CSR principles and activities as a steppingstone in enhancing ESG factors & firm value

CSR has evolved over the years as society’s expectations and the business environment have changed. Business adoption of CSR continued steadily in the 1980s and 90s, as corporations had to engage in more self-regulation due to the greater deregulation of businesses of that time. That critical shift led to the development of social audits and the implementation of codes of conduct to ensure that the company was meeting its social and ethical responsibilities. Moreover, increasing globalization was instrumental in widening the scope of CSR, as a wide array of international events and agreements occurred in the 1990s — the adoption of Agenda 21, the UN Framework Convention on Climate Change, and the Kyoto Protocol. These new policies and frameworks increased CSR concerns for multinational corporations, urging businesses to consider their impact on the world as a whole rather than just their local community. CSR however not only has benefits for the recipients of the corporate strategy, but also for the company itself as highlighted in the graphic below.

Today, CSR is an integral part of doing business, as it is increasingly driving company decisions and consumer choices. According to the survey analysis from Harvard Business Insights, 77% of consumers have expressed that their purchasing decisions are influenced by whether a company is committed to CSR initiatives. At the same time, 73% of investors highlighted efforts to improve the environment and society as the key factor when making their investment decisions. Although the scope of CSR has never been wider, incorporating the 17 SDGs and ranging from gender equality to protection of ocean life, there are some key principles underlying this concept:

1. Ethical behavior: Acting in an ethical and transparent manner, in compliance with laws and regulations, and in line with the company’s values and principles.
2. Social responsibility: Being aware of and addressing the social and economic impact of the company’s activities on the community and society as a whole.
3. Environmental sustainability: Acting to protect and preserve the environment, reducing the company’s carbon footprint, and promoting sustainable development.
4. Philanthropy: Giving back to the community through charitable programs and volunteerism.
5. Stakeholder engagement: Communicating and engaging with all stakeholders including shareholders, customers, employees, suppliers, and the community.
6. Transparency and accountability: Being open and transparent about the company’s CSR practices and taking responsibility for the impact of its actions.
7. Continuous improvement: Continuously working to improve the company’s CSR performance and reporting on progress.

So far, we have talked about how the pursuit of CSR agenda contributes to society by serving a wider range of human values and improving the overall quality of life and only briefly visually showed the benefits of CSR on a broad level. Adopting a strategic and proactive approach to CSR is not only a way for companies to be better corporate citizens, but has proven equally to benefit the business itself. Some key benefits include:

1. Improved reputation and risk mitigation: Companies that engage in CSR activities are often perceived as being more socially and environmentally responsible, which can lead to a positive reputation and increased trust among stakeholders. A study from Forbes shows that 92% of consumers form a more positive image of companies that support social issues and contribute to environmental efforts. A company’s reputation not only builds business sustainability but also creates a greater trust equity.
2. Increased customer loyalty: CSR can help to differentiate a company’s products and services while creating a loyal customer base. The loyalty of the customers to a brand plays a particularly crucial role in crisis management. Reputational risks appear to be significantly minimized for socially responsible companies, with 63% of the public claiming that they would give such businesses a benefit of the doubt in a time of crisis (Sickler, 2020).
3. Attraction and retention of employees: CSR statistics about employee beliefs demonstrate that 90% of employees working at purpose-driven companies report being more motivated and loyal. Furthermore, nearly 70% of employees stated that they would not work for a company without a strong purpose.
4. Cost savings: Different aspects of corporate social performance (CSP) are linked to a company’s financial performance through revenue improvements and reduced costs. For instance, implementing CSR strategies can lead to cost savings in areas such as energy and waste management.
5. Innovation and competitiveness: CSR can help companies to identify new market opportunities and business models. Moreover, by implementing sustainable practices, companies can increase their competitiveness in the market.
6. Better relations with stakeholders: By proactively engaging with stakeholders, companies can better understand and address their concerns and expectations. Studies strongly suggest that stakeholder awareness of CSR initiatives not only builds more positive views of the company but also strengthens firm-stakeholder relationships through a greater intention to invest in the company and consume its products.
7. Compliance: With the growing concerns that surround global issues, there is a strong push for governments to regulate business activities more closely. In 2021, the European Commission started to work on the Corporate Sustainability Reporting Directive. To further fill the gaps in the existing rules on sustainability information, the United States’ Securities and Exchange Commission (SEC) has also proposed a new climate disclosure rule. In light of these new policies and rule amendments, CSR can help companies to comply with laws and regulations.

