Investors are unintentionally affected by a company’s corporate social responsibility (CSR) profile when assessing its fundamental value, a new study has shown.
Accounting professors from the University of Illinois and the University of Texas conducted the research. They found that investors who focused almost exclusively on financials estimated a company’s fundamental value to be around 25% higher when a firm had a strong CSR record. This is compared to investors who divide their thinking between financials and CSR, according to Accounting Today.
The researchers said this showed CSR performance has a “significant influence” on investors, even when they have a low awareness of the issues and its impact.
Research participants were split into two focus groups, with one being asked to consider a company’s CSR statement. The other group was directed to the financials but were still aware of the CSR record.
If the CSR profile was positive, the group that had been told to focus on financials would be impacted by the firm’s sustainability performance more than those that had also considered the CSR profile.
On average, the former group estimated the shares of a company with a positive sustainability performance to be worth $20.82 (£12.67). This compares to the average estimates of $25.92 (£15.77) from the latter group. When asked participants that had been told to focus on financials said that they were relatively unaware of the CSR profile despite it clearly having an influence on their estimates.
Mark Peecher from the University of Illinois at Urbana-Champaign and co-author of the report, said, “Market participants who ponder a company’s CSR record as well as its financial performance turn out to make less extreme estimates of the company’s fundamental value than those who only assess financial results.
“While our findings do not determine which group’s estimate is right or wrong, they do indicate that the latter group is less aware of the CSR’s impact on their thinking, even though the impact is greater, a combination that does not inspire a lot of confidence in their evaluations.”
Separate research released earlier this month found that firms that invest in CSR initiatives see less risk in their stock prices, benefitting both the company and shareholders. Sustainable companies were found to have greater brand loyalty, resulting in more stability even during period of economic downturn.