Ira Yeung is an assistant professor at UBC’s Sauder School of Business.
There are many reasons why a growing number of business leaders want to do good deeds within their companies, contribute to their communities or support global causes.
Studies have shown that employees prefer to work with businesses that have a strong social or environmental compass; many consumers favour companies that reduce their negative impacts and give back to communities, even if it means their products or services are pricier; and employers who support worthy causes are held up as model citizens and respected corporate leaders.
But are those leaders also using it as a strategy to woo investors? And are investors taking the bait?
Corporate social responsibility, or CSR, has become a business buzzword, but it’s defined as actions that promote social good beyond the immediate interest of a company and its shareholders, and beyond what the law requires. So a company might start a scholarship fund, reduce their environmental footprint, have employees work with charities, or set up an in-house daycare.
We know that companies that invest in corporate social good tend to outperform companies that don’t, but what has been less clear is why that is: Is it that already-successful companies tend to invest more in CSR? Or is it that companies enjoy greater success by getting involved in CSR?
It’s not always a win-win. On one hand, many investors are drawn toward ethically minded companies; on the other, some experts argue that if time and earnings are being spent on charitable initiatives, they could distract business leaders and put a dent in the bottom line.
We conducted a two-pronged study that looked at whether CSR does, in fact, influence investors’ decision-making – and whether companies, in turn, respond to that investor sentiment by engaging in more CSR.
We found that when interest in CSR is high, investors place a valuation premium on companies that are more socially responsible. In other words, when companies do good, stock prices get a lift – even if their fundamentals are similar to companies that aren’t involved in CSR and have a lower valuation.
We also discovered that businesses are responding to that sentiment-driven investment by increasing their CSR activities, especially those looking for a quick stock market boost. This is particularly true for companies that are difficult to value, or that have more transient investors and a higher share turnover.
Of course, we have seen this phenomenon before. In the late 1990s, when companies added “dot-com” to their names, they saw their stock prices increase; more recently, when companies added “blockchain” to their corporate names, their values jumped.
That’s not to say that CSR is necessarily part of a gold-rush-type cycle as nineties dot-com companies were and as blockchain companies could be; investors, consumers and workers are increasingly concerned about everything from climate change to diversity in the workplace, and there’s no sign that’s about to change.
However, investors should understand that they’re paying a premium for that CSR activity, especially when investor sentiment for CSR is high, and if public sentiment shifts, their returns could be lower than similar companies that focus more tightly on generating profits.
There are risks on the corporate side, too: If struggling companies engage in CSR activities in order to give their stock prices a short-term boost, it can prove risky – especially if they’re sacrificing long-term fundamental value for a higher stock price now.
As a result, business leaders need to invest in CSR for the right reasons. Perhaps it provides a return on investment; for example, the right environmental initiative could prevent a problem that would prove costlier in the future, or it could help employers attract the highly skilled employees that will elevate their companies. Similarly, if customers put a premium on social responsibility, it can push the company toward success.
However they shouldn’t do it simply because it’s the current trend, or because they want to generate a market bump; as any seasoned investment expert will warn, sentiment can – and does – shift.
Similarly, when interest in CSR is high, investors should be aware of the premium they might be paying; it’s easy to get caught up in sentiment-driven investing, but in the long run it can be a losing proposition.
Studies have shown that we’re about to undergo the largest transfer of wealth in history, from aging male baby boomers to their wives, and ultimately to their millennial children – both groups that favour socially responsible companies, and are willing to take a financial hit to invest in them. No longer is a company’s value purely about cash flows or future profits; it’s also about what the business gives back.
But it’s important to remember that corporate social responsibility comes with a price tag; the question that both business and investors need to ask is whether, one way or another, it pays off in the long run.