Responsible Investor

I have strong empirical evidence that no significant difference in accounting measures of performance (i.e. return on assets/equity) exist between the best and worst performing CSR firms. I believe this is not unexpected. This is because the worst CSR firms should be able to cut costs and profit because they may choose to bully their suppliers, take unfair advantage of their work force, employ sweatshops and exploit third world countries, all whilst having little or no regard for environmental, social and governance related issues. This is especially so if these firms are poorly regulated and/or able to balance the economic costs of being a lagging CSR firm against the short-term economic costs of being socially irresponsible. On the other hand, leading CSR firms are equally likely to be rewarded for their commitment to social, environmental, and economic factors because they can better manage their reputation and brand, attract and retain the best managers and employees, and engage more effectively with stakeholders whilst improving the nexus of contracts through greater communication and trust. However, a rational and efficient capital market would not systematically allow or reward one activity over the other.

The simplest argument as to why poor CSR firms cannot continue to exhibit weaker accounting performances relative to their industry peers over time is because these poorly performing firms would very quickly be taken over, become insolvent, or become a top performing CSR firm if it was clearly more ‘profitable’ to do so. As a result, I believe that studies employing accounting data and investigating the historical link between CSR and accounting returns should not find a systematic relationship.
Why and how should the value of CSR be reflected in a firm’s share price and future returns profile if there is little ‘historical’ difference in internal revenue generating abilities? The answer is simple, although often overlooked. If we recognise that an investors ‘expected’ return is also a function of the risk associated with an investment, then lower risk equates to lower expected return, much in the same way that we require lower yields/returns for quality versus ‘junk’ corporate bonds. I, like others, find very strong empirical evidence that the best CSR firms have significantly lower levels of business risk, with firms exhibiting a poor CSR profile being as much as 49% more risky.

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