Does corporate social responsibility affect the cost of capital?


Picture above: Gratuitious graph to show deep understanding of stock images by the author

Apparently so, say the authors of an academic paper who have just been awarded the Moskowitz Prize for Socially Responsible Investing. Here’s a link to the paper.

They argue, as you would expect, that CSR lowers the cost of capital for large US companies. Hooray. You probably wouldn’t win the Moskowitz prize for arguing the opposite I guess. 

This 15 year old gong is awarded for “outstanding quantitative research in sustainable investing” each year.

So what are the key findings of the research? (Let’s remember the rigour of academic papers, at least in theory here, so this should be credible)

The paper is hard to understand in many places. It’s dense, complex and not particularly well structured. But here’s the headlines I pulled out. (It also repeats itself a lot!)

“More than half of the Fortune 1,000 companies in the U.S. regularly issue CSR reports, and nearly 10% of U.S. investments are screened to ensure that they meet CSR-related criteria” (I find this last part hard to believe, unless we simply count negative SRI screening)

“Improved CSR can enhance firm value by reducing the firm’s cost of equity capital”

And the evidence for this?

“Using a sample of 12,915 U.S. firm-year observations from 1992 to 2007, we find that firms with a better CSR score exhibit lower cost of equity capital after controlling for other firm specific determinants as well as industry and year fixed effects. Moreover, we find that CSR investment in improving responsible employee relations, environmental policies, and product strategies substantially contributes to reducing firms’ cost of equity”

And in conclusion:

“while prior research emphasizes the importance of corporate governance for firms’ valuation and access to external financing, our research suggests that investment in CSR activities is also important to firms as it has power to explain a firm’s cost of equity beyond corporate governance and other risk factors.”

So there we have it. Another study that produces a similar result to lots of other studies.

Was this useful? I don’t know. But I guess every piece of evidence, no matter how hard to read, helps.

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