Can Corporate Social Responsibility Affect Stock Prices?

June 26, 2013

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There are a lot of reasons U.S. companies practice corporate social responsibility (CSR). Some do it because it's the right thing to do for the environment, for the planet, and for their employees.

Others admittedly do it because it's good public relations to be seen helping build a community center or cleaning up after a storm.

But while CSR studies have been done from budgetary and philanthropic points of view, until now there hadn't been too much study of CSR from a purely financial point of view.

How much does practicing CSR help companies with their bottom line? Is it possible that practicing CSR actually makes a company's stock price more stable and less volatile?

A trio of researchers, two from Boston University (Rui Albuquerque and Yrjo Koskinen) and one from the University of Iowa (Art Durnev), had heard anecdotal reports that companies who practice CSR saw more stability with their stock prices. They set out to conduct a scientific study to see whether it was really true.

"There's always been this notion that companies do CSR and derive benefits from it, but what do the shareholders get out of it," said Durnev, the lead author of the study. "We really had no idea; this topic had been approached from the consumer side of it, but had been ignored from the finance side because it couldn't be quantified."

After months of study, the researchers looked at the stock prices of 3,005 firms from 34 countries between 2004 and 2010.

A graphic showing several major companies and their commitment to CSR over the years. Credit: Art Durnev, University of Iowa.

A graphic showing several major companies and their commitment to CSR over the years. Click to enlarge. Credit: Art Durnev, University of Iowa.

The prices were from a database that factored in the social and environmental risk factors of each company, including labor relations, health and safety, recruitment and retention strategies, progressive workplace practices, and environmental and climate risk. In the end, the researchers drew from 9,795 firm-year observations.

Durnev said that the results of the study showed that a healthy dose of CSR created greater brand loyalty, so customers kept buying their products and paid a premium for them, despite what the overall economic situation was.

That stability of sales in turn reduces the companies' costs of equity capital, further reducing its overall risk.

Durnev and his team based a lot of their research on beta -- a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. If companies have high beta, their cost of capital is higher, but companies with lower beta have a lower cost of capital.

According to Albuquerque, the percentage decline in beta is pretty large between two companies. Across companies, beta has a volatility of 40 percent, so "we're talking about a four percent difference in terms of total risk, between a good CSR and bad CSR company."

Companies with a high CSR rating have lower beta, the research found, so companies like Starbucks and Ben & Jerry's, two brands cited as examples of companies that have been early adopters of CSR, will have an advantage in any type of economy.

"If you buy Starbucks, it's not just that it's better coffee, it's that you know they're a good company, and you'll go to their stores because you feel good about buying their product," Durnev said. "Starbucks buys 70 percent of their coffee volume comes from ethically grown coffee farms; by 2016 it will be 100 percent. That matters to people."

"To get an accurate study, we modeled it from the consumer side, and then with business fluctuations. We found that customers still stick with their (high) CSR companies, and an economic downturn it doesn't hurt [those] companies. Their profits are less cyclical with the overall economy."

The research team measured CSR's effect on stock prices using a series of six indices, Durnev said.

  • Environment: When the company's working area/production facility had an adverse or positive effect on the environment.
  • Labor force: What a company's track record is in hiring racial minorities, and sexual minorities (gays, etc.)
  • Product quality and safety: Whether the company produces products that are environmentally friendly and using environmental technology.
  • Humanity: Whether the company does business with countries that are notoriously poor in human rights (Libya, Syria, etc.)
  • Community: How the company makes a significant economic impact in their community, and how charitable they've been. This includes support for housing, support for education, and other community programs.
  • Employee Relations: How a company treats its employees and their level of satisfaction in the workplace.
Through their analysis of 9,795 firm observations and data, the research team gleaned that the three industries with the highest CSR, and correspondingly most stable stock prices, are the hotel industry, the credit institutions industry, and printing and publishing industry.

"With hotels there are a lot of things they can do, from using less water, buying biodegradable detergent, and things like that," Durnev said. "And credit institutions like large banks have a more diverse labor force, and do more charitable giving."

The three industries with the lowest rating from the study were the coal mining industry, petroleum refining, and agriculture.

"Those industries might not have the need (for CSR), and they would also score low on the environmental categories of our study," Durnev said. "And with agriculture, the percentage of organic farming is still very low."

Durnev said that of the six categories they measured, the index with the strongest and most tangible effect on a company is environment.

"Customers want to see companies using green technology," Durnev said.

Many companies are trying to use more advanced technology to avoid pollution.

One interesting trend noticed by the researchers is that companies that were first, or early adopters, into CSR in their industry gained a larger market share and had less volatility in its stock prices than companies that began CSR later.

Albuquerque compared the issue of late CSR adoption to advertising.

"When you think about advertising, you have to be the loudest to be heard. And with CSR, your CSR performance is relative to the other companies who are similar to you," he said. "You have to be doing much more than everybody else.

"If you're a first mover, it's easier to show you're serious about it," Albuquerque continued. "Newcomers do have an obstacle to overcome, and they also face skepticism from customers who could think, 'Oh, they're just doing that because everyone else is doing it.'"

Both authors I interviewed stressed that CSR awareness by consumers is continuing to grow, and pointed to a recent action by a large employees group in California.

The California Public Employee Pension Fund (CalPERS), the largest public pension fund in the U.S., recently had a meeting of its management team and listened as shareholders told the managers that they wanted their money invested in more companies that do CSR, and would be carefully monitoring hoped-for changes in the kinds of companies CalPERS does business with.

"I think you'll see CSR having a more and more stabilizing effect on companies' stock prices in the future," Durnev said. "Interest in CSR isn't something that's going to go away."

 

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