THE VALUE OF CSR REPORTING AND THE IMPACT ON FINANCIAL PERFORMANCE
B. Rijkens
b.rijkens@student.rug.nl S3247880
University of Groningen Faculty of Economics and Business
Pre-MSC IB&M
June 2020
Supervisor: H.Reijn
THE VALUE OF CSR REPORTING AND THE IMPACT ON FINANCIAL PERFORMANCE
Abstract
Corporate Social Responsibility (CSR) reporting has increased massively over the last decades. A problem is that there are many different formats available to companies to report on CSR. Markets reward socially and environmentally desirable behaviour of companies, which could possibly influence the corporate financial performance (CFP). This study tried to answer whether the way companies measure and report CSR relate to their financial performance. It tried to do so by analyzing 20 articles on the CSR and CFP relation and answering if a higher quantity of reporting results in better CFP and if reporting on product responsibility specifically results in a better CFP.
The findings showed that the sheer quantity of CSR reporting plays a significant role in influencing CFP by building stakeholder and investors trust and reducing information asymmetries. The findings showed no significant relation between reporting specifically on product responsibility and better CFP, although this dimension does positively influence CFP together with other CSR dimensions. Firms that seek to benefit from CSR and CSR reporting must strategize towards frequent reporting of useful and credible CSR measurements and prevent greenwashing.
CONTENTS
Introduction 4
Literature review 6
Hypothesis development 13
Methodology 14
Results 15
Conclusion and limitation 20
References 23
Appendix 26
1. Introduction
Performance is a key dependent variable of interest for International Business (IB) scholars (Aybar, B., & Ficici, A. 2009). The number of companies that engage in Corporate Social Responsibility (CSR) reporting has increased massively and therefore attracted international attention in academic research. Many studies have shown a positive relation between CSR and financial performance.
The reporting of CSR is supported by standards to enable organizations to evaluate and report on their CSR performance. E.g.: such as the Global Reporting Initiative. A problem is that there are many different formats and self-evaluation methods available to companies to report on CSR.
(Wang, Z., Hsieh, T.-S., & Sarkis, J. 2017). The literature has tried to standardize and create a coherent model that would represent CSR performance, but social aspects are often considered to be ‘’soft’’ in nature and thus hard to quantify. (Panayiotou, N. A., Aravossis, K. G., & Moschou, P. 2008). A clear consensus of the theoretical meaning of the CSR concept is missing and because of the complexity of the concept the literature uses many different methods to measure CSR.
Therefore, there could be issues with relating CSR to financial performance (Galant, A., & Cadez, S. 2017). For example, many studies use CSR disclosures (Akisik, O., & Gal, G. (2014), Cheng, S., Lin, K. Z., & Wong, W. (2015)) as a starting point for measuring CSR performance (Beck, C., Frost, G., & Jones, S. 2018). Besides the ambiguity in reporting that companies have at their disposal, why is this a problem one could argue.
Study shows that CSR disclosures from companies can enhance their corporate reputation which can improve their competitive advantage. Markets reward socially and environmentally desirable behaviour of companies, therefore organizations are motivated to disclose more positive CSR information (Wang, Z et. al. 2017) which could possibly influence their financial performance.
This brings up the central question for this study which states:
“Do the way companies measure and report CSR relate to their financial performance?’’.
The aim of this study is to better understand the effects of the many different ways on ‘’CSR
Secondly, the type of CSR reporting of companies in relation to the financial performance is assessed. In order to find an answer to the central question the literature review seeks to answer the following sub-questions by analyzing the academic literature;
● What is financial performance?
● What is CSR?
● What types of CSR are there?
● How is CSR measured?
● How can companies report on CSR?
● What are the effects of CSR reporting on organizations financially?
● Does the way of reporting CSR influence the organization's financial performance?
The paper continues as follows. The next section provides a conceptual background for the study and gives a comprehensive look by reviewing the evidence in the literature about the different subjects. This is followed by a set of hypotheses to be tested after which the data and methodology is described and is followed by a presentation of the findings. The final section of the paper will give relevant conclusions and recommendations, after which it also reflects on the limitations.
2. Literature review
Corporate Financial Performance
Performance is a multidimensional phenomenon. This paper focuses on the financial performance dimension. The financial statements of a firm represent the usual starting point for any assessment of financial performance. (Bertonèche Marc, & Knight, R. 2003). This is also argued in a study by Daher, L., & Saout, E. L. (2013), who say that financial performance can be assessed by analyzing market value or through examining financial statements. Financial performance is best described as outcome-based indicators reflecting economic goals. This includes accounting- and market- based metrics. More specifically financial performance includes the overall profitability by reviewing ratios as: return on sales, return on assets, return on equity and variables as profit margin, earnings per share, stock price, sale growth and growth of foreign sales (Aybar, B., & Ficici, A.
2009).
