New research has found that firms that invest in corporate social responsibility (CSR) initiatives see less risk in their stock prices during economic downturns, benefitting the company, shareholders and the world.
The study was conducted by Art Durnev, assistant professor of finance at Tippie College of Business, along with Rui Albuquerque and Yrjo Koskinen of Boston University. Companies that have a strong CSR presence were generally found to have greater brand loyalty, resulting in customers paying a premium for products regardless of the overall economy.
Durnev said, “CSR’s increased popularity inside boardroom has outpaced the research needed to justify it. Many questions still remain on how CSR policies affect the risks firms are facing and the stock market implications of those policies.”
To address this problem, Durnev and his co-authors analysed the stock prices of 3,005 firms from 34 countries between 2004 and 2010. The stock prices were taken from a database that factored in the social and environmental risk factors of each company including health and safety, climate risk and progressive workplace practices.
The researchers found that the level of risk was significantly lower for firms with high CSR scores. This association is particularly evident during economic downturns when loyal customers kept sales high when compared to firms that did not practice CSR initiatives.
Separate research suggested that whilst CEOs saw the benefits of addressing sustainability challenges, they often fail to make it a priority for a variety of reasons, including shrinking financial resources and customer ambivalence. In contrast to the CEOs’ belief, the study indicates CSR could have a huge positive impact on business.
The research also found that timing was important. The first firm to start using CSR practices in an industry gets a larger market share, leaving less for competitors. Durnev explained, “The second entrant into the market doesn’t get as many customers as the industry leader so there’s less benefit, and so on.”