Beyond ESG: Connection Between the Corporate Net Impact and Financial Performance – Tutkimustietoa Finsif-stipendiaateilta 2023 5/9

The business landscape is undergoing a seismic shift. While Corporate Financial Performance (CFP) has long been the go-to parameter for assessing a company’s success, there’s a constantly emerging dialogue that seeks to balance profitability with purpose. As the significance of Corporate Social Responsibility (CSR) increases, a pressing question arises: How can we quantitatively measure a company’s societal impact?

Traditionally ESG scores, covering Environmental, Social, and Governance aspects, have served this purpose of societal impact. However, in our thesis we argue for shifting the focus from ESG metrics to actual impact. Instead of merely focusing on the internal operations, impact metric deeply examines the real-world effects of a company’s activities. In the essence of our thesis was the shift from measuring the ’how’ to measuring the ’what’.

In our thesis we studied the connection between the net impact of companies’ operations and their financial performance. Our research results tentatively suggest that firms with a higher net impact score have a dip in profitability in the short run. This could be attributed to the fact that businesses with a profound positive societal impact might incur more costs than the revenue they generate in the initial stages.

However, this doesn’t necessarily be a poor indicator for investors. The study also shed light on the fact that these same firms, despite the immediate challenges to profitability, command higher valuations in the market. This indicates a potential shift in investor mindset to look beyond just immediate monetary gains and that being associated with companies having a broader positive societal impact has value for investors.

Also, as a kind of by-product of our research outside the main hypothesis we tested, we found perhaps the most eye-opening insight. From the comparison between the used environmental net impact data and the E from ESG metrics, we found that the net impact metric might offer a more accurate reflection of a company’s environmental footprint than the often-used ESG metrics, increasing the confidence in using net impact as a metric for CSR.

So, why should the corporate world, and more importantly, investors, take note of these findings?

For starters, it’s clear that our understanding of success in the business world is undergoing a transformation. While profitability remains crucial, there’s a growing emphasis on the kind of legacy a business leaves behind in societal terms.

However, like all research, this too has its set of limitations, particularly around the data sourced from Upright Oy, since we were only able to work with a limited dataset of Fortune 500 companies. It’s essential to view these findings as a steppingstone, a starting point for what promises to be a fascinating journey into understanding the true nexus between CSR and financial performance.

In the end, as businesses and societies grow more intertwined, metrics like net impact will become indispensable. After all, in today’s world, the true mark of a company’s success lies not just in its balance sheet but in the positive mark it leaves on the world.

But as the corporate world marches forward, one thing is certain: responsibility and profitability can be two sides of the same coin, and that’s a balance that every business should strive to achieve.

Johannes Alanne
M.Sc. (Economics and Business Administration), Finance, Graduate from Aalto University, 2023

Matias Lehtinen
M.Sc. (Economics and Business Administration), Finance, Graduate from Aalto University, 2023

The study can be found here.