Corporate Social Responsibility
In order to link financial performance to corporate social responsibility (CSR), the definition of CSR has to be formulated. As stated before there is no absolute consensus on the term CSR, therefore we try to define this as comprehensive as possible by reviewing different definitions in the academic literature. CSR can be described as an occurrence when business firms consciously and deliberately act to enhance social well-being for those who are affected by the organization’s operations (Weber, J., & Wasieleski, D. M. 2018). The concept of CSR is based on the idea that companies should not only pursue their own profits, but be aware of the effect that their activities have on society. This does not stop with compliance to law and regulation although for many companies this is a priority. With CSR, companies should also pursue moral rightness (Marumo, K. 2020). Also, Mcwilliams, A., & Siegel, D. (2001) state that CSR is those actions that appear to further some social good, beyond the interest of the firm and of that which is required by law.
Conclusively, CSR can be defined as a self-regulating concept that encourages firms to have a positive impact on society, environment, consumers and stakeholders beyond the scope of law and regulation.
CSR Standards
With the concept of CSR defined, it is important to review how CSR takes form in businesses and what its effects are on organizations. Firstly, by assessing different academic views on the standardization of CSR. Table two below provides a list with the key elements of international CSR standards as defined by Colle, S. D., Henriques, A., & Sarasvathy, S. (2013).
ISO14001 Environmental management standards
ISO9000 Quality management standards
Ethical Trading Initiative (ETI) & SA8000 Worker condition standards for in the supply chain UN global compact Principles on human rights, labor rights, the
environment and anti-corruption
Responsible care Codes of practice for chemical industries
Global Reporting Initiative (GRI) Sustainability reporting standards
AA1000 Social & ethical accounting, auditing and reporting
ISO26000 Guidance for social responsibility
Table 1. Key elements of international CSR standards
The different standards are different in nature and can be categorized in four dimensions. First are the ‘process of standards’, focused on organizational processes within companies. The second dimension is described as the ‘focus’, or the aim, for instance to help develop human rights in general or focused on a particular stakeholder. The third dimension is the monitoring process, here the presence of a third party observer or the inclusion of a monitoring system is important. Lastly the fourth dimension is the ‘development’ and therefore the governance of the standard itself (Colle, et. al. 2013).
To expand from this, also a more practical approach towards CSR is considered. Therefore, three dimensions of CSR practices are stated. Namely moral practices, discretionary practices and relational practices (Wang, A. 2008). Moral practices can be described as treatment of employees, human rights of those employed in foreign countries, fair competition, environmental issues and lastly scandals. Discretionary practices are considered to be a contribution to society, for instance supporting or starting cultural, health and family initiatives. Lastly relational practices are the relations with the customers and other stakeholders. Seeking long term relationships and thinking and acting on social criticism (David, P., Kline, S., & Dai, Y. 2005).
As shown in table 1 the GRI sustainability standards are one of the key elements of international CSR standards. GRI does not only provide standards in CSR, but also gives guidance in reporting CSR related activities. GRI is viewed to be the most popular and recognized corporate sustainability reporting guideline, and can be divided into four dimensions: ‘labor practices &
decent work’, ‘human rights’, ‘society’ and ‘product responsibility’. (Chen, L., Feldmann, A., &
Tang, O. 2015). Table 2 below provides an overview of the dimensions, with their indicators.
Consequently, the focus will be on the four CSR dimensions as described by the GRI framework as this is more applicable for understanding the effects of CSR and CSR reporting.
Labor Practices &
Decent Work Human Rights Society Product Responsibility.
Employment Investment and
Procurement Practices
Local communities Customer Health and Safety
Labor/Management
Relations Non-Discrimination Corruption Product and Service
Labeling Occupational Health and
Safety
Freedom of Association and Collective
Public Policy Marketing Communications Training and Education Child Labour Anti-Competitive
Behavior Customer Privacy
Diversity and Equal Opportunity
Forced and Compulsory Labor
Compliance Compliance
Equal Remuneration for Women and Men
Security Practices
Assessment Remediation Table 2. GRI framework dimensions summarized.
CSR Measurement
Before analyzing the methods in reporting CSR and its effects, we shortly elaborate on how CSR is measured because these two elements are intertwined. As mentioned before in the introduction,
When measuring CSR many studies use one of the following two methods. GRI framework and the Kinder Lydenberg Domini (KLD) database. The latter provides information on CSR dimensions, including environmental, community, employee relations, diversity, product and corporate governance and uses these as a proxy to measure CSR performance (Wang, Z., Hsieh, T.-S., & Sarkis, J. 2017). The GRI framework will also be mentioned later as a tool for CSR reporting, but is also used in studies to measure CSR. (Beck, C., Et al.) Both methods are considered to be viable, but another issue that arises is the fact that many studies use different input for assessing CSR. For instance, some studies use CSR disclosures by companies as input to measure CSR performance, because of the various self-evaluation methods companies have at their disposal when it comes to CSR. (Wang, Z., Hsieh, T.-S., & Sarkis, J. 2017). Others studies use surveys or Likert scales and sometimes even in monetary amounts of spending that a firm does in CSR. The way CSR is measured will affect the results. (Newell, A. P. 2014). Most articles used a combination of CSR dimensions, put together from different methods or frameworks, based on what the researcher deemed appropriate.
