Firms that double down on their investments in corporate social responsibility (CSR) initiatives see less risk in their stock prices during economic downturns, but they shouldn't wait too long to place their bets, finds a new study from the University of Iowa.
CSR has become an increasingly important part of doing business in recent years, as more customers are looking to buy from companies with practices that match their own values, especially when it comes to environmental issues. While research and anecdotal evidence have suggested that CSR initiatives have helped companies like Patagonia and Ben & Jerry’s increase their brand loyalty, Art Durney, an assistant professor of finance at the University of Iowa's Tippie College of Business, says little research has been done to see how that loyalty affects firms’ stock prices.
Conventional wisdom suggests that companies with CSR initiatives have greater brand loyalty, so customers keep buying these companies’ products and paying a premium for them, regardless of the overall state of the economy. That stability, in turn, reduces those firms’ costs of equity capital, further reducing their overall risk.
“CSR’s increased popularity inside boardrooms has outpaced the research needed to justify it,” Durney said. “Many questions still remain on how CSR policies affect the risks firms are facing and the stock-market implications of those policies.”
Durney's research also found a significant first mover's advantage resulting from CSR initiatives. However, timing is important, as the first firm to start using CSR practices in an industry gets a larger market share, leaving less for its competitors that adopt CSR initiatives later on.
"The second entrant into the market doesn’t get as many customers as the industry leader, so there’s less benefit, and so on,” Durney said. Eventually, latecomers have no incentive to start using CSR practices because their competitors have taken up so much of the market that there’s nothing left for them. The risk of adopting CSR practices, Durney said, is no longer worth the investment.
The research looked at the stock prices of 3,005 firms from 34 countries between 2004 and 2010. The prices were from a database that factored in the social and environmental risk factors of each company, including labor relations, health and safety, recruitment and retention strategies, progressive workplace practices, and environmental and climate risk.
The researchers found the level of risk was significantly lower for firms with higher CSR scores, especially during economic downturns, as loyal customers kept sales higher during hard times than firms that did not practice CSR initiatives. That revenue and stock-price stability led to lower equity costs, further reducing risk and making the stock even more attractive to buyers.