A new metric, the Corporate Social Responsibility (CSR) rating, which is assigned by specialized agencies founded in the United State and Europe over the past 20 years.

Adelphi research finds no clear answer.

Investors place their money on companies with strong revenue, healthy profits and/or outstanding prospects for growth. But a growing number of global investors are looking at a less tangible factor: corporate social responsibility. This interest has led to a new metric, the Corporate Social Responsibility (CSR) rating, which is assigned by specialized agencies founded in the United State and Europe over the past 20 years.

Charles Richard Baker, Ph.D., professor of accounting and law in Adelphi’s Robert B. Willumstad School of Business, has spent his career studying corporate ethics, focusing recently on the development of CSR ratings and the agencies that provide them. He is particularly interested in the relationship between companies’ CSR ratings and their accounting performance and stock market returns.

This interest led Dr. Baker and two colleagues from the University of Grenoble in France, Bertrand P. Quéré and Geneviève Nouyrigat, to conduct in-depth research into the CSR ratings by Vigeo, the French agency that assesses companies operating in Europe. Their findings, which appeared in the December 2015 issue of the Journal of Business Ethics, call into question the belief that CSR investments by companies always increase their financial performance.

“There’s been a tremendous amount of research into CSR and financial performance in both the United States and Europe, but there doesn’t seem to be a lot of consistency in the findings,” Dr. Baker said. “We wanted to see if we could clarify the situation and find if there really is a business case for CSR, at least for companies in Europe.”

The team’s research is the first to be based on data obtained from Vigeo. This trove of information on 623 European companies from 20 countries allowed them to make precise comparisons between ratings and performance. Their methodology was also bidirectional, examining the relationship between CSR ratings on subsequent performance as well as the impact of performance on subsequent ratings.

CSR ratings, Dr. Baker explained, take a wide range of corporate behaviors and expenditures into account. KLD, the U.S. ratings agency, focuses more on human resources issues such as diversity, treatment of employees and suppliers and relations with local communities. Vigeo, on the other hand, places greater emphasis on environmental issues. Neither agency includes corporate philanthropy in its ratings.

Dr. Baker and his colleagues uncovered three significant aspects of the Vigeo ratings, which they describe as concepts of “political visibility,” “priorities” and “CSR rating downgrading.”

First, they found that companies’ ratings are related to the size of their market capitalization, with larger companies having higher ratings. The team surmised that large companies in the public eye cannot afford to behave in ways that may result in negative publicity and government regulation; their political visibility exposes them to pressure to conform to social norms.

Second, the research showed that companies with pressing financial needs often do not have the ability to invest in CSR. Companies on sound footing have different priorities and can afford to allocate resources to socially responsible initiatives, thus boosting their CSR ratings.

Third, and somewhat surprising, the team found that Vigeo assigned lower CSR ratings to companies with stock market returns that are significantly higher than sector averages. This downgrading may stem from a belief that high stock market returns indicate a failure to allocate enough resources to CSR activities.

But what effect do CSR ratings have on company performance? Perhaps not much, according to the research, challenging the notion held in the United States that investing in CSR is a solid business strategy. Dr. Baker and his colleagues determined that investment in CSR by European companies does not appear to result in increased sales, development of new products or higher stock market returns.

“There may not be a business case for CSR,” Dr. Baker said. “We were only able to cover three years of data, however, and sometimes these things take a while to factor in. Future studies based on more information may produce different results.”

Dr. Baker hopes that Vigeo will take his findings into account in refining their ratings system. In the meantime, he and his colleagues are working on a second paper that takes an even deeper look into the agency’s ratings by examining the six subratings they are based on.

“We’ll continue sharing our findings with the ratings agencies and academics,” he said. “Our goal is to gain a better understanding of what motivates companies to invest in CSR as well as a clearer picture of the way the ratings agencies operate.”

Charles Richard Baker, Ph.D., focuses his research on the ethics, legal liabilities and comparative regulations of the public accounting profession. A recipient of the 2008 Bender Award for Outstanding Body of Work, he has over 100 academic publications to his credit. Dr. Baker earned his Ph.D. from the University of California, Los Angeles, and is a certified public accountant in New York state.

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