Alex Wood Presentation - CIRANO & l'École Polytechnique de Paris Workshop: Corporate Social Responsibility and Firm Performance November 2010
Corporate Social Responsibility and Firm Performance CIRANO – Ecole Polytechnique Workshop Montreal – November 12, 2010 1
SustainableProsperity developsand promotes policy and market innovation to helpbuild a stronger and greener Canadian economy
CSR and financial performanceStarting 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 glanceWhat 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 glanceKey issue is understanding role of CSR/environment drivers of financial performanceDANA: PLS DROP VISUAL#1 IN HERE 8
Revenue DriversNew markets:Demand patternsNew 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 costsDANA: 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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