Does it pay to be socially responsible?

It is an understatement to say there has been a lot of research into corporate social responsibility (CSR); indeed, a single Google search returns over 64 million hits!

However, despite this large body of work, research continues into the fundamental question that as yet remains unanswered: Does greater corporate social responsibility lead to enhanced corporate financial performance?

When discussing CSR it is important to mention the moral duty of corporations. This is the idea that these corporations who operate, are successful and generate profits within the framework of society are obliged to behave in such a way that is for the wider societal good. It is accepted that this will impact on the choices and behaviour of corporations. However, for the purpose of addressing the question above, let’s start by adopting the following hypothesis: adopting CSR policies (such as reducing carbon emissions, ethically sourcing materials, improving corporate governance amongst others) must enhance financial performance… because if they didn’t, corporations wouldn’t pursue them.

Assuming this is the case, how exactly does CSR impact on finances? It could possibly be through influencing consumer behaviour. Research would suggest that although consumers are dubious about CSR claims made by corporations, they are willing to punish what they see as Corporate Social Irresponsibility (CSI) – think of the reaction to Starbucks UK tax payments! Additionally, environmental policies, such as those to reduce carbon emissions, could result in cost savings to corporations through reduced energy bills.

Legislative devices should also be considered as these also have a significant part to play in the profitability of CSR. For example, and sticking with carbon emissions, the climate change levy (a tax on specified energy use) rewards certain corporations who can lower their energy use. Additionally, the PRN system in the UK incentivises a reduction in packaging. So, for obligated organisations, a reduction in their packaging will result in a cost saving.

These are a just a few of the many ways, both market and policy driven, that CSR impacts the bottom line. However, if we are to understand the true relationship between CSR and financial performance, what other related issues (such as labour relations, community engagement, sustainable sourcing, avoiding litigation and brand reputation) do we need to consider to answer that fundamental question: does greater corporate social responsibility lead to enhanced corporate financial performance?