Industry Market Trends
Can Corporate Social Responsibility Affect Stock Prices?
June 26, 2013
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. 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.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
- 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.