The traditional capitalist model of measuring the success of a company only according to the increase in its share price is changing.
Green is good: When it comes to CSR investment, the most rewarded issue is climate change, Macquarie Business School analysis has found.
Realising there is a financial benefit to ethical investment – also known as corporate social responsibility (CSR) investment – companies are increasingly putting their money where their reputation is.
“Reputation matters and consumers want to be associated with principled firms,” says Dr Mostafa Hasan, an Associate Professor in the Department of Accounting and Corporate Governance at Macquarie Business School. “And crucially, CSR spending actually makes money for shareholders.
“Investors may not care so much about how a company behaves, but society certainly does. Our research indicates that companies which spend money on being socially responsible improve their bottom lines. CSR spending can even reduce financial distress.
“CSR is current expenditure for future benefit. It is about how much benefit a company can derive from its investment in societal good.”
CSR is a many-virtued thing
CSR can take different forms and has many dimensions. Hasan’s analysis has found, unsurprisingly, the most rewarded issue is climate change.
Human capital: Ethical treatment of employees is another valuable aspect of corporate responsibility, says Associate Professor Hasan.
“Companies that display a responsible attitude to addressing climate change are viewed more favourably by more members of society,” says Hasan.
“In most cases, CSR spending on the environment and the ethical treatment of employees are the most valuable. Other high-ranking aspects of corporate responsibility include ethical board governance, ethical sourcing of products, human rights and diversity.”
Further research by Hasan indicates a need to maintain ongoing investments in value-creating CSR activities. He also sees a parallel that might provide a lesson for politicians.
More and more companies are shifting from the shareholder perspective to the stakeholder perspective.
“There is a multiplier effect to ethical spending. Companies that engender a positive sentiment generate more profitability,” he says. “This in turn motivates companies to make greater investments in CSR.
“The same goes for politicians, by the way. If you believe a politician is principled, you will have a positive sentiment about them. You are likely to believe they will provide a greater benefit in the future and cast your vote accordingly.”
Shareholders or stakeholders?
Hasan says companies choose between two prevailing imperatives, each of which considers CSR in different ways. One is purely ‘shareholder-centric’, while the other takes a broader ‘all stakeholders’ perspective. Stakeholders, in this case, can include shareholders as well as customers, employees, suppliers and the community at large.
“In the traditional view of capitalism, managers simply use shareholders’ money to generate profits without placing undue emphasis on CSR," Hasan says.
“The alternative view is that if you invest in CSR, more stakeholders will be satisfied. They will therefore buy more of the company’s products and invest more in the company. Hence, the company will improve its performance over time.
“When you take the stakeholder perspective, you are reaching out to a far greater part of society. More and more companies are shifting from the shareholder perspective to the stakeholder perspective.”
Who decides which companies are pursuing CSR objectives?
Hasan says the information required to assess CSR spending - aka environmental, social and governance (ESG) spending - is far more readily available (and collected and analysed) in other parts of the world, especially the US and Europe, than it is in Australia.
Data gap: Associate Professor Mostafa Hasan (pictured) says a lack of organised databases on Australian firms makes CSR research more difficult in this country.
“Typically, CSR data is gathered by external organisations, which collect it from companies’ balance sheets, financial statements and annual reports. Based on this information, these organisations provide a CSR score – or rating – for the company. In the US and Europe especially, this is considered important information.
“CSR Ratings firms provide a valuable service. The lack of organised databases on Australian firms makes CSR research in this country more difficult. There is probably a gap in the market in Australia.”
US-based ratings firms MSCI and CSRHub provide comprehensive CSR data and rankings across the categories of community, employees, environment and governance. Users can select or weight their most important categories and derive a rating.
CSRHub provides limited information for Australian firms. As an example, an ‘average user’ profile for companies in NSW, Australia will find property group Stockland rated 65, Westpac Banking Corporation rated 57 and Southern Cross Media Group rated 46, to pick three at random.
Dr Mostafa Hasan is an Associate Professor, Department of Accounting and Corporate Governance at Macquarie Business School
