In 2008, researcher Alexander Dahlsrud examined 37 different definitions of Corporate Social Responsibility (CSR)1 . That was 15 years ago, and you probably may not be surprised to learn that there is still not 1 overarching, accepted definition. Of Dahlsrud’s 37 definitions, one of my favorites is “CSR is the voluntary assumption by companies of responsibilities beyond purely economic and legal responsibilities.” (Paicentini et al. 2000). What should be conspicuous to you are the terms “voluntary” and “beyond … legal responsibility.” You should be thinking “why would a public, for profit company, do things that are not required or that may have a negative impact on net profits?” Despite this misalignment with what we would expect from our investments, sustainable investments topped $66 trillion in 2022. It is clear that CSR has evolved into a pivotal consideration for investors as they navigate an increasingly complex and interconnected business landscape.
As you might have guessed from the opening, CSR is not a “thing” as much as it is a way that a company conducts itself. For example, some companies prioritize the wellbeing of their employees as they believe that happy, healthy workers are more productive. That fits under CSR. Other companies choose to operate in a sustainable manner employing green initiatives that will help the environment. That too fits under the CSR umbrella. As a final example, there are companies that believe that accounting transparency fosters a stronger relationship with shareholders. That would also fall under CSR.
CSR is a broad topic with initiatives that are all not directly tied to making profits, but somehow benefit stakeholders of one type or another. For example, customers, which are a stakeholder, benefit from products which are sourced sustainably. Employees, also stakeholders, benefit from good labor practices. Finally, stockholders, which are the most recognizable stakeholders, benefit from transparency in financial reporting. Ignoring the obvious costs of these initiatives, it is pretty clear that most investors would hope that the companies they invest in would do well to be socially responsible.
How do we know?
If you are a prospective investor, how can you find out what CSR initiatives a company undertakes, if any at all? Enter, ESG. I am confident that you have heard of ESG, which stands for Environment Social and Governance. Many people use ESG and CSR interchangeably, but ESG is technically a framework for measuring risk in CSR initiatives. Have I gotten you more confused?
There are rating agencies which rate companies’ effectiveness in Environmental issues, Social issues, and Governance issues. This enables prospective investors to compare companies based on their ESG ratings. For example, if an investor was deciding to invest in 1 of 2 chemical companies, wouldn’t it be prudent to invest in the one that has a better environmental score? Similarly, if an investor was considering investing in 1 of 2 companies that relies heavily on its employees’ mental and physical health, it would seem reasonable to lean toward the candidate with a higher social rating.
A Real Comparison
Following one of the prior examples of an investor deciding between 2 chemical companies, let’s assume that the 2 companies in question are Dupont De Nemour (DD) and Dow Inc (DOW). Both are members of the S&P500 materials index and are of a similar size in market capitalization. If we compare environmental ratings, we can see that Dupont has an environmental pillar score of 5.30, which is higher than Dow’s 4.64 rating. Under the environment pillar, greenhouse gas emissions management represents 24.61% of the score, and Dupont has a 7.9 rating, while Dow has a rating of 7.0. Now, there is clearly not a gross difference in scores, but it is certainly meaningful enough to consider, given the industry.
It is clear that some investors would simply like to invest in companies which are more climate friendly, regardless of financial implications, which is absolutely a legitimate investment hypothesis. But there is some good news for pure financial investors. There are actual financial implications behind the rating. There are clear regulatory implications for greenhouse gas emissions as climate change becomes more mainstream in legislation and regulation. Companies who are poor at managing greenhouse gas emissions are likely to have to spend capital on remediation and plant upgrades as regulations bear down. It is reasonable, therefore, to hypothesize that companies with lower emissions score more financial risk, especially in an industry where emissions management is top of mind.
Let’s take a step back and put things in perspective. Just because Dow has a lower environmental score than Dupont, it doesn’t mean that it is a bad investment, nor does it mean that it is bad managing environmental issues. Compared to its bigger peer group, Dow is a leader, ranking in the 75th percentile. In fact, looking at its historical ratings, Dow has trended positively over the past few years.
Let’s take a step back even further and recognize that while all companies have an ESG rating, not all are composed in the same way. For example, Dow has an overall ESG rating of 5.5 while Apple has an ESG rating of 5.75. For Dow, the environmental pillar carries a 45.45% weight while for Apple, environmental carries a 27.27% weight. Apple’s most heavily weighted pillar is social, and in that category, social supply chain management holds the heaviest weight. On that, Samsung is in Apple’s peer group of Technology, Hardware, Equipment, and Components, and Samsung’s social supply chain management rating is 3.13 versus Apple’s 6.13. That brings us back to the “third rail” of investing. Social supply chain management involves “fair labor practices.” If we want to get technical, low-cost labor, while not ethical, is unarguably more profitable. Ultimately, it all comes down to investor preference. While in some ESG rankings, social-conscious neatly aligns with business importance, while in others it clearly doesn’t… for now.
What does this all mean?
Milton Friedman, the Nobel Prize winning economist (and a fellow Rutgers alumnus 😉 ), famously penned an article in the New York Times Magazine entitled “The Social Responsibility of Business Is to Increase Its Profits” back in 1970. 2 The title of the article tells a lot, but the most important thing to note is that Friedman argued that corporate executives should not invest money in initiatives that do not have a net positive financial benefit to shareholders, who themselves can invest in socially conscious initiatives. As one might guess, there has been much debate in the decades since Friedman wrote the article. Most importantly, prospective investors now not only have ESG ratings to help guide their conscious, wallet, or both, but also CSR issues have converged with business issues, and ultimately, CSR, or socially responsible investing will become more mainstream.
1 Alexander Dahlsrud, “How Corporate Social Responsibility Is Defined: An Analysis of 37 Definitions,” Corporate Social Responsibility and Environmental Management 15, no. 1 (2008): 1–13, https://doi.org/10.1002/csr.132.
2 MILTON FRIEDMAN. “A Friedman Doctrine: The Social Responsibility Of Business Is to Increase Its Profits A Friedman Business Doctrine.” The New York Times, 1970, pp. SM17-.
Muriel Siebert & Co., LLC is an affiliated broker/dealer of the public holding company, Siebert Financial Corporation, which also owns Siebert AdvisorNXT, LLC. Siebert AdvisorNXT, LLC is a registered investments advisor (RIA) with the SEC and with state securities regulators. We may only transact business or render personal investment advice in states where we are registered, filed notice or otherwise excluded or exempted from registration requirements. Investment Advisor products are NOT insured by the FDIC, SIPC any federal government agency or Siebert’s parent company or affiliates.
You are being provided this Market Note for general informational purposes only. It is not intended to predict or guarantee the future performance of any security, market sector or the markets generally. This Market Note does not describe our investment services, recommendations or market timing nor does it constitute an offer to sell or any solicitation to buy. All investors are advised to conduct their own independent research before making a purchase decision. This Market Note is to provide general investment education and you are solely responsible for determining whether any investment, security or strategy, or any other product or service, is appropriate for you based on certain investment objectives and financial situation. Do not use the information contained in this email as a basis for investment decisions. You should always consult your investment advisor and tax professional regarding your investment situation before investing. The charts and graphs are obtained from sources believed to be reliable however Siebert AdvisorNXT does not warrant or guarantee the accuracy of the information. Any retransmission, dissemination or other use of this email is prohibited. If you are not the intended recipient, delete the email from your system and contact the sender. This is a market commentary, not research under FINRA Rule 2210 (b)(1)(D)(iii) and FINRA Rule 2210 (c)(7)(C).
© 2021 Siebert AdvisorNXT All rights reserved.