Research suggests that Corporate Social Responsibility (CSR) activities positively impact the enterprise value of companies in most cases. That said, a positive impact is not guaranteed in every case due to several reasons. The evidence that suggests a positive correlation between CSR initiatives and the enterprise value of a firm, as well as the important factors that should be considered in such an analysis, has been detailed below.
Evidence of Positive Impact of CSR on Enterprise Value
- Companies that have a CSR program in place experience several benefits, including increased sales and profits, enhanced employee engagement, and enticing qualified personnel.
- According to a survey of financial analysts and fund managers conducted by Deloitte, Euronext, and CSR Europe, “79 percent of fund managers and analysts indicated that social management has a positive impact on firm value in the long-term.”
- According to the survey, “51 percent of fund managers and 37 percent of financial analysts would grant a stock price premium to socially responsible companies.”
- Companies that engage in CSR initiatives experience a positive impact on firm value. This can be observed after accounting for simultaneity and endogeneity issues in the data being analyzed.
- Research suggests that CSR activities that address issues within the firm, e.g. the firm-employee relationship, product quality, are more likely to impact firm value more than activities that focus on external issues, e.g. community and environmental concerns.
- There is sufficient evidence, in the form of research, to prove that corporate giving has a positive impact on shareholders.
- Two experts coined the idea of “creating shared value“. According to the experts, businesses have an opportunity to “generate economic value by identifying and addressing social problems that intersect with their business.”
- Companies have realized that implementing operational efficiencies that directly impact environmental sustainability can result in significant cost savings.
- Many investors are beginning to not only rely on determining a business’ performance through its ESG (Environmental, Social, and Governance) performance but also correlate financial performance to the same.
- Studies have proved that companies can generate an IRR (Internal Rate of Return) of up to 80% when they invest in low-carbon initiatives.
Important Factors when Determining Enterprise Value
- Although research suggests that CSR initiatives can help businesses increase profits, a direct link between CSR and enterprise value cannot be established due to the complexities involved, specifically the involvement of abstract variables that cannot be defined or quantified.
- Although a direct link cannot be established, companies can figure out tailored ways to monitor changes in firm value due to CSR initiatives based on various parameters, e.g. client retention, employee productivity, and other financial metrics.
CSR and Enterprise Value for Small Firms
- According to data gathered from Western European listed companies, the impact of CSR initiatives on enterprise value varies with firm size as well as age.
- Enterprise value, for small and/or young businesses, may decrease due to CSR initiatives.
- CSR initiatives may be ineffective for younger and smaller businesses because of limited financial resources and other factors, e.g. experience, reputation, etc.
Examples of CSR’s Impact on Enterprise Value
- The companies that generate value through sustainability focus on improving return on capital. Many times, this is achieved by reducing operating costs. Operating costs can be reduced by improving the management of natural resources, e.g. managing the use of energy and minimizing wastage.
- Dow Chemical invested approximately $2 billion over a few years, starting in 1994, in efficient resource utilization. Later, the company reported having “saved more than $9.8 billion from reduced energy consumption and water waste in its manufacturing processes, even as it continues to develop innovations.”
- GE, in 2004, doubled its investment in research relating to clean technology and also worked on making its operations more environment-friendly. Since then, their Ecomagination division exhibited tremendous growth and generated $18 billion in product sales by 2009.
- Companies also create value by mitigating risks while investing in sustainability. A 2009 plan from Nestle focused on the promotion of sustainable cocoa through coordinated activities, including “producing 12 million stronger and more productive plants over the next ten years, teaching local farmers efficient and sustainable methods, purchasing beans from farms that use sustainable practices, and working with organizations to help tackle issues like child labor and poor access to health care and education.”
The research has provided strong evidence that supports the hypothesis that CSR positively impacts enterprise value. That said, the research does not focus only on that and also outlines the factors that need to be considered when gauging the positive impact of CSR initiatives on enterprise value and the role that firm size and age play. Although we have focused most of this research to the US, we had to resort to foreign sources in some instances to ensure that we were laying down a comprehensive analysis. We have also used some sources that might seem outdated, however, we have made sure that the content utilized in this research is still applicable and its age does not negatively impact the health of this assessment. It should also be noted that examples/case studies that exhibit the positive impact of CSR initiatives on enterprise value are unavailable. This also makes sense because our research clearly states that a direct correlation between CSR initiatives and enterprise value cannot be established because of the involvement of multiple abstract variables as well as certain complexities. As a result, we have provided examples that showcase the impact of CSR activities on economic/monetary value creation, which translates to an improvement in enterprise value.