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RESEARCH BRIEF: Where does the virtuous cycle begin? Corporate social performance is both chicken and egg to financial performance

Takeaway: Corporate social performance generally depends on prior financial performance, rather than the other way around. This study also finds that environmental concerns impact financial performance, and that social strengths and concerns influence financial risk over the long-term.

Suggested audience: Top management, corporate citizenship managers and professionals, particularly environmental managers

Many studies investigate the relationship between corporate financial performance and corporate social performance, but few consider the direction of the relationship: which one comes first? This study finds that corporate social performance generally depends on prior financial performance, but also that corporate financial performance is positively related to social and environmental strengths.

The researchers looked at the performance of 289 US firms between 1991 and 2004. To measure financial performance they considered the equity return earned by stockholders on a yearly basis; to measure financial risk they considered the volatility of stock prices. The researchers analyzed KLD data covering social strengths and concerns, which were broken down into the following categories:

  • Community involvement
  • Employee relations
  • Diversity
  • Environment
  • Product

Key findings include:

Researchers found a significant, positive relationship between corporate financial performance and social performance. 

  • Financial performance (both return and risk) generally precedes social performance (both strengths and concerns) much more frequently than the other way round. In other words, social performance depends on the prior financial performance of an organization.
  • Study findings suggest also that social and environmental performance can improve financial performance in the case of:

-- Environmental performance can improve financial returns

-- Social strengths can mitigate financial risk, but it appears that this effect takes about five years

Keywords: corporate social performance, CSP, financial performance, KLD, financial risk, financial returns, environment, U.S., companies

If citing, please refer to the original article: “A note on the interaction between corporate social responsibility and financial performance”, 2008, Ecological Economics, Volume 68, Issues 1–2, Pages 46–55, Bert Scholtens, University of Groningen, The Netherlands

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