The materiality of CSR performance for the financial return of companies.
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The materiality of CSR performance for the financial return of companies.

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Olaf Weber, Managing Partner - GOE M.B.H. - Gesellschaft Für Organisation - Switzerland

Olaf Weber, Managing Partner - GOE M.B.H. - Gesellschaft Für Organisation - Switzerland

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The materiality of CSR performance for the financial return of companies. The materiality of CSR performance for the financial return of companies. Document Transcript

  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Index lower group weighted Index upper group weighted Index lower group equiweighted Index upper group equiweighted 250% The materiality of CSR performance 200% for the financial return of companies 150% Index . 100% Dr. Olaf Weber GOE, Zurich 50% in co-operation with 0% ay 1 ay 2 ay 3 ay 4 ay 5 ay 6 Ju 01 Ju 2 Ju 3 Ju 4 Ju 05 Ju 06 Ja 01 Ja 02 Ja 03 Ja 04 Ja 05 N 01 No 02 No 03 N 04 N 05 ar 1 ar 2 ar 3 ar 4 ar 5 ar 6 Se 01 Se 02 Se 03 Se 04 Se 05 6 M 200 M 200 0 M 200 0 M 200 0 M 200 M 200 M n0 M n0 M n0 M n0 M n0 M n0 l0 20 20 20 20 20 20 ov v v ov ov p p p p p l l l l l Ja Sep-07 1 © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Core questions Does CSR performance show materiality for the financial performance for firms? What methods have to be used to show the materiality of CSR performance for the financial performance of firms? Sep-07 2 1
  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Basis for the analysis CSR data of a random sample of 574 companies worldwide from 2001 to 2006 • Based on the GRI Framework • Data collected by ASSET4 from all publicly available documents • Monthly Total Returns collected from Thomson Financials Hierarchical categorized system of • driver indicators (policy, implementation, monitoring, improvement) • outcome indicators (performance, transparency, exposure, momentum) • integration of the indicators into 18 categories, 4 pillars and one rating score Measuring the • economic • environmental • social and • corporate governance performance Sep-07 3 © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Method Creating 18 categories by equi-weighting the respective indicators • i.e. board structure, emission reduction, employment quality, etc. Weighting the 18 categories using multivariate statistical algorithms • Categories as independent variable that predict the Total Return as dependent variable Ranking the companies with respect to their CSR performance on the weighted algorithm Constructing two portfolios using 50% percentile split Analyzing the means of the Total Return for the two CSR portfolios with respect to significant statistical differences Testing whether the difference between the portfolios is developing in the following year Sep-07 4 2
  • Sep-07 Sep-07 Index . Index . Ja 50% 70% 90% 110% 130% 150% 170% 190% 210% 230% Au M n0 50% 70% 90% 110% 130% 150% 170% 190% 210% 230% g ar 1 O 200 M 200 c 0 ay 1 Det200 20 c 0 Fe 20 Ju 01 b 00 l Ap 200 Se 01 r 1 p Ju 200 N 01 n 1 ov Au 20 g 01 Ja 01 O 200 c 1 M n0 ar 2 Det20 c 0 M 200 ay 2 Fe 20 1 20 b2 01 0 Ap 00 Ju 2 r 2 l Ju 200 Se 02 n 2 p Au 20 g 02 No 02 O 200 v c 2 Ja 02 und Entscheidung m.b.H. und Entscheidung m.b.H. D t20 ec 02 M n0 Fe 200 ar 3 b2 2 M 200 Ap 00 ay 3 20 r 3 0 Ju 200 Ju 3 n 3 l Au 20 Se 03 g 03 p TR index lower 50% in CSR © GOE – Gesellschaft für Organisation © GOE – Gesellschaft für Organisation O 200 c 3 No 03 Det20 v c 03 performance gap as well TR index lower 50% in CSR Fe 20 Ja 03 b 03 M n0 the Total Financial Return Ap 200 ar 4 r 4 M 200 ay 4 Ju 200 n 20 Au 20 4 0 g 04 Ju 4 O 200 l c 4 Se 04 Det20 p c 04 No 04 Fe 200 v b 4 Ja 04 Ap 200 r 5 M n0 Ju 200 ar 5 n 5 M 200 Au 20 ay 5 g 05 20 O 200 c 5 Ju 05 42.1% D t20 l ec 05 The algorithm is able to forecast the Se 05 TR index higher 50% in CSR Fe 20 p b 05 No 05 Ap 200 v r 6 Ja 05 Ju 200 TR index higher 50% in CSR n2 6 M n0 00 ar 6 6 M 0 20 ay 6 20 59.7% Ju 06 l0 6 There is materiality of CSR performance for 35.9% 6 5 3