But researchers question the usefulness and appropriateness of a single framework or metric system, because companies will focus their CSR efforts on dimensions according to their activity and stakeholders. (Newell, A. P. 2014). E.g.: Energy firm Transalta, reporting more on (environmental) carbon emissions than other dimensions. This brings up the problems that all approaches suffer from, which are subjectivity and selection bias by researchers (Galant, A., &
Cadez, S. 2017). Conclusively, CSR measurement in empirical literature ranges from multidimensional to one-dimensional, with many different approaches, therefore there is no perfect measure for linking CSR to Corporate Financial Performance (CFP). Consequently, we accept different ways of measuring CSR to CFP, including measures companies chose to report and the GRI framework.
CSR Reporting
Disclosure of CSR reporting in many jurisdictions is not mandatory (Galant, A., & Cadez, S.
2017). This does not mean that companies don’t disclose their CSR reports. According to the governance and accountability institute, the CSR reporting for S&P 500 companies has increased from approximately 20% in 2011 to 70% in 2013. (Wang, Z., et al. 2017). CSR reporting is supported by standards, for instance the Global Reporting Initiative (GRI) framework that gives companies around the world the tools to evaluate and disclose their own CSR reports. But also, the previously mentioned ISO standards help regulate the reporting of CSR. (Wang, Z., et al.
2017). When companies report against these guidelines, this should result in a comprehensive report addressing multiple stakeholders and cover the economic, environmental and social dimensions (Beck, C., Et al. 2018). The GRI is considered to play a principal role in CSR reporting, where many financial and healthcare institutions use their guidelines to draw up publications on CSR. (Newell, A. P. 2014). As mentioned before, the GRI framework is viewed to be the most popular and recognized corporate sustainability reporting guideline (Chen, L., Et al. 2015).
CSR Effects
With the definitions and dimensions of CSR stated and after reviewing the standards and frameworks on CSR and CSR reporting that companies have at their disposal, it is important to look at the effect that CSR has on organizations. This includes the effects of CSR not only directly in a financial capacity, but also in an organizational capacity which can translate into financial performance in the end (Lusthaus, C., Adrien, M.-H., Anderson, G., Plinio, G., Carden, M. H., et al. 2014). Because besides the possible relation between CSR and financial performance, adapting CSR can have an influence on the organization in a negative or positive way (Colle, et. al. 2013).
For example, adopting CSR can enhance corporate reputation, which is considered to be a positive effect of CSR. But a negative effect is the obsession with CSR compliance, which can be at the expense of relationships and trust between organizational members and stakeholders. This suggests that besides the agreed positive effect of CSR, one must not forget the significant difficulties associated with CSR (Colle, et. al. 2013).
The aim is to analyze the effect of CSR reporting on financial performance. Many extensive empirical studies have been done on the relationship between CSR and CFP (Galant, A., & Cadez, S. 2017). Although many of these studies used CSR reports as benchmarks for ‘’CSR’’, they do not directly link the way of reporting to the CFP. In order to do so, we first elaborate on the effects of CSR on CFP, and after that take a deeper look at the effects of CSR reporting on CFP, and if such a relation could exist.
The old way of looking at CSR was that it is costly because of its additional expenses. But companies engage in CSR, which can be motivated by a variety of reasons. For instance, a purely philanthropic motivation. But there have to be other benefits in order for companies to perform well in CSR practices. CSR conforms with institutional pressures and can lead to financial gains and a better reputation (Lee, K.-H., & Shin, D. 2010). Social responsibility can also make it easier to attract resources and employees, make it easier to market products and services and also create competitive advantage (Barnett, M. L., & Salomon, R. M. 2006). Other studies also mention the positive effects on employee motivation and recruitment, higher sales, improving image and reputation, which all have possible positive effects on CFP. (Galant, A., & Cadez, S. 2017).
Therefore, one could argue that being socially responsible rather has a positive effect than a negative one (Moser, D. V., & Martin, P. R. 2012).
The performance impact depends on the fact whether a firm's CSR reputation is positive. Positive here means that a firm exceeds at corporate social regulations. Gaining a positive CSR reputation can lead up to 4% in rise of profits. But gaining a negative reputation can lead to almost 8% of reduction in profits. (Miller, S. R., Eden, L., & Li, D. 2018). This is partly due to the fact that there are many public and private rating agencies that publish rankings of firms and their performance of being socially responsible; for instance Maclean's top 50 socially responsible corporations and Forbes’ top 10 companies with best CSR reputations. Firms can increase or decrease their reputation by performing better. (Miller, S. R., Eden, L., & Li, D. 2018). Even more arguments for positive effects of CSR come from a study that used the GRI framework to rate companies on their CSR engagement and performance, and found a significant relation between CSR engagement and financial performance (Beck, C., Frost, G., & Jones, S. 2018). The disclosure of CSR reports has become booming. They seem to have become one of the most used and growingly important tools to communicate social behaviour with stakeholders (Newell, A. P. 2014).
CSR Reporting Effects
This then raises the question if the way of reporting CSR influences the organization's financial performance? As stated above, CSR arguably has a mostly positive effect on financial performance, although this can be debated, and CSR reputation is flexible in the sense that it can be moved in a positive or negative direction. Markets reward socially and environmentally desirable behaviour of companies, therefore organizations are motivated to disclose more positive CSR information (Wang, Z et. al. 2017). It would be logical reasoning to think that companies could use CSR reporting as a way to influence and enhance corporate reputation, which, showed by study, could lead to an increase in CFP (Miller, S. R., Eden, L., & Li, D. 2018) and lead to improving an organization's competitive advantage (Barnett, M. L., & Salomon, R. M. 2006). We assess this reasoning by reviewing different academic literature.
