While it may not help financial performance directly, corporate social responsibility can grease the wheels when it comes time to tap the markets.
Don’t print that email! Return that crazy shareholder’s call! Send your staff home before midnight on Christmas Eve! It turns out that companies with effective corporate social responsibility (CSR) programs enjoy easier access to funding. At least that’s the conclusion of a Harvard Business School study co-authored by Beiting Cheng and George Serafeim of Harvard Business School and Ioannis Ioannou of London Business School.
The study, Corporate Social Responsibility and Access to Finance, gives several reasons why companies with CSR programs have better access to financing. First and most obvious is the amount of money invested in “socially responsible investing (SRI) vehicles that target CSR-oriented companies.
“In 2007 mutual funds that invested in socially responsible firms had assets under management of more than $2.5 and $2tn dollars in the United States and Europe respectively. In Canada, Japan and Australia, the corresponding numbers were $500, $100 and $64bn respectively,” the authors write.
Another reason for the lower capital cost, the authors argue, is the lower agency costs incurred by firms with high CSR performance. This is due to better stakeholder engagement, which builds mutual trust and cooperation. This, the authors say:
“Increases transparency around the social and environmental impact of companies, and their governance structure and may change internal management practices by creating incentives for companies to better manage their relationships with key stakeholders such as employees, investors, customers, suppliers, regulators, and civil society.”
This increased amount of data about the company reduces information asymmetries, making investors more willing to believe a company’s story, thereby lowering capital costs. Companies with strong CSR programs are likely to trumpet them and their results, increasing transparency around their social and environmental impacts. This factor is the biggest contributor to companies’ lower costs of financing, according to the research.