  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. What happens when the CSR performance is not weighted? Weighted TR Index lower 50% in CSR Weighted TR Index upper 50% in CSR Non-weighted TR Index lower 50% in CSR Non-weighted TR Index upper 50% in CSR 230% 210% 190% 170% Index . 150% 130% 110% 90% 70% 50% ay 1 ay 2 ay 3 ay 4 ay 5 ay 6 Ju 01 Ju 2 Ju 3 Ju 4 Ju 05 Ju 06 Ja 01 Ja 02 Ja 03 Ja 04 Ja 05 N 01 No 02 No 03 No 04 No 05 ar 1 ar 2 ar 3 ar 4 ar 5 ar 6 Se 01 Se 02 Se 03 Se 04 Se 05 6 M 200 M 200 0 M 200 0 M 200 0 M 200 M 200 M n0 M n0 M n0 M n0 M n0 M n0 l0 20 20 20 20 20 20 ov v v v v p p p p p l l l l l Ja Sep-07 7 © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Methodological conclusions There are many opportunities to show the materiality of the CSR performance for the Total Return of companies, but… • the materiality can only be shown if a statistical weighting of different CSR aspects using multivariate algorithms is done, • rather a detailed analysis of the influence of different aspects of CSR performance on the Total Return is necessary to clarify the heterogeneous findings about the relation between CSR performance and financial performance. • About 10% of the variance of the Total Return can be explained by the CSR performance, because many other factor influence the financial performance of a firm. Thus different aspects of CSR performance have different influences on the financial performance, thus equi-weighting CSR aspects is not appropriate • Governance performance has the highest influence before economic, social and environmental performance Sep-07 8 4
  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. CSR in different sectors and regions Sector analysis of the categories with respect to their CSR performance • We hypothesize that different aspects of CSR play different roles in different sectors Regional analysis of CSR performance • Are there regional differences in the CSR performance? Sep-07 9 © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Sector analysis of the categories with respect to their CSR performance 0.8 Governance Economy Environment Social materials category value 0.7 telecommunication energy 0.6 consumer staples utilities 0.5 information technology industrials financials 0.4 consumer discretionary health care 0.3 Human Rights Training and Development Emission Reduction Compensation Policy Products Innovation Product Responsibility Community Employment Quality Board Functions Shareholder Rights Resource Reduction Shareholder Loaylty Diversity and Opportunity Health and Safety Visions and Strategy Margins and Profits Client Loyalty Board Structure Mean Sep-07 10 5
  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Summary of the sector analysis CSR Aspect Leaders Laggards Overall materials health care, consumer disc., financials Economic telecom., energy information technology Environmental materials financials Social materials health care Governance materials, energy consumer disc., industrials Sep-07 11 © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Regional differences in CSR performance Asia Australia Europe North America South and Middle America 0.8 0.7 0.6 Score . 0.5 0.4 0.3 0.2 Governance Economy Environment Social Sep-07 12 6
  • © GOE – Gesellschaft für Organisation und Entscheidung m.b.H. Conclusions CSR performance is material for the financial performance of firms • Using statistical methods we could create portfolios of CSR leaders that over- perform significantly the portfolio of laggards with respect to Total Return • Only the use of sophisticated methods shows the influence of CSR performance on the financial performance of companies CSR performance is significantly different with respect to sectors and regions • Thus for analyzing the influence of CSR performance on the financial performance of companies sector and regional characteristics must be taken into account Because our graph show that the CSR performance explains only about 10% of the financial performance of companies the influence of CSR on the financial performance must be analyzed using sophisticated methods. Sep-07 13 7