, sought to address were not improving. In order to create a new system of generating social value, SK established the Social Progress Credit (SPC) initiative. The SPC initiative designed a measurement methodology that was used to measure the social value created by social enterprises – firms whose mission was to generate social value in conjunction with generating sustainable financial returns. Additionally, the SPC initiative provided monetary incentives to social enterprises in proportion to the social value generated by participating social enterprises. Looking to the future, SK envisioned a marketplace in which SPC’s were traded among investors and credits were priced by the market. Initial results of the SPC initiative were positive, showing positive growth in social value created and financial stability of social enterprises. How then could SK convince other public and private organizations to adopt the SPC model and promote social value? Moreover, how could SK convince mainstream capital markets to make investments into society enterprises on the basis of the social value creation? More importantly, was this attempt to enrich and grow the ecosystem of social value creation making a difference?

Keywords: Impact; impact investing; impact measurement; social value; social development; conglomerates; measurement of purpose; ESG; ESG (environmental, social, governance) performance; capital markets; cooperation; innovation; Environmental Impact; collaboration; Social Enterprise; Social and Collaborative Networks; Social Issues; Measurement and Metrics; Value Creation; Environmental Sustainability; Employment; Accounting; Energy Industry; Telecommunications Industry; Chemical Industry; South Korea;

Citation:

Serafeim, George, Ethan Rouen, and David Freiberg. "SK Group: Social Progress Credits." Harvard Business School Case 120-071, January 2020. View Details

Cite View Details Educators

Faculty & Research

A Tale of Two Stories: Sustainability and the Quarterly Earnings Call

Abstract

Citation:

About the Author

More from the Author