How can Corporate Social Responsibility (CSR) lead to value creation for your company?
Corporate executives struggle with this question, and rightly so. This question requires quantitative analysis of the degree to which social and environmental actions taken by a company improves measurable factors that positively benefit the enterprise.
There are countless qualitative examples of the positive role CSR plays on impacting employee recruitment and retention, socially conscience consumer purchasing behavior, and brand reputation. The 2012 Edelman goodpurpose © Study conducted in 16 countries with 8,000 consumers shows 72 percent of respondents would recommend a brand affiliated with a good cause over one that is not. Additionally, 83 percent of consumers have more trust in a brand that is ethically and socially responsible.
You may be thinking, “Mark, I already know that.” Now, what if I told you the benefits of CSR don’t end there? What if you had access to empirical evidence that CSR may generate value for your company in the long term - beyond consumer behavior and social reputation? And what if I told you that companies that perform poorly in CSR can pay 7 to 18 basis points more on their bank debt (Gross and Roberts – 2011)?
A 2013 white paper published in the Strategic Management Journal entitled Corporate Social Responsibility and Access to Finance presents statistical evidence that definitively addresses the question: does CSR create value? The answer, according to the authors (Beiting Cheng, Ioannis Ioannou, and George Serafeim) is yes!
The study uses a data set from Thomson Reuters ASSET4 for 2,439 publicly traded companies, concluding that CSR can help lower the “idiosyncratic” financial constraints that a business faces when accessing capital markets to finance operations. Idiosyncratic, or specific, risks are market frictions that impact a company’s ability to obtain financing used for strategic projects. CSR influences these capital constraints in two ways: “(1) increased transparency around the social and environmental impacts the company faces; and (2) improved stakeholder engagement.”
At the risk of oversimplifying a statistically data-rich study, here’s the conclusion. According to the authors, stakeholder engagement and CSR disclosure are two variables that are linked to capital constraints in a predictive manner. When constraints are high, it cost the company more to obtain financing, issue equity, and debt. The lower the capital constraints, the lower the cost of capital.
You may be wondering why companies face lower capital constraints due to CSR activities? Superior social responsibility performance is linked to better stakeholder engagement. Companies with better CSR strategies are likely to be more transparent, signaling a better understanding of the long-term opportunities and threats impacting the business. These important variables are taken into account when accessing capital markets.
Here’s the bottom line. Don’t march into your CFO’s office quite yet. Nor, should you use this information as the sole argument to increase your budget. My suggestion to you is read the study and familiarize yourself with the concepts linking these variables. Once you’ve done that, consider what strategies you can bring to the table to strengthen you company’s disclosure and stakeholder engagement.
As always, I welcome your feedback.
President & CEO