Why do firms invest millions of dollars in Corporate Social Responsibility (CSR) initiatives?

The answer given by Rui Albuquerque, Yrjo Koskinen and Chendi Zhang in their paper “Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence,” is that CSR initiatives reduce firms’ systematic risk and increase valuations.  This is because firms investing in CSR face relatively less price-elastic demand – that is demand for their goods does not fall that much with a price hike - so they can charge higher prices for their products and retain loftier profit margins. Customers become more loyal because they appreciate firms’ green credentials and socially responsible products, which are in line with their values and concerns about sustainability, so they are not so swayed by prices.

In fact, environmentally conscious consumers are willing to pay a premium for products like organic food or electric vehicles, with CSR becoming a form of product differentiation for firms. Those companies in tune with the changing demands of society and growing concerns around climate change are able to build a loyal customer base, making profits more stable and less correlated with economic cycles, which reduces their systematic risk and in turn increases their valuations. The impact on firm valuations is substantial, with an average increase of five per cent across the firms. Investing in CSR is akin to a risk management policy to make companies less sensitive to booms and busts.

The authors develop a monopolistic industry equilibrium model within an asset-pricing framework, and analyse the performance of 4,670 US listed companies from 2003 to 2015 - and so covering the Great Recession. In the model they created, the authors assume investors are not interested in CSR initiatives and are simply wealth-maximizing investors only interested in risk and return. Instead, consumers are the driving force generating the results. The model predicts that the reduction in systematic risk is stronger for consumer-oriented companies, especially as these firms spend more on advertising which will amplify the effect of CSR initiatives.

The authors use Morgan Stanley Capital Investments’ Environmental, Social and Governance (MSCI ESG) database to construct an overall CSR score for each of the firms in their study each year. The score combines information on the firm’s performance across community, diversity, employee relations, the environment, product and human rights attributes. First the authors estimate firms’ systematic risk (beta) using the standard Capital Asset Pricing Model (CAPM) for each year. Then the authors study the effect of CSR scores on beta, paying careful attention to reverse causality issues. They find that firms with high CSR scores indeed have lower betas compared to firms with lower scores. This finding is backed up by the result showing that firms with higher CSR scores also have  profits that are not as affected by the business cycle. Consistent with the model, the reduction in systematic risk is 40 per cent stronger for firms that advertise a lot and the effect on valuation for these firms is 20 per cent larger.

Read the full article at: https://pubsonline.informs.org/doi/10.1287/mnsc.2018.3043.


Albuquerque R, Koskinen Y, and Zhang C (2019). Corporate Social Responsibility and Firm Risk: Theory and Empirical Evidence. Management Science 65(10):4451-4949.