A paper by Chen, L., Feldmann, A., & Tang, O. 2015 studied the GRI reports of 75 companies and linked these with the CFP of the companies using statistical evaluation methods. The study indicated that the categories; Human rights, Society and Product Responsibility displayed significant and positive correlation with the return on equity. Based on the research it shows that the CSR categories that got the most attention in reports are labor practice and decent work. Also based on the analysis they show that CSR indicators that are easier to quantify score higher than others, which indicates that companies make effort in improving performance at product responsibility, because this CSR condition impacts product reputation and due to the fact that the products reputation in the market directly impacts the companies market performance. They expand from this by saying that companies doing well on GRI indicators also perform well financially and have extra resources to put into the improvement of CSR and CSR reporting. Which in time can bring better CSR publicity and in time a significant competitive advantage. They conclude this by saying that CSR reporting and CFP mutually affect each other through a virtuous cycle (Chen, L., Feldmann, A., & Tang, O. 2015).
When diving deeper into what dimensions of CSR affect CFP, studies show that investors ask more premiums for non-socially responsible stocks, therefore the cost of equity is lower for socially responsible firms (Girerd-Potin, I., Jimenez-Garcès, S., & Louvet, P. 2013). A study by Rodger et al. provides empirical evidence that there is a positive link between a firm's CSR reputation and firm value. They observe that various dimensions of CSR have different impacts on a firm's performance. The CSR dimensions that include customer interests are significantly related to a firm's accounting- and market-based CFP (Rodgers, W., Choy, H. L., & Guiral, A.
2013).
Conclusively, if CSR and positive CSR reputation arguably have a mostly positive effect on CFP, and companies use CSR reporting as a way to communicate and influence the stakeholder’s perception on their CSR reputation that would suggest that CSR reporting influences the CFP.
Literature shows that companies that are more involved with CSR perform better financially, and are able to expand from this. Study also shows that many dimensions of CSR have impact on CFP, but as mentioned before the dimensions that are easier quantifiable and are closely related to market performance, brand value and competitive advantage (product responsibility) perform better. Which makes this an interesting dimension to investigate further.
3. Hypothesis development
From the discussion above we conclude that when investigating the relationship between CSR reporting and CFP there are many CSR dimensions that can be assessed. After reviewing the literature, the two following hypotheses are stated.
Reporting more positively
It is stated that companies use CSR reporting as a tool to communicate with their stakeholders and influence public opinion, and therefore companies would report more positively (Wang, Z et. al.
2017). Gaining a positive CSR reputation could lead to an increase in competitive advantage and a rise in profits (Miller, S. R., Eden, L., & Li, D. 2018). Companies could possibly use their CSR disclosure to increase their competitive advantage and to increase their reputation, because many studies use CSR report as the baseline for their research, and rating agencies are also partly reliant on the CSR disclosure by companies. Therefore, one could expect that companies indeed will report more on their CSR engagement, but this leaves the question whether this leads to better financial performance, which results in the following hypothesis.
Hypothesis 1: Companies that report more CSR measures perform financially better.
Reporting closely related to market performance, brand value and competitive advantage As stated above, markets reward socially and environmentally desirable behaviour of companies (Wang, Z et. al. 2017). GRI categories like; Human rights, Society and Product Responsibility displayed significant and positive correlation with the return on equity. Research shows that the CSR categories that got the most attention in reports are labor practice and decent work. Studies also show that CSR indicators that are easier to quantify score higher than others. Which indicates that companies make effort in improving performance at conditions like product responsibility, because this CSR condition is closely related to market performance, brand value and competitive advantage. But the question that arises is whether reporting on those conditions lead to better financial performance. This results in the following hypothesis.
Hypothesis 2: Companies that report CSR measures closely related to product responsibility perform financially better.
4. Methodology
The aim of this study is gaining in-depth insight into CSR reporting and its relation to CFP. In order to gain a better insight in that relation this study used and examined existing literature and data on the topic.
The academic literature used was selected by manually searching the university library of Groningen’s online catalog for academic literature. Besides that, references that seem relevant within potentially relevant literature are also highlighted for further investigation. This traditional approach for literature review is followed by the research triangle institute (Chapman, A. L., Morgan, L. C., & Gartlehner, G. 2010). The study follows a pragmatic methodology approach, which could be defined as the use of more than one qualitative approach with another, and has been noted as one of the most sensible and practical methods for answering research questions (Clarke, E., & Visser, J. 2018). The paper itself does not conduct quantitative methods like surveys or experiments or qualitative methods like interviews or focus groups, but includes papers that do so, to get a comprehensive look on the topic of CSR and CFP. Potentially relevant literature is extensively read and either selected or not selected based on the following criteria;
i. Papers about; CSR, CSR and CFP, CSR reporting, CSR effects, CSR measurement, CSR performance.
ii. Relevancy to hypothesis based on the readers opinion.
iii. Peer reviewed articles only.
iv. English language only.
