Why Socially Responsible Companies Can Raise Money on the Cheap

Are corporate responsibility initiatives a waste of money, or do they bring companies tangible benefits? According to a new study, corporate social responsibility (CSR) initiatives do bring one very important benefit to their companies-a superior ability to raise money for strategic investments and initiatives.

Beiting Chen and George Serafeim of Harvard Business School, with Ioannis Ioannou of London Business School, analyzed the corporate social responsibility scores of 2,439 publicly traded companies, as provided by Asset4, a unit of Thomson Reuters. (About half those companies were in the U.S., the U.K., or Japan.) They then compared those scores to a five-point index designed to measure the companies' access to capital, looking at every year from 2002 to 2009. They found that companies with high CSR scores have a much easier time raising money than their less socially-responsible competitors.

This implies, the researchers say, that firms with great CSR scores can access capital at better interest rates than other firms, or that they can access more money than other firms, but at the same interest rates. It could be that a particularly high CSR score kicks of a 'virtuous cycle': Companies with great CSR scores are better able to raise money for their strategic investments and initiatives, which in turn improve their stock market returns-and that makes it easier for them to raise money.

Raising awareness, raising money
In general, the authors say, companies with active CSR efforts inadvertently save investors a lot of time. They usually offer sustainability reports, which offer a more detailed look at their operations than might otherwise be available. Those reports are often vetted by third parties, which gives investors or lenders an additional level of comfort.

The researchers also say that because companies that make CSR a priority are more engaged with their stakeholders, the various stakeholders themselves-from customers to employees-provide an additional layer of monitoring that might be lacking at other firms.

Corporate social responsibility is generally divided into three types of intitiatives: environmental responsibility, social responsibility, and good corporate governance. When the researchers tried to determine which factor was most responsible for improved ability to raise money, the found that environmental and social responsibility were about equally responsible, and that corporate governance was much less important. They suspect this may be because a company's corporate governance may be more influenced by the regulations and expectations in its home country than by any independent initiative.

Do you think companies that are more "responsible" are also less risky? Why or why not?

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