According to the World Business Council for Sustainable Development, corporate social responsibility (CSR) involves a commitment by industries to exhibit ethical behavior and invest in causes that aim to improve the quality of life for employees, their families, the community, and broader society.
The idea of CSR has grown significantly in recent years, with over 12,000 companies worldwide joining the United Nations Global Compact, a directive focused on a sustainable future. CSR focuses on three main categories:
- Environmental – climate change, sustainability, etc.
- Social – e.g., labor practices and societal development
- Governance – ethical conduct and company procedures
Benefits of CSR
The premise that ESG factors can affect a company’s market value and performance is gaining traction as it is estimated that more than one-quarter of global investments are based on this ideology. Although there are naysayers who believe that a company’s sole goal should be maximizing profits no matter the impact, there are benefits for the company when CSR is implemented.
- Cost Savings and Income Generation – In 2019, General Mills reported a whopping $4.8 million savings and reduced its carbon footprint by 6,000 metric tons by implementing over 60 energy reduction projects. A 2015 study of sustainability at 152 companies by Pure Strategies found that 27% benefitted from $5 million in sales of recycled products while 33% generated this same income by caring for employees.
- Customer Loyalty – A study conducted by Nielsen in 2018 showed that 81% of consumers thought that companies should focus on enhancing the environment. This corroborates a 2014 investigation that more than 55% of the world’s occupants would pay extra for goods procured from socially responsible companies.
- Employee Engagement and Loyalty – Engaging employees through CSR, be it through volunteering opportunities or boosting creativity through new CSR projects, results in them feeling respected and acknowledged.
CSR and the Stock Market
One question that looms when considering CSR is whether its implementation enhances the stock value. Several investigations have been carried out by scholars trying to investigate this link. Thesis research on this subject was conducted by a student at Jönköping University over the period 2006 to 2016 (except for 2008). For the undertaking, a t-test was carried out based on Cumulative Abnormal Average Return (CAAR). The study yielded the following results.
- There was a 95% measure of certainty that CSR does affect a firm’s stock price.
- T-tests and CAAR analysis for both environmental and ethical indicate a positive relationship between CSR and stock price.
- Philanthropic CSR, however, was proven to be neutral by the t-test when relating CSR and stock price. The CAAR test determined a slightly negative relationship between them both.
Due to a desire to give back, consumer perception, potential financial gains, and inroads into more significant stock benefits, CSR will continue to rise in popularity. Nielsen projects that by the end of 2021, $150 billion will be spent on sustainable products, with an estimated 73% of consumers altering spending habits to have less impact on the environment.