Once literature meets these criteria it is used for further investigation. This study conducts a semi- systematic review on the literature. This type of review is designed for topics that have been studied and conceptualized by other researchers (Snyder, H. 2019). This also means that for the literature search a set of key words are defined, which are: CSR, CFP, Corporate social, Relationship, Reporting, Reports, Measurement, Reputation, Disclosure, Financial.
The keywords will be searched in combination with Boolean operators: AND, OR, WITH.
The search results are then documented, after which they will be read and deemed relevant or not.
This method repeats throughout the construction of the paper, and is not used once. The way literature is selected to be relevant or not is done by a first and second round approach. The first round looks at the title and abstract. After this a paper will be selected for the second round or not.
The second round consists of reading the selected literature entirely (or in case of books, the relevant chapters). If the literature is deemed relevant after round two, it is documented and saved.
In order to do a comprehensive analysis, the relevant literature is placed in a literature review matrix. Each of the academic titles get a row, each column is a point of interest for the study.
Important sections within the literature are highlighted and documented.
This type of review has effects on the validity of the paper. References that meet criteria to be reviewed could be missed. Secondly, whether literature is deemed relevant is decided by the author of the paper, this could involve some form of bias. Furthermore, there could be a form of bias in the interpretation of the academic literature, or within the literature itself.
5. Results
The first round of selecting literature resulted in 31 articles. After reviewing the selection of 31 articles in round two, 20 articles were found relevant to incorporate within the study. The 20 articles were documented in a literature review matrix as can be seen in appendix 1. This matrix consists of all 20 articles, including relevant text for answering the hypothesis. The relevant text is divided into three columns. The first column includes a description of the theoretical framework and/or research question and hypothesis. The second column describes the methodology and/or analysis. Lastly, the third column describes the conclusions and/or implications. Not all columns were completely filled for the sake of readability and usability. Data deemed not relevant was left out. In the following paragraphs the results from the matrix will be interpreted and discussed.
When analyzing the literature, seven relevant topics were found within the articles.
CSR and CFP
After reviewing all the literature, 18 out of 20 articles showed a significant relationship between CSR and CFP. The two other articles did not contradict those implications, but emphasized on different aspects of CSR. From the 18 studies supporting CSR’s positive influence on CFP, most studies controlled for factors like industry-effects, firm size. For example Beck, C., Frost, G., &
Jones, S. (2018) used the GRI framework in their analysis to rate 116 public companies on their CSR and test the effect on the financial performance. Implications for the results are: the reduced associated risk that comes with CSR, more control over the firm, and reducing information asymmetries (Tang, Z., Hull, C. E., & Rothenberg, S. 2012). Conclusively, we therefore assume that companies that engage in CSR perform better financially. This does not yet tell whether more CSR reporting, or CSR reporting about product and service responsibility relates to better CFP. It only gives a clear implication that CSR itself has a positive influence on CFP.
CSR reputation and CFP
3 articles showed that CSR reputation is significantly related to a company’s CFP. They explain this by saying that enhancing a firm's reputation will increase stakeholder trust and mitigates firm risk, while strengthening the innovation capacity (Vishwanathan, P., Oosterhout, H., J. V., Pursey P. M. A. R. Heugens, Duran, P., & Essen, M. 2019). The results from a study by Rodgers, W., Choy, H. L., & Guiral, A. (2013) implied that CSR reputation does not only affect CFP in the short term, but also the long-term performance by affecting the market’s perception of the firm. The effect of CSR reputation on CFP is best summed up by saying that reputation significantly affects the financial performance by developing a positive image with stakeholders (Ali, H. Y., Danish, R. Q., & Asrar‐Ul‐Haq, M. 2019). Conclusively, one could argue that enhancing a firm's reputation increases CFP. Therefore, we look at the results of two factors in the following paragraphs, the effects of ‘CSR measures’ and ‘CSR reporting’ on CSR reputation.
CSR measures and CSR reputation
4 out of 20 articles' implications are in line with the statement that CSR measures improve CSR reputation. GRI activities positively influence the financial performance in this capacity (Lee, J.,
& Maxfield, S. 2015). A study by Ali, H. Y., Danish, R. Q., & Asrar‐Ul‐Haq, M. (2019), that looked at 229 companies listed in Pakistan’s stock exchange, says that CSR significantly affects CFP by ‘developing a positive image’. This is also mentioned in a study by Miras-Rodríguez, M.
D. M., Carrasco-Gallego, A., & Escobar-Pérez, B. (2014) where they mention CSR actions oriented at the environment are mainly motivated to improve the company’s image and reverse their negative impact. Therefore, we assume that CSR measures positively relate to a firm's CSR reputation. Since CSR reputation improves CFP, one could argue that CSR measures do indeed improve a firm's CFP. By this reasoning we can also look at CSR’s disclosure and its effect on CSR reputation.
CSR disclosure and CSR reputation
From the 20 articles, 3 mentioned statistically significant implications on CSR reports and its relation to CSR reputation. Two articles explained this by saying that CSR reports are reviewed by third parties, and these third-party reviews are significantly related to the firm's CFP (Akisik, O., & Gal, G. 2014). Public and private rating agencies often publish the rankings of the compliance of firms with government regulations, and these are reported in the media. (Eg. Forbes,
Although only three articles supported this reasoning, none of the other articles contradicted it.
