This article is based on the paper “Synergistic effects of CSR practices on firm value: Evidence from Asia Pacific emerging markets ” by Boonlert Jitmaneeroj, School of Business, Research Institute for Policy Evaluation and Design, University of the Thai Chamber of Commerce.

This paper is posted on the CFA Institute Asia-Pacific Research Exchange (ARX).

Academics, activists, and an array of niche asset managers have spent decades promoting the advantages of socially responsible investing. The general concept, which appears finally to be coming into its own, rests primarily upon three categorical pillars – environmental, social, and governance issues – a framework better known simply as ESG.

In terms of its ubiquity in the realm of corporate jargon, ESG can be effective shorthand when broadly referencing any company’s vast, complicated set of impactful policies and activities. Essentially, most every move a company makes is evaluated within a three-bucket ESG context that has come to broadly represent a company’s overall commitment to another three-capital-letter abbreviation: CSR, which if you are keeping track of such things, stands for corporate social responsibility.

As both a piece of jargon and a business consideration, not to mention an area of academic study, CSR predates ESG. These days, the two terms are inextricable as corporations heavily rely on ESG statistics as stand-ins for CSR.

As a CSR barometer, however, ESG has limits. Amalgamating societal, governance, and environmental impacts together in one amorphous bundle can result in a superficial portrait at best, leaving keenly attuned investors wanting more standalone information.

Taking the three ESG pillars in isolation, meanwhile, undercompensates for overlapping, interwoven considerations. Hypothetically, you could have a confluence of superior governance facilitating environmentally sound initiatives that improve the drinking water for millions of people – helping to create, in this simplistically linear example, an intangible goodwill asset.

But the science of measuring the merits of corporate citizenship is hardly exact.

When reviewing existing academic literature aimed at quantifying CSR, Boonlert Jitmaneeroj, assistant professor of finance, University of the Thai Chamber of Commerce, finds not only a lack of empirical consensus that CSR creates value but also a sizable gap between the more innovative, dynamic techniques potentially available to researchers and the suboptimal regression analysis practices that are still most commonly used.

In seeking to fill that gap, Jitmaneeroj has introduced a structural equation modeling (SEM) approach that is distinct from single-equation regression. This new measurement approach does not purport to settle the debate as to whether CSR does or does not correlate to value creation, and it may muddy the waters even more. But the author does present with some noteworthy findings.

One of them (perhaps not surprising) is that Thailand is home to a large number of responsible companies.

Additionally, the author’s SEM approach, in contrast to inconclusive regression analysis, suggests that, when combined, positive ESG pillar scores appear to have a positive effect on value.

The paper’s single-most-interesting discovery, quantitatively, is one that sheds new light on the “S” in ESG.

Jitmaneeroj’s paper, “Synergistic Effects of CSR Practices on Firm Value: Evidence from Asia Pacific,” published in 2018 and updated earlier this year, is the subject of this latest installment of the ARX Practitioner’s Brief.

The views expressed herein reflect those of the authors and do not represent the official views of CFA Institute or the author’s employer.

What's the investment issue?

In an early iteration, during the 1980s, CSR conceptually took on the dimensions of a fourtiered hierarchical pyramid of, in ascending order, economic, legal, ethical, and philanthropic responsibilities.

Stakeholder management meant examining these societal obligations through a matrix of perspectives (e.g., the public at large, activist groups, employees, and customers), but somewhere along the way, measurement of CSR was linked to ESG pillar scores. Often, two of the pillars, environmental and governance considerations, are given more attention, in part because financial scandals and climate change concerns have dominated public attention for the past two decades. In addition, the “E” and “G” considerations tend to be more easily quantifiable relative to social factors.

Today, most companies do not need much convincing about the importance of CSR. We’ve reached a point in financial history when older institutional and younger retail investors alike are keenly focused on solid corporate citizenship with ever-rising attention being paid to societal impacts, including issues such as wages, gender and ethnicity fairness, and workplace conditions.

The more vigorously the case for CSR can be made – using cold, hard data – the better the chances that corporate lip service more readily transforms into a genuine commitment to change that ultimately is viewed as being mutually beneficial to both shareholders and stakeholders (e.g., meaningfully lower carbon footprints someday being undeniably correlated with higher investment returns).

Conversely, misleading and ambiguous findings surrounding the upside of CSR behavior serves only to hinder progress. That we have such a checkered evidentiary trail, the author asserts, is rooted in fundamentally flawed but often repeated methods of analysis.

According to Jitmaneeroj, CSR has several inherently unobservable attributes, as well as attributes that are measured erroneously when ESG pillar scores are used as proxies.

Gaining a richer understanding of the CSR effect requires an alternative methodology that can account for measurement errors in CSR indicators. Jitmaneeroj’s research seeks to produce such a process and to better connect value with CSR.

How does the authors tackle this issue?

Jitmaneeroj uses his SEM approach to explicitly take into account measurement errors of CSR proxies

He takes a step back, treating CSR as merely a latent variable in a wider, reengineered examination of the performance of hundreds of companies in nine Asia Pacific markets during the period 2010–2016.

Using a range of variables with well-established correlations to positive performance (e.g., above-average P/E and dividend yield), Jitmaneeroj establishes a baseline, sans explanatory CSR proxies, on top of which he then injects CSR proxies – that is, ESG pillar scores – one at a time.

The findings

The “E” and “G” coefficients show a positive but statistically insignificant (less than 1%) correlation to otherwise demonstrable positive performance. Only one of the three pillars (“S”), at 5%, proves to be significantly positively correlated.

The author shows that traditional regression analysis, depending on which CSR proxy enters the model, is woefully inconsistent in terms of revealing the effects of CSR on value, which makes it difficult to ever draw clear-cut conclusions about the relationship between any one factor and enhanced corporate value.

Meanwhile, his more robust SEM approach fares better. It appears to have produced evidence that social engagement deserves greater attention as a value-creation channel. To reiterate, it is the “S,” more so than either the “E” or the “G,” that appears to meaningfully and measurably drive value.

What are the implications for investors and investment professionals?

Increasingly, large institutions have become more receptive to the message that societal measures have been getting short shrifted, and so this research should buttress efforts to put more “S” in ESG. Taking a more general view, it would seem that for those people who manage businesses, there’s a major takeaway – the need to engage in all three dimensions of CSR concurrently and to not put these activities into silos.

Any single measure tends to understate the positive impact of CSR on the whole, the author explains.

In terms of providing a better measure of CSR, the author’s research might not be the missing link that corporate responsibility advocates can now point to definitively as representing a value creation correlation. Yet the question of whether CSR moves the needle has received a jolt of nuance. At a minimum, the paper suggests the industry should consider giving a higher weighting to issue relating to social impact. Investors screening stocks based on ESG obviously will want to take note of the social engagement factor having a more statistically significant role in value creation.

“Corporate managers should implement strategic CSR programs covering these activities in an integrated manner,” Jitmaneeroj writes. “However, if a company has limited resources for conducting all dimensions of CSR programs, corporate managers should give the first priority to social rather than environmental and governance activities since social engagement is a critical driver for corporate value creation.”

About the Author(s)

Rich Blake

Rich is a veteran financial journalist who has written for numerous media outlets, including Reuters, ABC News, and Institutional Investor.

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