CSR doesn't affect stock price. Or does it?
By Elaine Cohen
Does CSR affect the value of a company and its stock price? New research shows it does not. Some might say that's bad news. Others say it's good news. It all depends on whom you ask.
The Catch 22 of Corporate Social Responsibility is that everyone knows it adds business value over the long term, but no one can prove it. Everyone wants CSR to deliver an unequivocal financial return but no one can measure it conclusively. This is complicated by the fact CSR started out being all about non-financial performance and now everyone is looking for cash proof it works. In fact so much effort is expended today proving CSR delivers money to investors that one wonders if, ultimately, we will turn full circle and CSR will become lost in financial statements and fizzle out without ever having transformed business in any way at all.
The expectation of ethical stocks, of course, is that they will deliver a positive return for investors. But does "positive" mean better than stocks which are not typically included in Social Indexes, or simply no worse? And, can this be effectively measured? It all depends on whom you ask.
One of the issues with measuring the return CSR delivers is that there are so many variables which affect stock price that isolating specific CSR effects is almost a non-starter. A recent post by the Elm Consulting Group refers to "the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices," explaining "environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the ‘current quarter’ myopia of corporate management, financial markets and analysts." In other words, some say force-fitting CSR into a financial evaluation of companies just doesn’t work. Results may be available but causality remains evasive.
On the other hand, there are those who claim categorically CSR delivers attractive cash benefits relatively to conventional (or non-CSR companies). Meir Statman of Santa Clara University and Denys Glushkov of Barclays Global Investors came to this conclusion in their paper published in 2008, "We analyze returns during 1992-2007 of stocks rated on social responsibility by KLD and find that this tilt gave socially responsible portfolios a return advantage relative to conventional portfolios." Simply stated, CSR stocks deliver higher financial value than "conventional" stocks. Obviously, these are the right people to ask if you are looking to make money from CSR.
In a working paper published by Harvard Business School, Ioannis Ioannou and George Serafeim presented the conclusion "for a strong CSR firm, coverage by higher ability analysts leads to even greater value creation in the capital markets, relative to the same firm being covered by less able analysts, since higher ability analysts are more accurate forecasters of long-run firm." Again, asking different analysts will deliver a different perspective on whether CSR is delivering value. You simply have to know whom to ask.
If you ask Zvi Amrusi, an MBA student at Ben-Gurion University in Israel, a statistician at heart, he will give you a definitive response. CSR has no effect on stock prices.* In his research presented at a Business Accounting Conference in Athens in July 2011, Amrusi studied 39 companies traded on the Dow Jones Sustainability Index. By comparing 39 DSJI randomly-selected companies who have traded consistently on the DJSI between 2004 and 2009, and twinning them with non-DSJI companies, based on a statistically-proven compatibility profile (same sectors, similar size, etc.), Zvi Amrusi makes a substantiated claim there is no statistical difference in the stock performance of the DJSI group and non-DSJI group. Similarly, the research shows there are no significant financial indicators (net profit, ROA, ROE, etc.) that can be discerned as predictors of stock performance in ethical companies.
In addition, Amrusi examined eight companies traded on the local Israel social responsibility index called the Maala Index, composed of publicly traded companies who have submitted a self-declared assessment of their own CSR performance using a standardized questionnaire. Amrusi's research analyzed the stock performance of these eight companies five years prior to entering the Maala index and five years post-entry. Again, no statistically significant long-term effect on stock price can be attributed to the fact that these companies started trading under a socially responsible banner.
Many might see this as bad news. Socially responsible firms should outperform their non-responsible counterparts and this should be reflected in the stock price. On the other hand, socially responsible investment is often a negative screen, replacing companies not considered ethical poster children with more palatable alternatives, in order to invest while doing no harm rather than make a maximum financial return.
In this case, Zvi Amrusi's research is good news, as investors can still channel their cash into ethical companies and make the same return as if they had invested in non-ethical companies. In fact, this research was guided by Professor Rami Yosef, Head of Finance and Insurance at Ben Gurion University, who admits this was not the typical type of research his students of finance engage in. "Socially responsible companies make a form of contribution to society. I felt this research would be important both in an academic sense but also because such research itself contributes to furthering awareness of the social responsibility of business. Our hope was to prove that CSR has no negative effect on stock performance of companies and I am glad that we were able to do this."
In the end, you may or may not agree with Zvi Amrusi, who says, "I believe this is just a matter of time. Investors will eventually understand the real issues and the results will turn out fine. You have to look at the half-full glass."
Which just goes to prove, with CSR as with almost anything else, it depends on whom you ask.
About Elaine Cohen
Elaine Cohen is a Sustainability Consultant and Reporter at Beyond Business and blogger on sustainability reporting and author of CSR for HR: A necessary business partnership to advance responsible business practices.
*Editor's Note: At the time of publication, the Ben-Gurion University of the Negev website was experiencing server issues. The link to the study may be found here.
This commentary is written by a valued member of the CSRwire contributing writers' community and expresses this author's views alone.
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