Therefore, one could argue that CSR disclosure can help increase the firm's CSR reputation. By this reasoning CSR disclosure can improve CFP, since positive CSR reputation is positively and significantly related to CFP. To add on the previous statement that CSR disclosure can improve CSR reputation, I also looked at CSR disclosure and its effect on Stakeholder trust. 4 articles out of 20 implied that CSR disclosure has a positive effect on Stakeholder and/or investors trust. This is due to the fact that CSR disclosures help with reducing information asymmetries, give the perception of lower associated risk to the investment, which altogether increase trust by stakeholders (Sciarelli, M., Tani, M., Landi, G., & Turriziani, L. 2019).
CSR disclosure and CFP
As established previously the indirect effects of CSR disclosure on CFP through CSR reputation are positive, but in this paragraph we look at the literature, and its implications on CSR disclosure in relation to CFP directly. When analyzing the articles, 7 out of 20 articles support the claim that CSR disclosure has a significant influence on financial performance. A study by Lee, J et al. (2015) compared the CSR reporting methods of Fortune 500 companies, and found that especially GRI reporting has a strong impact on both social and financial performance. The hypothesis that CSR disclosure and financial performance are related was tested by Beck, C et al (2018) by using 116 GRI framework reports and testing if there is an effect on CFP, and showed significant relationship between CSR disclosure and financial performance. Literature suggests that there is not only a positive relation between CSR disclosure and the financial performance in the short run, but in the long run as well. (Platonova, E., Asutay, M., Dixon, R., & Mohammad, S. 2016). Although data from this study is from the Islamic banks in Gulf Cooperation Council (GCC), and might not be generalizable towards more western countries, and other industries besides the financial one.
But literature originating from western society also suggests that CSR disclosure can improve CFP.
Not only by official CSR reports, but also by disclosing CSR related news through other media like web and social. Disclosing news closely related to their products and activities have shown to be linked to better performance (Sciarelli, M., Tani, M., Landi, G., & Turriziani, L. 2019). A study from China tested whether obeying governmental regulations in CSR disclosures is positively associated with the performance of a firm in that current period of time, but also in the subsequent period of time. The results show statistically significant, and positive relation between CSR reporting and the CFP in the subsequent period of time, but found that historical CFP is related to the CSR disclosure. This suggests that companies that do better financially, engage more in their CSR disclosures. The study also implies that corporate donations are strongly associated with improved performance, but also for the subsequent year. The managerial implications from the study suggest that CSR reporting have legged effects, and in order to have a direct effect on performance, firms should publicize their CSR achievements through different channels (Cheng, S., Lin, K. Z., & Wong, W. 2015).
Lastly, two studies from 2014 both found that CSR disclosure does affect the performance of a company, specifically the stock prices (Herbohn, K., Walker, J., & Loo, H. Y. M. 2014),(Reverte, C. 2014). Implications from the study by Reverte (2014) that used a sample of listed Spanish companies and reviewing their CSR disclosure, suggest that the effect of CSR disclosure on CFP is also related to the industry a firm is operating in. Namely that firms operating in environmentally sensitive industries (eg. mining, energy) experience higher market valuations with CSR disclosures than firms in non-sensitive industries.
When analyzing studies from multiple parts of the world, the general assumption is that CSR disclosures have a positive relation to CFP, and are not bound by the geographic location, more than it is to the environmental sensitivity. Conclusively, we therefore assume that CSR disclosure has a positive relation to CFP. This leaves two more essential subjects to analyze in order to answer both hypotheses. Namely, what is the influence of the sheer quantity of CSR disclosure on CFP, and what is the effect of CSR reporting focused at ‘products’ on CFP.
Quantity of CSR disclosure and CFP
The previous paragraph established the effect of CSR disclosure on CFP. The quantity of CSR reporting was not taken into account when analyzing the articles that proved a positive relation between the two. When taking the quantity of CSR reporting into account, 3 articles support the statement that the amount of CSR reporting relates to the CFP and specifically mentioned the positive effect of the amount of CSR reporting. Beck, C et al (2018) proved by analyzing the CSR disclosure against GRI of companies, that higher total CSR reporting is negatively associated with financial risk. A study conducted on the GCC Islamic banks tested the hypothesis that higher levels of CSR disclosures result in better financial performance. The result of the study supported this hypothesis, and mentioned in particular that GRI reporting had the most impact (Platonova, E., et al. 2016).
