The business benefits of corporate social responsibility can be divided into four categories: Firm Value, Marketing & Sales, Reputation & Risk, and Human Resources.
Various studies have found that positive social performance can increase the overall market and accounting value of a firm.
- In NBER Working Paper No. 17950, Eccles, Ioannou & Serafeim (2014) found that companies with good social performance “significantly outperform their counterparts over the long-term, both in terms of stock market and accounting performance.” Specifically, they found that the high sustainability group outperformed the low sustainability group by 4.8% annually.
- Other researchers (Park & Moon, 2011) have taken large stock performance data sets, filtered them through investor screening services, like the MCSI ESG screen, and have shown that the stocks of companies in the top social performance quantile “outperform those of companies in the bottom quantile by as much as 6.24% annually."
- In a research note for the European Centre for Corporate Engagement, Derwall & Verwijmeren (2006) find that firms with better governance scores enjoy lower cost of equity capital (by up to 1%).
- A Journal of Banking & Finance article investigated the impact of CSR on the cost of bank loans. (Goss & Roberts, 2011). They found that low CSR performers face higher loan costs (7 to 18 bp), while high CSR performers split into two groups. In financially strong companies, high CSR performance was correlated with lower loan costs, but in financially weak companies, high CSR performance was correlated with higher costs.
Marketing & Sales
The effect of strategic CSR on marketing and sales is both well-documented and well-understood, but the magnitude of some of the effects can still be surprising.
Cone Communications administers a bi-annual survey of customer perceptions about social responsibility. The following points are from their 2017 report.
- 89% of customers say that they would switch to a brand associated with a good cause, all else equal.
- 81% of customers say that they would tell friends and family about a company’s CSR efforts.
Since what consumers say they will do is often different from what they actually do, other researchers have set up experiments to test actual consumer behavior.
- In an MIT working paper, Hainmueller & Hiscox (2012) found that “labels with information about fair labor standards had a substantial positive effect on sales among a segment of shoppers even in outlet stores where customers are predominantly concerned with prices. The labels increased sales of a more expensive women's item by 14%.”
- More specifically, a meta-analysis of 83 research papers (Tully & Winer, 2014) found that 60% of respondents are willing to pay a positive premium on socially responsible products, and that the mean premium is 16.8%.
- A 2010 study by Lev, Petrovits & Radhakrishnan found that growth in corporate philanthropy is a leading indicator for sales growth. The mechanism here appears to be customer satisfaction, showing the following causation: corporate philanthropy generates customer satisfaction, which in turn generates sales growth. Sample averages for that study implied that “a $500,000 increase in charitable contributions result[ed] in an estimated $3 million increase in sales.”
Reputation & Risk
Once again, the Cone Communications study provides some good data.
- 86% of customers expect a company to do more than make a profit.
- 92% of customers have a more positive image of a company that supports social issues.
And, especially for larger firms, risk mitigation is a useful effect of CSR.
- Strategic CSR can add 2-4% to firm value as insurance against litigation risk (Koh, Qian & Wang, 2014).
- In a crisis, a well-managed CSR program can protect some of a firm’s value (Schnietz & Epstien, 2005).
- The existence of a corporate philanthropy program (or even a workplace giving match) increased productivity by an average of 13% (Tonin & Vlassopoulous, 2015).
- While there hasn’t been much research in this area, one study found that among firms that are “best employers,” the firms with positive social performance showed a 25-30% reduction in annual employee turnover. (Vitaliano, 2010).
- In a 2012 survey conducted by Net Impact, 59% of millenials (and even 52% of boomers) rated “having a job where I can make an impact on causes or issues that are important to me” as either “essential” or “very important.”
- Firms with good CSR attract higher performing workers. (Greening & Turban, 2000).
For many years, researchers were unclear about the relationship between corporate social performance and corporate financial performance. The biggest problem was that there was really no way to tell whether or not a particular CSR program was strategic or effective. As you might imagine, ad hoc, nonstrategic CSR is completely ineffective. In fact, in 2008, Brammer & Millington found that firms with top 10% CSR programs outperformed everyone over the long term, but that middle 20% CSR programs under-performed everyone else over short, middle and long terms. In other words, it makes more financial sense to do no CSR at all than to take it only half way.
Are you interested in setting up a corporate social responsibility program and want to make sure you're doing it the most affordable and effective way? Or are your existing programs stuck in that middle 20% range, and generating more costs than benefits? Please contact us for a free consultation.