1. Skeptical or ambivalent studies of SR

Skepticism about SR generally starts with the 1970 position of Milton Friedman:

"…there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Friedman’s argument is valid in the perfect world of economic theory but his “so long as” qualifier admits we aren’t there. Empirical studies are a way to determine whether and in which direction imperfections reward or penalize businesses with a proactive stance on social responsibility—and other SR elements.

A backup argument is that empirical evidence showing SR companies are more profitable is not only spotty but confuses cause and effect. SR may be a form of conspicuous consumption that only those making exceptional, and implicitly unsustainable, profits can afford. This was a fair criticism of most of the early empirical work, say before 2003, but much of the more recent work addresses these concerns—at a price. More sophisticated statistical techniques have to be employed to sort out cause and effect, which makes the evidence harder for nonexperts to interpret.

Some researchers are not so much skeptical about the case for SR as ambivalent because it doesn’t discriminate among alternatives. In effect, business managers are left where they began: either choose the SR that places the least demand on BI systems or approach it as an investment, like R&D.

Does Corporate Social Responsibility Enhance Business Profitability? (2005; Arthur Laffer)

“This analysis [by Laffer associates] does not support the claim that CSR is positively correlated with business profitability. Future efforts to evaluate the effect of CSR initiatives on profitability should be careful to tease out the specific financial impact of CSR initiatives, rather than relying on crude analyses that, at best, may only really show that profitability leads to CSR.”

Inside the Mind of Stakeholders – Are they Driving Corporate Sustainability? (2006, Salzmann, et al)

We found few players (out of the nine groups surveyed) that exert meaningful pressure on companies, apart from NGOs, which are increasingly frustrated about (1) companies’ newly learned abilities for handling – not resolving – their stakeholders and issues more systematically, and (2) other stakeholders’ widespread ignorance about corporate sustainability. This is precisely why the current largely incremental approach to corporate sustainability – characterized by stakeholder dialogues, minor modifications of processes and products, lots of window-dressing and few changes in strategies and culture – is, from a stakeholder management and profit maximizing point of view, absolutely rational.

Stocks of Admired Companies and Despised Ones (2008, Anginer, et al)

“Do stocks of admired companies yield admirable returns? We study Fortune magazine’s annual list of “America’s Most Admired Companies” and find that stocks of admired companies had lower returns, on average, than stocks of despised companies during the 23 years from April 1983 through March 2006. We link differences between the returns of stocks of admired and despised companies to differences in affect, the quick feeling that distinguishes good from bad, admired from despised. The affect of admired companies is positive, and investors who were attracted by affect to stocks of admired companies paid for it with lower returns. However, the relative returns of stocks of admired and despised companies varied considerably from year to year and from decade to decade and the relationship between admiration and returns is not always monotonic.”

Investing in Socially Responsible Mutual Funds, (2005, Geczy, Stambaugh, Levin)

“We find that the costs of the SRI constraint can be as little as 1 or 2 basis points per month in certainty equivalent terms, but only when investors adhere rather strongly to a belief in the CAPM [Capital

Asset Pricing Model] and maintain complete disbelief in manager skill, or when their minimum allocation to SRI funds is small. When the investor’s beliefs shift toward multifactor models like the Fama-French (1993) three-factor model or the Carhart (1997) four-factor extension, or when the investor admits the possibility that fund managers have skill, then the costs associated with socially responsible investing can be economically significant. The cost of the SRI constraint is especially high for investors who insist upon allocating their entire mutual fund investments to socially responsible funds but it is also quite substantial for the average SRI investor who (according to Silby, 2002) allocates only a third to that subset of funds.”

Social Responsible Indexes: Composition and Performance (2005, Statman)

“We find that the returns of the DS 400 Index were higher than those of the S&P 500 Index during the overall May 1990 – April 2004 but not in every sub-period. In general, SRI indexes did better than the S&P 500 Index during the boom of the late 1990s but lagged it during the bust of the early 2000s.”

Relevance of Corporate Social Responsibility Criteria to Explaining Firm Profitability (2007, Manescu and Starica)

“Let us move to the less good news (that leave however room for improvement in many ways). The first is that most of the CSR scores considered in the analysis do not seem to contribute to explaining profitability. The ’big absent’ is the environment dimension.”