A very important implication to mention, before firms start to drown stakeholders with CSR reports and messages, is that the enhancement of credibility and usefulness of the information that is being given in the CSR reports is essential for companies, due to the frequent claims of window- dressing or otherwise known as green-washing (Miras-Rodríguez, M. D. M., Carrasco-Gallego, A., & Escobar-Pérez, B. 2014). Conclusively, when analyzing the literature from this study we can
CSR reporting on ‘products’ and CFP
When analyzing the literature on CSR reporting for specific dimensions of CSR, 5 articles supported the claim that CSR reporting on the dimension ‘product responsibility’ positively affects CFP. 1 of the articles contradicts this statement at the same time by saying all dimensions lead to better CFP, but it is better to report on closely related CSR measures to the company's business, or to specialize at one dimension, specifically internal dimensions as corporate governance, diversity and employee relations, before focusing on external dimensions including product & services responsibility. (Tang, Z., Hull, C. E., & Rothenberg, S. 2012). A study conducted by Miras- Rodriguez, M. D. M., et al (2014) shows results based on a worldwide sample of electrical companies, that the CSR dimension with the most economic justification where: community, diversity, corporate governance & product responsibility. This is in line with the statements from the study by Tang, Z., et al (2012), but including the dimension product responsibility.
A study by Platonova, E., et al (2016) researched the hypothesis that all composite dimensions of CSR disclosure have an individual positive impact on the financial performance. The results show no statistically significant relation between the individual dimensions of CSR and CFP, except for the one on ‘Mission and vision’ and ‘Products and services’, implying that reporting on the responsibility of product and services does indeed have a significant effect on CFP. This is in line with the previous article by Miras- Rodriguez, M. D. M., et al (2014). In this paper the GRI guidelines have been mentioned extensively, and therefore the article by Chen, L., Feldmann, A.,
& Tang, O. (2015) gave an interesting insight on how the different dimensions of the GRI reporting guideline affect CFP. The results indicate that the factors of Human rights, Society performance and Product responsibility all have significant positive correlation with the return on investment of companies, but that companies make more efforts in improving their performance in product responsibility. The article explains this by saying that product responsibility is more closely related to market performance of a company. But not only does product responsibility have a significant impact on market based performances, but according to Rodgers, W., Choy, H. L., & Guiral, A.
(2013) product responsibility also impacts accounting based performances.
Conclusively when analyzing the literature, we cannot say that reporting on ‘products and services’
generates more CFP than other dimensions, but it is definitely an interesting and important dimension within CSR reporting, since it does contribute significantly to the CFP of a firm.
6. Conclusion and limitation
Conclusions
CSR disclosure affects CFP in two various methods, directly and through CSR reputation. CSR reputation significantly affects CFP by developing a positive image with stakeholders, and therefore creating investor trust and is associated with lower risk. CSR reputation can be changed negatively and positively. Two methods that show a statistically significant effect on changing the CSR reputation of a company in a positive capacity are through CSR measures and CSR disclosure.
Since positive CSR reputations are associated with a higher CFP and are affected by CSR reporting, we therefore assume that CSR reporting has a positive effect on CFP.
CSR reporting also affects CFP directly in the long and short run. Not only by official CSR reports against methods like GRI, but also by disclosing CSR related news through other media like web and social. Managerial implications from a study by Cheng, S.,et al (2015) suggest that CSR reporting have legged effects and in order to have a direct effect on performance, firms should publicize their CSR achievements through different channels. The positive effect from CSR reporting comes from reducing information asymmetries and also by creating stakeholder trust, since investors use CSR reports to assess how socially responsible a firm is. Reporting against the GRI framework has the most effect on CFP as shown in a study by Platonova, E., et al. (2016).
Additional implications are that firms operating in environmentally sensitive industries (eg.
mining, energy) experience higher market valuations with CSR disclosures than firms in non- sensitive industries.
Literature analysis showed that the sheer quantity of CSR reporting matters too. Three articles support the statement that the amount of CSR reporting relates to the CFP and specifically mentioned the positive effect of the amount of CSR reporting. An explanation for this is because higher total CSR reporting is negatively associated with risk. An important footnote is that enhancement of credibility and usefulness is essential for the effect of CSR reporting because of green-washing claims. Because CSR reporting significantly affects CFP directly and through a company’s reputation, and more reporting is associated with positive effects on CFP. We therefore assume that hypothesis 1 is correct and companies that report more CSR measures perform
After analyzing the positive effects of CSR reporting on CFP, the individual dimension of product responsibility was also analyzed. The results from this also show a positive relation between product responsibility reporting and the CFP of a company. A possible explanation for this is that this dimension is more closely related to market performance. Although this is met with some contradicting implications. Namely that multiple studies show that reporting on internal factors like diversity, corporate governance is preferred over external factors. Also mentioned is the importance of focusing on certain dimensions instead of trying to be jack of all trades.
The most success for companies can be found in dimensions closely related to the firm's business.
(eg. electrical companies reporting on environmental dimensions). A counter argument is that a study by Platonova, E., et al (2016) looked at the individual effects of the GRI dimensions and found no statistically significant evidence that they improve CFP, except for ‘product responsibility’. Concluding from this, we see a positive effect of product responsibility on CFP in the literature, but this dimension is arguably also affected by other dimensions and the relatedness of the firm's business. We therefore assume that hypothesis 2 cannot be proven with the current data. More study is needed on the reporting of CSR measures closely related to product responsibility.
