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Corporate Social Responsibility
   and Firm Performance

  CIRANO – Ecole Polytechnique
          Workshop

        Montreal – November 12, 2010




                                       1
Sustainable
Prosperity develops
and promotes policy
     and market
 innovation to help
build a stronger and
  greener Canadian
      economy
CSR and financial performance
Starting point for SP – reflected in this
  presentation – is understanding how a
  corporation’s integration of environmental risks
  and opportunities into its business translates
  into enhanced performance (including financial
  performance)

So: what is the relationship between CSR and
  financial performance?

                                                     3
A framework for understanding CSR
     and financial performance
• First frame: short-term and long-term nature of
  the issue

• Second frame: drivers of corporate financial
  performance

• Assume that most basic calculus for firm
  performance is that opportunity should
  outweigh risk
                                                    4
At first glance:
• With that basic framework, one concludes – in
  relation to CSR and environmental “agenda” for
  firms is:
  – A long-term issue
  – A driver of costs, and not revenues
  – Largely involving or addressing risks, not
    opportunities
• This “first glance” can explain why decision-
  makers in firms and capital markets undervalue
  CSR/environment

                                                   5
Beyond first glance
What we know:
- Research shows correlation, but not causality,
  between CSR/environment and financial
  performance
- But “toolkit” available to analysts/researchers is
  not fully developed
- In particular, “strategic advantage” of
  CSR/environment integration is hard to
  quantify
                                                       6
Beyond first glance
• So...lots of proxies:
   – Firm focus on CSR/environment reflects good
     management practice
   – Focus on CSR/environment boosts employee morale
     and productivity
   – Focus on CSR/environment provides reputational
     “insurance”

• All of these have multiple drivers/explanations, so
  difficult to quantify and to attach a causal
  relationship to financial performance.
                                                        7
Beyond first glance
Key issue is understanding role of
  CSR/environment drivers of financial
  performance

DANA: PLS DROP VISUAL#1 IN HERE




                                         8
Revenue Drivers
New markets:
Demand patterns
New revenue forms (carbon credits)
DANA; NEED ONE KEY $$$ NUMBER FOR
 EACH: MESSAGE IS GROWTH IN EACH
 OF THESE DRIVERS



                                     9
Cost Drivers
• Raw material costs
• New regulatory costs
• Higher electricity costs
DANA: TOUGHER TO QUANTIFY THESE, BUT
  MESSAGE FROM ME WILL BE THAT COSTS
  WILL INCREASE AND CSR/ENVIRONMENT
  FOCUS IS A HEDGE AGAINST THESE COSTS


                                         10
In the long-run....
• Basic conundrum at heart of impact of
  CSR/environment on financial performance:
• In short-term, CSR/environment does not
  translate into “free cash flows”, and so isnot
  prioritized
• Cash flows can be expected in long-term, though
• Question is why – when it comes to
  CSR/environment – rate of growth matters less
  than costs/risks (which is reverse of almost every
  other investment opportunity)
                                                   11
Role of policy
• Big part of the answer is that a major risk factor
  comes from policy/political uncertainty around
  CSR/environment
• This points to the need for policy and political
  certainty
• Key drivers of CSR/environment integration will
  emerge over time (i.e. resource constraints)
• Role of policy is to anticipate this and manage a
  transition that will – in part – come through
  creation of economic conditions that make
  CSR/environment profitable.
                                                       12

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Alex Wood Presentation - CIRANO & l'École Polytechnique de Paris Workshop: Corporate Social Responsibility and Firm Performance November 2010

  • 1. Corporate Social Responsibility and Firm Performance CIRANO – Ecole Polytechnique Workshop Montreal – November 12, 2010 1
  • 2. Sustainable Prosperity develops and promotes policy and market innovation to help build a stronger and greener Canadian economy
  • 3. CSR and financial performance Starting point for SP – reflected in this presentation – is understanding how a corporation’s integration of environmental risks and opportunities into its business translates into enhanced performance (including financial performance) So: what is the relationship between CSR and financial performance? 3
  • 4. A framework for understanding CSR and financial performance • First frame: short-term and long-term nature of the issue • Second frame: drivers of corporate financial performance • Assume that most basic calculus for firm performance is that opportunity should outweigh risk 4
  • 5. At first glance: • With that basic framework, one concludes – in relation to CSR and environmental “agenda” for firms is: – A long-term issue – A driver of costs, and not revenues – Largely involving or addressing risks, not opportunities • This “first glance” can explain why decision- makers in firms and capital markets undervalue CSR/environment 5
  • 6. Beyond first glance What we know: - Research shows correlation, but not causality, between CSR/environment and financial performance - But “toolkit” available to analysts/researchers is not fully developed - In particular, “strategic advantage” of CSR/environment integration is hard to quantify 6
  • 7. Beyond first glance • So...lots of proxies: – Firm focus on CSR/environment reflects good management practice – Focus on CSR/environment boosts employee morale and productivity – Focus on CSR/environment provides reputational “insurance” • All of these have multiple drivers/explanations, so difficult to quantify and to attach a causal relationship to financial performance. 7
  • 8. Beyond first glance Key issue is understanding role of CSR/environment drivers of financial performance DANA: PLS DROP VISUAL#1 IN HERE 8
  • 9. Revenue Drivers New markets: Demand patterns New revenue forms (carbon credits) DANA; NEED ONE KEY $$$ NUMBER FOR EACH: MESSAGE IS GROWTH IN EACH OF THESE DRIVERS 9
  • 10. Cost Drivers • Raw material costs • New regulatory costs • Higher electricity costs DANA: TOUGHER TO QUANTIFY THESE, BUT MESSAGE FROM ME WILL BE THAT COSTS WILL INCREASE AND CSR/ENVIRONMENT FOCUS IS A HEDGE AGAINST THESE COSTS 10
  • 11. In the long-run.... • Basic conundrum at heart of impact of CSR/environment on financial performance: • In short-term, CSR/environment does not translate into “free cash flows”, and so isnot prioritized • Cash flows can be expected in long-term, though • Question is why – when it comes to CSR/environment – rate of growth matters less than costs/risks (which is reverse of almost every other investment opportunity) 11
  • 12. Role of policy • Big part of the answer is that a major risk factor comes from policy/political uncertainty around CSR/environment • This points to the need for policy and political certainty • Key drivers of CSR/environment integration will emerge over time (i.e. resource constraints) • Role of policy is to anticipate this and manage a transition that will – in part – come through creation of economic conditions that make CSR/environment profitable. 12