Want a higher share price? Better get real on CSR

15 September 2014 -

Firms that have well-managed policies on corporate social responsibility will see favourable results in value and performance, according to joint research

Jermaine Haughton

Bosses who have successfully hardwired their businesses with strong environmental and social policies can expect increased share values, according to From the Stockholder to the Stakeholder: a new piece of joint research by Arabesque Asset Management and the Smith School of Business and the Environment. Their meta-study of more than 190 academic probes on the impact of environmental, social and governance (ESG) policies and corporate social responsibility (CSR) found that 80% of them drew a “positive correlation” between sustainability and stock market performance.

Furthermore, the research found that companies with high sustainability scores were less risky for investors, and tend to function more effectively. For example, 90% of the studies examined in the report indicated that sound sustainability standards lower the cost of capital. Meanwhile, 88% suggested that solid ESG practices result in better operational performance.

“Stocks of well-governed firms perform better than stocks of poorly governed firms,” said Smith School and Arabesque, adding: “Firms that violate environmental regulations experience a significant drop in share price. On the social dimension, the literature shows that good employee relations and employee satisfaction contribute to better stock market performance.”

The report encourages investors to spur business leaders’ adoption of CSR by becoming more involved in shaping and monitoring company policies in the firms where they have put their money – a process known as “active ownership”. In particular, it notes:

1. Sustainability is one of the most significant trends in financial markets for decades.

2. Active ownership allows investors to influence corporate behaviour and benefit from improvements in sustainable business practices.

3. The future of sustainable investing is likely to be active ownership by multiple stakeholder groups including investors and consumers.

Arabesque CEO Omar Selim argued that it is best economic interest of corporate managers and investors to incorporate sustainability considerations into everyday decision-making processes. “This report ultimately demonstrates that responsibility and profitability are not incompatible, but in fact wholly complementary,” he said. “When investors and asset owners replace the question ‘how much return?’ with ‘how much sustainable return?’, then they have evolved from stockholder to stakeholder.”

On the way to integrating sustainability policies, the report stressed, bosses must first identify the specific issues that are material to them – which can differ depending on the industries they are operating within. Environmentally, for example, a company’s main concern may be energy use or water management – while socially, it could be diversity issues or health and safety. Other areas of governance that may need to be formalised include transparency and ownership structure.

But no matter which issues have been identified, the report points out, a successful incorporation of ESG/CSR policies in all relevant areas will lead to a competitive advantage in the areas of risk (particularly company-specific risks and external costs), performance (in the fields of process and product innovation) and reputation (such as consumer relations and investment in human capital).

Arabesque head of values-based research Andreas Feiner said: “Based on the growing trend that we are seeing of sustainability entering the corporate mainstream, we believe that the most successful future investors will be those with continuous research programmes that analyse a range of ESG factors. Sustainability and profitability can go hand in hand.”

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