By Joe Siblia
Some things are clear: Firms that are able to raise external funds enjoy a higher growth rate. They are able to invest in efficiencies and create competitive advantages. Capital constraints create vulnerabilities.
The results of the Harvard Business School 'Corporate Social Responsibility and Access to Finance' working paper suggest that superior corporate social responsibility (CSR) performance causes lower capital constraints, lower capital costs, greater access to capital and improved earnings. Lower capital constraints lead to an improvement in CSR performance, thus creating a vibrant cycle of mutual benefits.
In the abstract, the researchers “investigate whether superior performance on corporate social responsibility (CSR) strategies leads to better access to finance.” By using a large cross-section of firms, instrumental variables and a simultaneous equations approach, they conclude: “the relation is primarily driven by social and environmental performance, rather than corporate governance.” Corporate governance advocates might take issue with this conclusion; however, the focus of the paper is rooted exclusively in capital constraints.
Since Milton Friedman’s New York Times Magazine article in 1970, there have been over 300 studies, articles and reports suggesting the positive link between CSR, financial performance and value. Time has allowed us the luxury of analysis and comparisons. Many of these studies have concentrated on one aspect or another. This study conducted by Harvard concentrates its analysis on the link between CSR and capital costs. There are over 113 resources and studies identified, eight pages of tables and panels, four pages of appendixes and 23 footnotes. The authors took into consideration industries, countries, neoclassical economic assumptions, informational asymmetries, market frictions, currency adjustments, instrumental variables approach and simultaneous equation modeling. The arguments and analysis are compelling.
They disaggregate performance into components and find that social and environmental activities have the greatest influence. Governance considerations do not demonstrate as much influence. But, by looking at a ‘more fine-grained level’ and concentrating on capital constraints exclusively, they are able to present a formidable conclusion.
Many of us in the CSR community want to empirically support our intuitive impression that CSR works for the mutual benefit of business and the world around us. Studies that present the business case and are based on empirical analysis give us a sense of security when approaching our detractors. Until we move beyond the traditional approach to business as a means to maximize returns to shareholders, we must accept the need for the business case, reward research with our support and disseminate ideas to the widest possible audience.
In times of economic uncertainty, we continue to see a growth in available capital through SRI funds and impact investing. The corresponding expansion of potential financiers that base their investment decisions on ‘non financial’ data provide additional evidence that CSR makes business sense. The Enhanced Analytics Initiative (EAI) allocates a minimum of five percent of trading commissions to brokers that integrate analysis of CSR data into their mainstream research. How about a bonus for integrating information that will benefit your research? Imagine a financier investing in the insurance industry without an analysis of global climate change. Through this research, we’re beginning to see that CSR is slowly coming of age.
About Joe Sibilia
As a visionary of the socially responsible business movement, Joe Sibilia is the founder of Meadowbrook Lane Capital (MBLC), described by the Wall Street Journal as a “socially responsible investment bank” specializing in turning values into valuation.
He is also CEO of CSRwire, the social responsibility newswire service that distributes and archives corporate social responsibility/sustainability news to journalists, analysts, investors, activists, academics, public relations and investor relations professionals worldwide.
Joe also founded the Gasoline Alley Foundation, a 501(c) 3 corporation that has incubated 43 small businesses since 1985 and teaches inner city and/or underprivileged persons to be successful entrepreneurs using socially responsible/sustainable business practices while revitalizing inner city neighborhoods.
Through MLBC, Joe has worked with a number of socially responsible companies and has been widely recognized for his work in attempting to take Ben & Jerry’s Homemade Ice Cream private, while creating a private stock exchange for CSR companies. MBLC successfully preserved many of its founders’ social initiatives and advanced the connection between good corporate citizenship and increased share value.
His long-range plan for CSRwire is to establish a “platform for innovative revenue sharing applications advancing the ‘Sustainability Movement’ towards a more economically just and environmentally sustainable society and away from single bottom line capitalism.”
Joe and David Mager recently co-authored Street Smart Sustainability: The Entrepreneur's Guide to Profitably Greening Your Organization's DNA as part of the Social Venture Network Series published by Berrett-Koehler.
Readers: Does superior CSR performance lead to lower capital constraints? Share your experiences on Talkback!