1. Costs of SR

Part (a) presents the few studies of the direct costs of SR. None assesses its full cost, including mandatory reports to government agencies. Not surprisingly, then, no one has suggested minimizing direct cost by making the most of what has been reported to governments—until OconEco. Clients receive detailed plans for mining their reports to governments and others for relevant data plus OconEco’s benchmarks for their industry. The next step, distilling such data into SR elements, is complicated but OconEco has devised data processing routines that can take over, on a strictly confidential basis and at a modest cost relative to the direct costs of SR. Data are then fed into OconEco’s wealth model, if they pass a default run of the materiality filter (based on the client’s initial “corpus” processed in SR^Prep).

The indirect cost of SR arises from the shotgun approach of conventional models, which hits immaterial as often as material points when applied to any one company. Palliatives like reducing the scope of the generic model or blending qualitative and quantitative evidence create their own problems: generic models relegate key materiality concerns to industry-specific modules; blending qualitative and quantitative data is more art than science (but less so with SR^Prep)

OconEco views these as information systems inefficiencies consuming the most costly factor of production in most corporations: management time. The materiality filter between OconEco’s wealth model and SD&A both minimizes the time management has to spend on SR and uses the available time to promote consensus within the company about what is material rather than any outside prescription.

Given the paucity of information about direct costs, it should come as no surprise that only symptoms of indirect costs can be found. OconEco offers clients a special report, excerpted in Part (b), which documents two major symptoms: a low penetration rate in the primary market (large companies from advanced countries) and a high drop-out rate after a few years of reporting.

1. Direct cost of SR

Benchmarking Survey on EHS Annual Reports (2001; GEMI)

This survey of 34 US companies found EHS (Environment, Health, and Safety) reports cost an average of $115,000 ($86,000 for preparation plus $29,000 for distribution) plus about a year of staff time. All had website reports and most also had printed versions (26,000 copies on average). Most hardcopy versions used recycled paper and soy ink.

On average, 14 different metrics were covered. Most (78%) of the report was about EHS but 17% dealt with other social, 9% economic, and 10% other matters. All those surveyed said they believe the company obtains sufficient benefits compared to the resources it takes to publish the report. Barely a quarter of those surveyed make any attempt to integrate their financial and EHS reports but many are beginning to address the issue of sustainable development.

The Costs of Preparing a Sustainability Report (2001; GRI but NO LONGER AT WEBSITE)

“With relatively limited data it is difficult to draw conclusions about the cost of preparing a sustainability report. Most of the data cover only certain aspects of sustainability. With the exception of one company surveyed, costs did not exceed $1 million. Based on the information reported here, the average for a sustainability report could be estimated at <$500,000. Because the studies covered differing aspects of reporting and not all information is available to categorise reporters, conclusions regarding a cost scale for varying sized companies cannot be provided. The GRI, GEMI [See above] and DEFRA studies primarily involve multinational companies and the others do not specify if SMEs are included in the survey groups. For outreach and other purposes GRI should undertake a sustainability reporting costs study. It should be designed to generate the types of data required to answer cost-related questions from companies of all sizes and locations.

Towards transparency: progress on global sustainability reporting (2004; CorporateRegister, ACCA)

As covered elsewhere in this publication, pressure on companies to report is increasing. In some cases these pressures are mandatory, while in others they are stakeholder driven. There has been a marked decline in the rate of take-up, however, and it appears that while the larger and more high-profile companies are already responding to these growing demands for increased transparency, fewer newcomers are accepting the challenge.

1. Indirect costs of SR

This page excerpts a few key points from a report OconEco offers to clients on the market for sustainability metrics.

Direct costs of SR are trivial for large corporations yet, as shown in Table 1, fewer than 5% of those from advanced (OECD) countries issue such reports. At best (UK and Switzerland) SR reporters are about a tenth of large corporations. This strongly suggests indirect costs, such as management time required not only to launch but also to sustain an SR, are high.

Roughly a third of those who have ever issued an SR haven’t done so in the last three years. That suggests the problem is systemic and not just an initial learning curve.

Chart 1 suggests the problem is not corporate resistance to sustainability issues per se. Voluntary environmental standards from the International Standards Organization (e.g., ISO 14001) were introduced more recently than SR yet are now implemented in over 80,000 facilities in OECD countries, exceeding the number of large corporations in those countries partly because many have more than one facility but also because many smaller companies adopt ISO 14001. Moreover, OconEco’s catalog of companies in one or more sustainability network suggests that only about a fifth of these companies issue SR. OconEco views these as symptoms of inefficient information systems rather than recalcitrant businesses.

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