The Economist Doesn't Get CSR

The Economist recently did a special report on corporate social responsibility (CSR) with lots of interesting information. One of the articles was about whether CSR works. Reading it, I couldn't help but come to the conclusion that The Economist doesn't get the point of CSR.

Sustainability rankings and indices of various kinds also help to concentrate corporate minds by shaming firms or helping them shine. But they also point to a problem. Two of the best-known indices—the Dow Jones Sustainability index and the FTSE4Good—underperform the market. AccountAbility, a British think-tank, admits to the inconvenient truth that its 2007 ranking of the Fortune Global 100 companies by their progress on building sustainability into their business shows no connection with their financial performance.

Might cleverer approaches to CSR in future produce better returns?

Is CSR adding value to the business?

Apparently, The Economist believes that the way you tell that CSR is working is that the value of the company is increasing. But that is nonsense. Measuring the success of a company by its valuation is just standard investing. CSR is about taking additional social and environmental factors into account above and beyond the profitability/return on investment that a company produces.

As a CSR investor, you are concerned with whether the business is maximizing its value to society, not whether the company is maximizing the value of the business. CSR is about asking companies to internalize their externalities. Instead of passing on problems to society, you want that company to handle them. Yes, some companies like Whole Foods are able to get their customers to pay higer prices to absorb the additional costs of these policies and therefore are as profitable as other companies. But, just as Whole Food customers are willing to pay more for social and environmental reasons, so too should a CSR investor be willing to take smaller returns to invest in companies that are doing more than their fair share.

To measure the success of CSR, you can't do so by looking at the valuation of the company, but rather you need to look at other societal statistics to see if society and the environment are improving.

Examples of social and environmental impacts that are outside of the financial reporting include:

• Reducing CO2 emissions
• Reducing fertilizer and pesticide runoff
• Reducing air pollution
• Employing otherwise unemployable employees such as those that are disabled and those that just got out of prison

If a company is just as profitable as another but does a better job on these social and environmental aspects then it is a better company from a CSR standpoint. If a company does a better job on these but is slightly less profitable, then as a CSR investor you need to decide whether the reduction in profitability is more than made up for by the other aspects.

Yet there is nothing wrong with making money: more than anything else, that is how companies do good. The welfare they create in the form of jobs, products and innovation dwarfs anything firms are likely to do explicitly in the name of CSR.

After all, a socially conscious but bankrupt business is no good to anyone.

First, it is a false choice between going bankrupt and focusing on the maximizing profit as the only definition of success. The question should be whether the changes they are making due to their CSR policy has social and environmental benefits that are greater than any loses in profits that they caused.

Second, making money isn't how companies do good, providing a good or service that is a benefit to society is how they do good. If a company makes lots of money but this is only because of bad government subsidies or due to pollution for which they aren't handling, then the company really isn't doing good. CSR is about maximizing the benefits to society rather than maximizing the benefits to investors.

The silliness of their definition of CSR success can be seen in this article:

When Hank Paulson, now America's treasury secretary, was boss of Goldman Sachs, he was persuaded to raise the amount that the firm chipped in to boost employees' charitable donations. Now it is starting a philanthropy fund aiming for $1 billion to which the partners will be encouraged to contribute a share of their pay.

If you aren't going to spend the additional profits on yourself, but instead are just going to give them away to charity, why should you be concerned only with maximizing the rate of return? Instead of trying to maximize the companies return and then taking part of the profits and giving them away to charity, why not be willing to accept a slightly lower rate of return, if by doing so you can help out society more than by giving to philanthropies?

For example, instead of investing in a coal plant that gives you a 10% rate of return, but also adds to air pollution and CO2 emissions, why not invest in a solar project that gives you a 6% rate of return? You could think of the 4% difference as a donation you are making to help the environment. Instead of maximizing your return with the coal plant and then donating to a non-profit that helps with asthma or other problems caused by the coal plant, investing in the solar project means that those problems never existed in the first place.

The other thing that drove me nuts about this article is that I am sure that it is not all the writers at The Economist that believe this, but rather just the one who wrote it. But because there are no bylines, you can't figure out who that person is and you have to attribute the point of view to The Economist as a whole. While I can understand why they choose not to print bylines, I think it is a bad decision and overall it would be better to know who wrote which article.