Why is Corporate Social Responsibility (CSR) Important?

Do investors value an organization’s corporate responsibility efforts and does this impact a company’s financial performance?  The answer is, yes; there an increasing interest and growing expectation from consumers, as well as the investment community. According to a report published by BSR, a leader in corporate responsibility, entitled “ESG in the Mainstream: The Role for Companies and Investors in Environmental, Social, and Governance Integration”, engaging in the right type of corporate social responsibility (CSR) may add value and provide long-term financial benefits to an organization. The primary drivers, current perceptions, and actions regarding CSR are evolving rapidly and organizations should integrate ESG factors into their strategic planning efforts and communications with both internal and external constituents.

How does CSR add value?

The way organizations, investors, and individuals view CSR is changing rapidly. Investors believe that integrating ESG considerations into the strategy of an organization will yield strong financial returns. In addition, it is becoming more apparent that integrating ESG factors into an organizations strategic planning initiatives demonstrates strong management support who are in a better position to be able to identify emerging risks and plan for long-term future growth. Demands from clients have also increased, especially among pension funds and certain demographic groups. Integrating CSR with strategy creates a competitive advantage that can set an organization apart.

Core Drivers of the Interest in CSR

There are three core drivers supporting investor interest and the importance of integrating these activities into an organization’s business.

  • Increasing perceived value. While this has been a barrier historically, investors continue to feel that CSR activities support an organization’s ability to manage risks in order to adapt to new challenges.
  • Increasing Client Demand. There is an increase in the requests for ESG criteria to be incorporated into an investment analysis. Many feel this provides an opportunity for an organization to differentiate itself from the competition.
  • Increasing Significance of ESG Issues.  Investors continue to see how insufficient CSR efforts could have a negative impact on the success of its business.

Reasons for Integration with an Organization’s Strategy

Given the importance and drivers of CSR, an organization should focus on how to align CSR with its strategic objectives. It is essential that organizations give back to the community in ways that support operations and core demographics. For example, businesses targeting young adults may want to consider donating to environmental charities and investing in efforts to reduce their carbon footprint to meet expectations of its demographic support. By integrating CSR with strategy, this sets an organization apart from its peers, and may increase the support and loyalty from customers as well as other constituents. However, it is important to ensure these initiatives align with your organization’s vision and values.  

Create Awareness of Current CSR Activities

Once an organization has established that it will integrate CSR with its strategic objectives, it is beneficial to communicate this throughout the organization. Although some organizations are demonstrating a strong commitment to CSR; they are not proactively communicating their efforts to investors or its customers. Thus, the potential competitive advantage for engaging in CSR may not be realized.

Recommendations for Next Steps

BSR has developed several recommendations for organizations regarding CSR. The first is that investor relation teams and senior management need to become familiar with ESG factors to create a strategy for communicating the impact on performance with investors. The second is that organizations should begin compiling CSR data to support analysis by the investment community. The third recommendation is that organizations should manage CSR issues similar to other critical business operations demonstrating management’s ability to sustain long-term performance and growth.

Summary

In summary, CSR is becoming an important factor for investors and supports strong governance practices. Organizations may soon be judged not only on the short-term financial performance, but also by its long-term contributions to society.  Investors and consumers are both attracted to organizations addressing CSR as it is one indicator of strong performance, effective leadership and the ability to manage emerging risks.  Investors and other constituents perceive an organization’s CSR activities as positive and expect this to be an integral part of an organization’s strategy.  

Link: BSR "ESG in the Mainstream: The Role for Companies and Investors in Environmental, Social, and Governance Integration"

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ERM Enterprise Risk Management Initiative 2020-01-24