CSR can be a valuable tool for companies that want to create long-term value for their shareholders, employees, customers, and society as a whole. In the previous section, we discussed how a strategic CSR approach can benefit organizations through growth in market share, organizational learning, increased commitment and commitment in employees, support from external stakeholders, and positive investor relations. The outlined benefits clearly show that linking CSR to your company’s purpose and values is a vital strategic step in the modern-day business landscape. The following steps are intended as a checklist for creating and implementing a CSR strategy:

1. Assess your current CSR activities: Review your current CSR activities and assess their effectiveness in meeting the needs and expectations of your stakeholders.

2. Set CSR goals and objectives: Identity the specific CSR goals and objectives that align with your business strategy and are relevant to your stakeholders.

3. Identify key CSR issues: Identify the key CSR issues that are relevant to your company and stakeholders, such as environmental sustainability, labor rights, and community development.

4. Develop a CSR plan: Develop a detailed CSR plan that outlines the specific actions, responsibilities, and timelines for achieving your CSR goals and objectives.

5. Implement the CSR plan: Implement the CSR plan by acting on the identified issues and communicating the progress to stakeholders.

6. Monitor and evaluate progress: Monitor and evaluate the progress of your CSR activities, and make adjustments if necessary.

7. Communicate and report on CSR: Communicate and report on your CSR activities and progress to stakeholders, using appropriate reporting frameworks and standards.

8. Continuously improve: Continuously review and improve your CSR strategy ad performance to ensure that it remains relevant and aligned with the changing expectations and needs of stakeholders.
It is also important to engage key stakeholders in the process of creating and implementing a CSR strategy, as it will help to ensure that the strategy is relevant and aligned with their needs and expectations. Moreover, it’s necessary to have clear communication channels and to engage employees in CSR activities, as it will help to create a sense of purpose and engagement among employees.

Measuring the impact of CSR activities can be challenging, for it is an ongoing process that requires continuous monitoring and evaluation. It also has to incorporate the different perspectives of stakeholders and communicate the results of the CSR activities transparently. Nevertheless, there are several methods that companies can use to assess the effectiveness of their CSR initiatives:

1. Financial performance and other KPIs: Costs and benefits associated with sustainability strategy must be measured and incorporated into management decisions. Benefits often come from positive and improved relations with regulators and other stakeholders and can be measured through employee engagement, as well as customer satisfaction. The impact of CSR activities is also linked to corporate financial performance, as it usually comes as a direct outcome of positive sustainability performance. CSR actions can lead to significant cost reductions. Perhaps from material substitution, less packaging, lower energy consumption, reduced material storage, water usage, or reduced waste disposal. Every sustainability initiative undertaken by the company should be associated with a specific sustainability performance indicator. Therefore, it is also helpful to set and measure KPIs relevant to your CSR strategy. Those can include the number of employees participating in volunteer programs, or the number of suppliers meeting sustainability standards.

2. Social Return on Investment (SROI): SROI is a framework that allows companies to measure the social and environmental value generated by their CSR strategy. This framework considers both financial and non-financial impacts and allows for a comparison of the value generated by different CSR activities. A SROI framework could be built up similarly to the following graphic.

3. Stakeholder engagement through surveys and questionnaires: Stakeholders play a crucial role in the creation and development of an impactful CSR strategy. Customers, employees, suppliers, and local communities provide valuable feedback on the impact of the CSR initiatives. Collecting relevant information from the respective stakeholders through surveys and questionnaires can, therefore, be applied to measure the effectiveness of certain initiatives, such as volunteer programs or community engagement.

