Corporate social responsibility, or corporate sustainability, is often linked to superior financial performance. In this regard, investors may be able to use environmental, social and governance (ESG) analysis to identify well-managed companies capable of outperforming their peers. In fact, there is considerable research that supports this belief.
- The importance of governance is not misplaced
"Overall, there is strong consensus in the literature that corporate governance in legal initiatives following on from the fall of Enron and more recently the global financial crisis is not misplaced... research across a broad spectrum of governance practices suggests the importance of governance to the bottom line."
Anita Anand, “The Value of Governance,” The Program on Ethics in Law and Business, University of Toronto, February 1, 2013.
- The relationship between CSR and financial performance
In an empirical study of the relationship between corporate social responsibility (CSR) and financial performance and risk at U.S. banks between 1998-2010, the authors found that "there is a positive relationship between CSR and both operating performance and firm value…Overall, these results suggest that improving the quality of CSR at banks might go a long way towards improving individual bank performance and reducing the risk associated with U.S. financial institutions."
Brian Bolton, “Corporate Social Responsibility and Bank Performance,” June 2013.
- Climate change engagement and superior profitability
"We found that industry leadership on climate engagement is linked to higher performance on three key financial metrics that reflect overall corporate quality: return on equity; cash flow stability; and dividend growth. Specifically, we found that superior climate engagement, as measured by the difference between Q1 industry leaders and Q5 industry laggards on (Carbon Disclosure Project) CDP disclosure scores, portends a 'quality premium' equivalent to +5.2% return on equity; +18.1% cash flow stability and +1.6% dividend growth. Further, there is no observable valuation premium for Q1 industry leaders, presenting an attractive opportunity for investors: superior climate change engagement and superior profitability with negligible valuation premium."
Sustainable Insight Capital Management and Carbon Disclosure Project, “Linking Climate Engagement to Financial Performance: An Investor’s Perspective,” September 2013.
- CSR improves employee satisfaction
"I find that the adoption of CSR proposals leads to positive announcement returns and superior accounting performance. When I examine the channels through which companies benefit from CSR, I find that the adoption of CSR proposals is associated with an increase in labor productivity and sales growth. This evidence suggests that CSR improves employee satisfaction and helps companies cater to customers that are responsive to sustainable practices."
Caroline Flammer, “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach,” October 2013.
- Companies that actively engage in CSR reduce risk
"This study investigates whether corporate social responsibility (CSR) mitigates or contributes to stock price crash risk... If socially responsible firms commit to a high standard of transparency and engage in less bad news hoarding, they would have lower crash risk... We find that firms' CSR performance is negatively associated with future crash risk after controlling for other predictors of crash risk... The results are consistent with the notion that firms that actively engage in CSR also refrain from bad news hoarding behavior and thus [reduce] crash risk."
Yongtae Kim, Haidan Li and Siqi Li, “Corporate social responsibility and stock price crash risk,” February 2014.
- Employee-friendly companies have better financial performance
"Companies and individuals are increasingly concerned about employee-friendly work environments and work-life balance... Results of our analysis indicate that employee-friendly companies, compared to other companies, do indeed have better financial performance and lower risk levels. This is an important finding, as it affirms corporate efforts to offer employee-friendly work environments, including facilitating work-life balance for employees. Such efforts pay off, not only with worker satisfaction, as demonstrated in prior studies, but also as shown in this study, with improved company financial performance and risk level."
Janell L. Blazovich, Katherine Taken Smith and L. Murphy Smith, “Employee-Friendly Companies and Work-Life Balance: Is there an Impact on Financial Performance and Risk Level?” 2013.