Responsible Investor

SRI and performance: Don’t throw the baby out with the bath water

Analysts, investors and financial markets are developing a dangerous obsession in expecting corporations demonstrating best practice in corporate and social responsibility to provide better returns.

In the US approximately 10% or US$2.29trillion (€1.7trillion) of all assets are now managed with specific regard to corporate social responsibility (CSR) principles. Europe boasts more than €1trillion in similarly managed assets. The importance of incorporating CSR issues into stock and company valuation is gaining momentum. In a recent survey by Mercer Investment Consulting, 89% of the 195 investment managers surveyed predicted CSR would form a part of their mainstream investment criteria within 10 years. Clearly, corporations, governments, accounting firms and capital providers are making significant investments in the area. It is not surprising that many seek to better understand the association expected between CSR performance and corporate financial performance (CFP).
A review of the research suggests the evidence remains mixed; different studies find a positive, neutral or negative linkage between the two. The success of the CSR movement going forward will largely depend on our understanding of this relationship.
I believe there is a harmful obsession by researchers, investors and financial markets in general, in expecting corporations who exhibit best practice with regard to CSR to provide better returns.

These better returns are expected with regard to the growth in a firm’s share price. As we know, share prices increase as a result of two main factors. The first is its internal revenue generating abilities. The second is a reduction in the yield (i.e. return) that people require given the risk profile of the company in question. With regard to the first, we expect the best CSR firms to provide comparatively higher market returns due to increases in productivity and other virtues bestowed upon them. Consequently, if we observe our best CSR firms providing a lower market ‘return’ relative to poorer performing CSR firms, we are tempted to argue that investing in CSR destroys shareholder value. A 2006 study by Brammer et al. found evidence of a negative relation and said investment in CSR was: “largely destructive of shareholder value”. I believe some researchers remain confused as to what the relationship should be. Often their results do not indicate a destruction of shareholder value, but rather, demonstrate a price premium (i.e. returns discount) afforded to firms with the best CSR performances. This negative association occurs not because firms perform badly, but rather, reflects the way in which the research has been undertaken.

Not a member? Register here »