What is Corporate Social Responsibility?
One of the most prominent concepts in modern investing strategy is to invest in companies with strong Corporate Social Responsibility (CSR). When evaluating companies, investors aren’t only looking at financial performance or forward-looking prospects. They’re also looking at how the company engages with the world around it. Socially conscious investors seek out companies that contribute to the sustainability of society as a whole.
Corporate social responsibility is a philosophy that offers wide-ranging benefits to companies that take it seriously. Not only does it invite positive press coverage and public appreciation, it can also enable stronger profits and a sustainable business model. For these reasons, companies with strong CSR policies tend to attract and retain investors.
Here’s a closer look at corporate social responsibility: what it means, how companies pursue it and the benefits that come from an authentic approach to stewardship.
What Does it Mean to be Socially Responsible?
Social responsibility means different things for different companies, and depends on the operational scope of the business. At its core, it comes down to making altruistic choices that improve the world, while still benefiting the business and its shareholders. Activities within a CSR construct can include:
- Environmental examples such as reducing emissions or improving recycling efforts.
- Social initiatives might include supporting arts and culture or defending human rights.
- Governance responsibility includes efforts like ensuring diverse C-suite representation.
Social responsibility is proven by a company’s willingness to go above and beyond to create benefits beyond profits. From improving supply chain transparency and working conditions, to adopting sustainable production principles, to responsible governance and operational excellence, it all comes back to a willingness to do better.
The Benefits of Corporate Social Responsibility
Companies that exhibit strong CSR are usually seen as more credible in the eyes of consumers. For example, these are people who demand further transparency in how they do business. This can, in turn, lead to longer-term relationships with customers and entice new business. From an investment perspective, CSR can be a driving force behind a company’s profitability.
There’s also a certain equivalency behind CSR decisions. For instance, a company may pay more money to source materials from a sustainable supply chain, while customers are willing to pay a premium for that transparency. Likewise, a company that’s known for donating to positive social causes may find an increase in revenue from consumers who appreciate that stewardship. It creates a continuum of positive growth that more and more investors have begun to tap into.
CSR unlocks new opportunities for growth, evidenced by philosophies like the Triple Bottom Line. Beyond pushing for pure profit, companies become more competitive and successful when they look at the broader picture.
Why are Companies Adopting CSR Policies?
Years ago, CSR policies were public relations tools. In fact, it was a way to show action in the face of public outcry over unsavory business practices. For instance, the BP (NYSE: BP) Deepwater Horizon catastrophe, Nestle’s (OTCMKTS: NSRGY) child slavery claims and Nike’s (NYSE: NKE) links to forced labor conditions all generated negative PR that resulted in billions in lost revenue. Since coming to light, these companies have rectified the allegations and implemented CSR policies to show corrective action.
In a more proactive capacity, many companies implement CSR policies as a way to distinguish themselves as stewards. Perhaps the best example in the public markets is Starbucks (NASDAQ: SBUX), which was one of the first companies to begin publishing global environmental and social impact reports and disclosures. Many other companies have since followed suit after seeing the positive response from media, investors and customers.
Today, a company might adopt a CSR policy for any number of reasons, proactive or reactive. CSR initiatives show that a company is willing to seek improvements that benefit its workers, society and the environment.
The Links Between CSR vs. ESG
There’s a strong connection between Corporate Social Responsibility (CSR) and Environmental, Social and Governance (ESG) practices. While many businesses use the terms interchangeably, there are slight differences that distinguish them.
- CSR is more big-picture. An example of a CSR initiative would include Starbucks’ pledge to “reduce the environmental impact of its cups and engage its employees in environmental leadership.”
- ESG is more quantifiable. An example of an ESG plan would include Ikea’s mission to source “50% of its wood from sustainable foresters and 100% of its cotton from farms that meet the Better Cotton standards.”
Many companies are actually replacing their CSR policies with ESG doctrines, as a way to show their commitment to change. The specific, measurable policies in an ESG report hold companies accountable to stakeholders and the general public.
CSR and ESG as Driving Forces Behind Investment Decisions
In the modern investing marketplace, CSR and ESG aren’t just perks: they’re becoming requirements for successful companies. There are already entire ETFs and mutual fund portfolios devoted exclusively to companies with strong ESG scores. The rise of designations like B Corporations also affirm that corporate social responsibility is a critical measure of a company’s investment worthiness. It all goes to show that investors are paying attention to companies beyond their bottom line.
Many of the world’s largest public companies are making CSR and ESG central to their operational decision-making. As a result, investors are using these initiatives to benchmark success. The correlation between corporate social responsibility and long-term ROI is strong and growing stronger, rewarding everyone involved: companies, investors, society and the planet.