Managerial implications
Firms that seek to benefit from CSR and CSR reporting must strategize towards frequent reporting of useful and credible CSR measurements. Firms should publicize their CSR achievements through different channels and official reporting, preferably the GRI framework as this is shown to have the most effect on CFP. This is in order to take lagged effects of reporting into account and to prevent greenwashing . The financial result of the individual CSR dimension companies report on is partially dependent on the industry the firm is operating in, but generally reporting on the CSR dimension of product responsibility does well, but not provably better than internal dimensions as corporate governance, diversity, and community. Concluding from managerial implication found in literature, CSR reporting attention should be more focused on the internal dimensions and business-related dimensions. This also calls for further research, namely in the assessment of
‘product responsibility’ and preferably in relation to other individual dimensions in CSR reporting.
A suggestion could be to test this against the GRI framework.
Limitations
This study also has limitations that could affect the validity of the paper. It is possible that important literature supporting or counter arguing the hypothesis were missed in the search progress. This could also be due to a form of bias. This bias also plays a role when analyzing and interpreting the literature. As a researcher one tries to be as objective as possible, but this has its limitations. Furthermore, there is an argument to be made about the generalizability of the literature used. Articles about CSR often research one certain market or industry, or a specific region or country. Not all industries are the same. Same reasoning applies for specific regions. The study tried to account for this issue and based the implications on literature from different studies from different industries and regions. There could also be issues with the sample size of 20 articles, which has an influence on identifying significant relations. This is also due to the issue of time constraint, which influences the extensiveness of the paper and calls for further study on the subject. A proposition is a cross-country and cross industry-study towards the individual dimensions of the GRI framework and their relation with CFP.
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8. Appendix
Literature review matrix:
author / date theoretical/co nceptual framework
Research question/
hypothesis
methodology Analysis/
results Conclusions Implications for future research
Implications for practice
Beck, C., Frost, G., &
Jones, S.
2018.
There is a positive relationship between CSR disclosure/
engagement and financial performance, even after controlling for a CSR performance proxy, industry-level effects, country-level effects, firm size, financial risk, type of assurer and investment returns.
use the
Global Reporting Initiative (GRI) framework to rate 116 public companies on their CSR disclosure, and see if there is an effect on financial performance
Regression
analysis Significant relationship between CSR disclosure and financial performance.
indicates that higher total CSR
engagement is negatively associated with financial risk (lower
risk is
associated with higher CSR
engagement)
Vishwanathan
, P.,
Oosterhout, H., J. V., Pursey P. M.
A. R.
Heugens, Duran, P., &
Essen, M.
2019.
This study develops the concept of Strategic Corporate Social Responsibility (Strategic CSR) by meta- analyzing the available empirical evidence on the
relationship between CSR
Using meta- analytic structural equation modeling on effect size data from 344 primary studies, our study documents four empirical mechanisms explaining
how CSR
positively
by 1)
enhancing firm
reputation(, 2) increasing stakeholder reciprocation, 3) mitigating firm risk, and 4) strengthen- ing innovation capacity. We propose these four
mechanisms to identify
suggesting that considerable room remains for future empirical research.
mechanisms combined explain 20 percent of the CSR-CFP relationship Tang, Z., Hull,
C. E., &
Rothenberg, S. 2012.
We propose that firm profits are shaped by how firms engage in corporate social responsibility.
Drawing on absorptive capacity theory and related perspectives such as time compression diseconomies, asset mass efficiencies, and path dependence theory, we argue that when a firm engages in CSR slowly and
consistently, focuses on related CSR dimensions,an d starts with internal dimensions of CSR, CFP will be enhanced.
Drawing on absorptive capacity theory and related perspectives such as time compression diseconomies, asset mass efficiencies, and path dependence theory, we argue that when a firm engages in CSR slowly and
consistently, focuses on related CSR dimensions,an d starts with internal dimensions of CSR, CFP will be enhanced.
With longitudinal data collected from 130 firms from 1995 to 2007
Another important managerial implication has to do with the relatedness issue: it's better to specialize in one or more closely related areas of CSR at a time than to try to pursue all of them at once.
Thus, managers are advised to take
care of
internal dimensions
such as
Governance, Diversity, and Employee Relations before external dimensions
such as
Community, Environment, Human Rights, and Product.
Both lead to better CFP.
Pursuing CSR internally first gives the firm more control.
Uncertainty is limited, and potential damage can be more easily controlled;
thus, it is easier to succeed.
Initial Success
breeds future successes, making the transition from internal to external dimen-sions easier than the other way around.
Yim, S., Bae, Y. H., Lim, H., & Kwon, J. 2019.
signaling theory in proposing a conceptual framework that simultaneousl y incorporates both the mediating effects of corporate reputation (CR) and the moderating effects of marketing capability (MC) into the corporate social responsibility (CSR)–
corporate financial performance (CFP) link and theorize a single moderated mediation model.
This study uses structural equation model estimations with the relevant secondary datasets collected from publicly available databases.
The empirical results of the research confirm the theorized moderated mediation model among the four variables, where a firm's CR corporate reputation
plays a
mediating role
in the
relationship between CSR and CFP, and afirm’s MC moderates the effect ofCSRonCRe xclusivelyinth efirst link.
Miras- Rodríguez, M.
D. M.,
Even though electrical companies attain a top
Based on a worldwide sample of electrical
The sample is composed of companies from the
The results show that there is an economic
The enhancement
of the
credibility and
