Bridge over ocean
1 July 2015 CFA Institute Journal Review

Financial Effects of Corporate Social Responsibility: A Literature Review (Digest Summary)

  1. Peter Eickelberg, CFA

Research published since 2005 generally shows that socially responsible investing produces market-like long stock and bond returns, stronger long–short portfolio performance, and lower financing costs for companies. “Green” real estate may also support higher rents and market prices. The author includes an appendix that lists studies, time periods covered, and key findings.

What’s Inside?

The author presents key findings from approximately 30 articles on socially responsible investing (SRI) published since 2005 and elaborates on possible economic reasons for the results. The main categories include SRI stock and bond performance relative to non-SRI instruments, including “sin stocks,” SRI equity index performance, SRI-based long–short portfolio performance, credit costs and default risk, and “green” real estate. A helpful appendix concisely lists the studies, their applicable countries and time periods covered, and their main observations. By referring to this tool, a practitioner could quickly find relevant research and determine where to dig deeper.

How Is This Research Useful to Practitioners?

Studies covering performance generally show that SRI stocks and bonds fare just as well as their non-SRI counterparts, which is odd given the tendency of SRI stocks to appear overpriced at times. Yet, SRI indexes do seem to have higher risk than indexes with no social emphasis. Mixed stock/bond portfolios with an SRI emphasis actually have a peer group. In a long–short strategy, the use of corporate social responsibility (CSR) scores as a selection tool has led to significantly stronger SRI portfolio returns. This finding contradicts previous research and could be related to the different CSR rating stringencies used. The difference could also stem from how CSR measures are applied. Finally, sin stock portfolios have also outperformed, which emphasizes the need for further research.

Regarding credit considerations, companies with high CSR scores seem to enjoy lower financing costs. The reason may be that a firm with high CSR practices or a high CSR rating may simply prove to be better managed overall. Most studies of energy-efficient or green real estate also indicated that higher rents and market prices may accompany green practices. Moreover, a green REIT could enjoy lower bankruptcy risk.

How Did the Author Conduct This Research?

As a literature review and not an empirical study, there is no methodology, strictly speaking. But because earlier authors had already surveyed then-current SRI research, the author limits his review to studies published since 2005 and chooses to focus on the links between CSR and the specific outcomes mentioned earlier. The appendix and bibliography offer an excellent starting point for someone interested in a quick summary of the latest findings.

Interestingly, although the author attempts to show recent studies, the appendix lists only a few that examine a period beyond 2009, and none of those seem to deal primarily with stock or bond performance. The author is quick to point out the limitations of available research, such as weak causality testing, a focus on US stocks, and a small number of published articles. Still, he concludes that there is a clear link between CSR scores and market performance as well as financing costs.

Abstractor’s Viewpoint

As society becomes more willing to pay for values-based investment approaches and industry products to meet this demand, an investment professional should possess a framework for evaluating them effectively. A literature review, such as this one, can provide a quick perspective on developments in SRI and shed light on areas of caution. Of course, it will be up to each practitioner to evaluate the conclusions that matter by performing a more thorough reading.

We’re using cookies, but you can turn them off in Privacy Settings.  Otherwise, you are agreeing to our use of cookies.  Accepting cookies does not mean that we are collecting personal data. Learn more in our Privacy Policy.