4. Net Promoter Score (NPS) and Reputation assessment: There is a strong correlation observed between the company’s performance against CSR standards and its reputation score. While NPS is applied to measure the satisfaction level of various stakeholders, it can also be used as an indicator of the overall reputation of the company, contributing to the evaluation of the impact of CSR activities. Another way to place value on reputation and mitigate potential reputational risks can be achieved through a reputation quotient. Given that stakeholders’ opinions are based on their perceptions and expectations of a company, the quotient captures those perceptions in six dimensions, as represented by the model below.

5. Balanced scoreboard: This is a strategic management system that links performance measurement to strategy using a multidimensional set of financial and non-financial performance metrics. The balanced scorecard represents the key components of creating and sustaining the corporate value by considering four perspectives: financial, customer, internal business processes, as well as learning and growth.

6. External assessments and certifications: Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) are examples of external assessments and certifications that can be used to measure CSR performance and compare it to industry standards.

7. ISO 26000: While ISO 26000 is not a certification standard, it is commonly used as an international standard for social responsibility. It provides guidance to organizations by addressing all the key principles of a CSR approach, including topics such as human rights, labor practices, the environment, fair operating practices, consumer issues, and community involvement.

Although not every corporation follows CSR principles and those that do still have substantial room for improvement, it is evident that businesses are beginning to recognize the myriad of ways in which they can change society for the better. The growing awareness surrounding the importance of considering a wider range of social and environmental factors in business decision-making is reflected in the evolution from CSR to a more comprehensive framework — environmental, social, and governance (ESG).

CSR programs can be tailored depending on the strategic approach, and therefore vary from company to company. The varied activities that fall under CSR range from philanthropic causes to employee volunteerism, and therefore can cause oversight across the organization. To put this into perspective, here are a couple of typical CSR activities you might come across in reality: Companies often make charitable donations to non-profit organizations or causes aligned with their values and mission. For example, a tech company might donate to organizations working to close the digital divide and improve access to technology for underserved communities. Companies may also engage with local communities by sponsoring community events, volunteering, or offering education and training programs. For example, a food company might support local agriculture and food security initiatives. Additionally, companies can also address internal stakeholders with CSR activities: they can create a positive work environment and foster employee engagement by offering wellness programs, promoting work-life balance, and encouraging volunteerism and community involvement. Companies like Spotify, Netflix, or Amazon have massive success and impact on their employer brand with CSR activities offered to their employees.

The issues addressed through ESG, on the other hand, are more interconnected. Compared to traditional CSR, ESG places a stronger emphasis on the intersection of social and environmental considerations in a company’s core business strategy and decision-making. For instance, when tackling climate issues, ESG not only considers an organization’s environmental impact but also looks at the social justice issues around the disproportionate impact climate change has on low-income populations.

Additionally, while CSR is often focused on short-term, project-based initiatives, ESG focuses on the long-term sustainability of an organization, addressing a wider range of factors that include climate change, human rights, labor practices, and governance. These factors are increasingly being seen as material to a company’s long-term financial performance, which explains why ESG investing is becoming increasingly popular. Investors are recognizing the potential risks and opportunities associated with these factors and are investigating how to incorporate them into their investment decisions.

Brønn and Vidaver-Cohen found that “improved image” and “be recognised for moral leadership” were most cited as reasons to engage in CSR. This narrative has shifted through the evolution to ESG, as the improved framework serves as a strategic lever to drive new optimization opportunities and enhance long-term performance. This argument is supported by the fact that, despite a market downturn, 81% of globally representative companies with better ESG profiles outperformed their counterparts in 2020. The key difference between CSR and ESG are highlighted in the table below.

Overall, the evolution from CSR to ESG reflects a growing awareness of the need for companies to take a more holistic and integrated approach to social and environmental issues. It is worth noting that CSR and ESG are not mutually exclusive, as both frameworks can be used to guide a company’s sustainability and ethical performance. Regardless of the preferred approach, there is an evident positive correlation drawn between strong social and environmental performance and firm value.