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CSR & the Capital Markets

Discussions about the relevance and influence of corporate social responsibility usually don't take into account the significance of corporate conduct on capital market decisions, perhaps because it is thought this is the arcane domain of financial analysts and academics.

However, if those of us who believe responsible conduct is an imperative and not just an afterthought to a business strategy, then we should get better at finding and defending the evidence that the capital markets will react to social and environmental behaviour if only to manage risk.

Fortunately, we've been given an advantage with two academic papers appearing over the past couple of months which look at the repercussions of CSR on cost of capital and investment strategies. (Thanks Tara, a colleague, for sending them my way!)

Having not read the full studies yet, I can't tell you whether the findings are  definitive. But the abstracts offered here suggest they may provide some materiel for engagement with the Freidmanites.

The first Does Corporate Social Responsibility Affect the Cost of Capital? jointly authored by four academics, three of whom are based at Canadian universities:

We examine the effect of corporate social responsibility (CSR) on the cost of equity capital for a large sample of U.S. firms. Using several approaches to estimate firms’ ex ante cost of equity, we find that firms with better CSR scores exhibit cheaper equity financing. In particular, our findings suggest that investment in improving responsible employee relations, environmental policies, and product strategies contributes substantially to reducing firms’ cost of equity. Our results also show that participation in two “sin” industries, namely, tobacco and nuclear power, increases firms’ cost of equity. These findings support arguments in the literature that firms with socially responsible practices have higher valuation and lower risk.

The second is a working paper called The Impact of Corporate Social Responsibility on Investment Recommendations by Ioannis Ioannou of London Business School and George Serafeim of Harvard Business School.

Using a large sample of publicly traded US firms over 16 years, we investigate the impact of corporate socially responsible (CSR) strategies on security analysts’ recommendations. Socially responsible firms receive more favorable recommendations in recent years relative to earlier ones, documenting a changing perception of the value of such strategies by the analysts. Moreover, we find that firms with higher visibility receive more favorable recommendations for their CSR strategies and that analysts with more experience, broader CSR awareness or those with more resources at their disposal, are more likely to perceive the value of CSR strategies more favorably. Our results document how CSR strategies can affect value creation in public equity markets through analyst recommendations.

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