IR Papers: Social/environmental disclosure: why bother?

Sep 20, 2010
<p>Research challenges the financial benefits of corporate social responsibility</p>

Whether corporations have a social responsibility beyond increasing profits is outside the realm of adult discourse. Whether they can make a buck doing it remains debatable. A new study published in the Journal of Economics and International Finance casts doubt on that challenge. Sampling the CSR reports of 154 European firms between 2000 and 2008, researchers at the universities of Cambridge and Bordeaux found a significant negative association between CSR and financial return.

‘If a firm publishes a CSR report for any given year, the firm’s quoted average monthly growth rate will decrease by 0.4 percent to 0.5 percent, even when all other variables remain the same,’ the study reports. ‘Yearly, that’s a cut of between 4.5 percent and 6 percent.

On the other hand, in Asia’s emerging markets the relationship between social/environmental reporting and value seems more affirmative. Based on three years of CSR scores compiled by Credit Lyonnais Securities (Asia), a group of regional researchers found a strong positive association between CSR and market valuation with incremental improvements handsomely rewarded.

The complex relationship between CSR scores and stock price was further investigated by a French team that analyzed the short-term stock return impact of French CSR ratings agency Vigeo’s corporate social rating announcements on more than 700 firms from 2004 to 2009. Its data reveal only specific CSR features play a significant role on returns, while some even have a negative effect.

The Université Paris-Est researchers conclude that while investors applaud corporate governance to improve reputation, they seem to penalize practices that could generate some cost without enough benefit (responsible contractual agreements, development of green products and services). Business behavior or community involvement has no effect on share price.

Canadian research also finds a weak link between voluntary environmental disclosure and the cost of equity capital or firm value. Instead, institutional investors appear to use actual toxic emission data (such as that provided by the EPA) to independently assess corporate social/environmental performance.

Sampling big US polluters, the research team concludes: ‘Firms use voluntary environmental disclosure mainly to manage the public perception about their environmental performance.’

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