New York – This week, The Wall Street Journal presented an article titled The Case Against Corporate Social Responsibility, which reflects an ongoing debate that can have serious repercussions for research providers in the environmental, social, and governance (ESG) space. Do companies have a responsibility to act in the public interest and will they benefit or perceive increased profits while acting responsibly? Depending on their answer to the question above, investors’ will have more or less appetite for ESG research.
In this article we outline the two sides of the debate on the social responsibility of enterprises, and analyze its implications for providers of research and information in the ESG space.
What is CSR?
The WSJ article arguing against CSR has spurred almost 300 positive and negative comments in 3 days (popular articles in the same section barely reach 90 comments). One interesting aspect of the debate is the meaning of CSR. “Social responsibility” is a notion that runs the danger of being so broad in scope that it can end up being meaningless.
One of the definitions that better encompasses the CSR notion is suggested by Professor Davis from Arizona State University, who believes that CSR refers to a company’s response to issues beyond the formal technical and legal requirements. Professor Davis argues that “[CSR] is a firm’s acceptance of a social obligation beyond the requirements of the law”.
Companies Should be Socially Responsible – For their own good
Supporters of CSR argue that companies can do well while doing good. Some of the arguments include long-run self-interest, public image, viability of business within a given society, avoidance of government regulations, and ultimately, stockholders’ interests. Even if the company’s business is not directly aligned with the social interest, by doing good the firm will benefit from assuring its long-term feasibility within a given society.
CSR is either Irrelevant or Ineffective
According to the mentioned WSJ article, claims for CSR are an illusion and a distraction from more effective initiatives to protect social interests.
“…in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against the shareholder interests.”
The real danger, argues the WSJ, is that efforts dedicated to CSR initiatives are a distraction from more effectives measures of protection of the social interest, such as governmental regulation and civil society movements.
ESG Research Providers Watch Out
Should companies be socially responsible for their own good? The debate around this question is not limited to academic circles. Companies and investors also have their own views on the matter, which directly affect ESG research providers.
Providers of information and research in the ESG space have conducted numerous studies, issued papers, and developed ranking models, in an effort to support the view that CSR, in terms of environment, social issues and corporate governance, does matter for the profitability and viability of the company. Investors who adhere to the CSR paradigm will certainly tap into these providers products.
However, as the WSJ article and its overwhelming response rate indicate, the paradigm against CSR is a strong one in today’s business environment. Apparently, all the case studies, ratings, and warnings from scientist, have not been enough to bring everyone on board of the CSR boat. This week’s article reminded us of one of the main challenges/opportunities that ESG research providers face today: Convince corporations as well as investors (among other key players) that CSR is neither irrelevant nor ineffective, and it is not a distraction from more effective mechanisms of protecting the social interest.