A series of scandals over the years have taught Western companies an important lesson about operating in developing countries: Any indication that a company or one of its suppliers is exploiting workers or damaging the environment in these regions can have devastating effects on a company’s reputation—world-wide. The result is fleeing customers and investors.

But here’s a lesson many executives have yet to learn: A commitment to improving social and environmental conditions in the developing countries where a company operates is the key to maximizing the profits and growth of those operations.

That’s the conclusion we drew after studying more than 200 companies. As a group, the companies most engaged in social and environmental sustainability are also the most profitable.

What does sustainable management entail?

On the production side, companies that are able to maximize their use of recycled or renewable raw materials and environmentally friendly energy supplies are also the most successful ones. They design their production lines to use water and energy efficiently, promptly replace obsolete machinery and continuously look for opportunities to reduce waste. And they minimize harmful emissions into the air and water.

Companies that excel in providing health insurance, retirement benefits and professional development for their employees also show above-average profitability.

The most successful companies not only enforce safety standards strictly but also improve them over time. And they support local communities with initiatives in education, health care, environmental protection and agricultural development.

Finally, the most successful companies set high social and environmental standards in the selection of their suppliers, monitor the suppliers to ensure compliance, and work with them to continually improve their performance in these areas.

How exactly do such efforts affect profits? We found that sustainable management yields six major competitive advantages:

A STERLING REPUTATION: A growing number of consumers consider competing companies’ social and environmental records when deciding which products to buy. A reputation for concern about these issues sets a company apart from its competitors. Consider the popularity of fair-trade groceries, whose distributors promise to promote the welfare of the providers and the environment.

It’s important to remember that a company’s reputation in this regard depends not only on its own actions but also to a large degree on those of its suppliers.

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