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Hard to tell whether CSR has a positive effect on profitability or not

- New thesis presents CSR ranking tool to be used by rating agencies The meaning of CSR is very broad, and there is still no consensus on how it should be defined, according to research at the University of Gothenburg, Sweden.

Corporate Social Responsibility (CSR) is now a familiar concept and everyday fare for most companies and organisations, not least investment analysts. But the meaning of CSR is very broad, and there is still no consensus on how it should be defined, which is problematic when measuring CSR and the effects of CSR activities. This is particularly evident when it comes to CSR's impact on financial performance, as examined by researcher Cristiana Manescu from the University of Gothenburg's School of Business, Economics and Law in her thesis "Economic Implications of Corporate Social Responsibility and Responsible Investments".

The main aim of Manescu's research was to look at how companies' engagement with CSR impacts on financial performance, and to identify the mechanisms through which it does so. This research is part of the Sustainable Investment Research Platform, financed by MISTRA, the Swedish Foundation for Strategic Environmental Research. Manescu has analyzed sustainable investments from two perspectives: that of companies and that of financial markets. The results reveal that CSR activities do not generally have a negative effect on profitability, but that in the few cases where they have a positive effect, this effect is rather small. On the other hand, the study finds that financial markets react relatively strongly and negatively to negative news about companies' CSR efforts, but do not react to positive CSR performance news.

Manescu emphasizes the fact that, as CSR is a concept that spans many dimensions, in many cases being not even well defined, it is difficult to assess a company's CSR achievements fairly and comprehensively by a single representative number. This is partly because her research shows that different dimensions of CSR have different effects on profitability. To be able to construct a meaningful CSR performance index, Manescu's thesis puts forward the usefulness of a mathematical tool for evaluating a company's overall CSR achievements relative to other players in the same industry, for use by ranking agencies, for example. "When I began my research five years ago, sustainable investment was a relatively new concept in the financial world," she says. "The field has grown hugely since then and now plays an important role in rankings and various indices. This highlights the importance of discussing how we can best measure CSR and rank companies accordingly, so that we can then make valid assessments of their financial risk and performance."

Manescu has also looked at financial markets' reaction to CSR activities and the CSR return premium - the amount CSR adds to a company's stock return. Her study identifies and explores two main explanations for their reaction, which require further study, she believes.

"On the one hand, companies engaging with CSR might be viewed as high-risk players because they're either committing substantial resources to unnecessary CSR activities or because CSR is used as a distraction from unflattering corporate behaviour, and are, therefore, earning higher returns. On the other hand, good performance can be viewed as a surprise that can be attributed to the company's CSR engagement, previously not taken into account, a kind of mispricing. Mispricing is found as the more prevalent explanation, because the CSR premium has decreased in recent years, perhaps also because most companies are now communicating their CSR activities better." Manescu says that the results of her thesis will be useful mainly for large investors such as public pension funds and by market analysts such as rating agencies, but they may also be useful for investors more generally when it comes to understanding financial products and their risk for which CSR might be an important factor.

The thesis has been successfully defended.

For more information, please contact: Cristiana Manescu Tel.: + 46 - (0)768 05 11 27 E-mail: cristiana.manescu@economics.gu.se

idw :: 06.12.2010

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