CSR ratings: Does more
information add more value?
Magali Delmas
UCLA
delmas@ucla.edu
PRI Academic Network Conference
2014 Montreal
1
CSR Ratings
• $3.74 trillion in assets managed according to
socially responsible criteria/strategies 2010 (SIFF
2012)
• More than 50 different sustainability ratings
2
3
4
Are green companies managed differently?
The tip of the iceberg?
5
Environmental
Reporting
Comparative Cost
Advantage
Regulatory
Proactivity
Environmental
Proactivity
Competitive
Advantage
Operational
Improvement
H1
Environmental
Partnerships
H2
Reputation
Advantage
Innovation/
Differentiation
Advantage
Absorptive
Capacity
Knowledge
Acquisition
Knowledge
Assimilation
Delmas, M., Hoffmann, V. H., & Kuss, M. (2011).
Knowledge
Transformation
Knowledge
Exploitation
6
The adoption of environmental and social practices
is associated with greater labor productivity.
Firm attractiveness
to prospective
employees
Employee
Engagement
ISO 14001 standard
Employee positive
social identification
with firm
Organic Labeling
Corporate Social
Responsibility
Employee
Training
Labor Productivity
Fair Trade
Interpersonal
contacts
Other CSR
standards
Employee health
and Safety
Delmas, M. A., & Pekovic, S. (2013).
Employee
retention
7
Research questions
• What do SRI ratings actually measure?
• What aspect of SRI does the market respond to?
• When do SRI investments pay?
– Delmas, M., Etzion, D., & Nairn-Birch, N. (2013).
Triangulating Environmental Performance: What Do
Corporate Social Responsibility Ratings Really
Capture?. The Academy of Management Perspectives,
amp-2012.
– Delmas, M., Etzion, D., & Nairn-Birch, N. (2014).
Temporal Dynamics of Environmental and Financial
Performance: The Case of Greenhouse Gas Emissions.
Draft
8
What do EP ratings actually measure?
• Data on 475 companies produced by three
widely used ratings agencies from 2004-2007
9
Ratings
Variable Name
Trucost
Total Damage Cost
Total environmental damage cost (mUSD)
Concerns Total
Total Environmental Concerns
Strengths Total
Total Environmental Strengths
Eco-efficiency
Environmental Performance (Eco-Efficiency)
Reporting
Environmental Reporting
KLD Analytics
Sustainable Asset
Management (SAM)
Description
KLD Analytics
• Binary variables for environmental strengths
and concerns categories
Environment
Strengths
Beneficial Products & Services
Pollution Prevention
Recycling
Clean Energy
Communications
Management Systems
Other
Concerns
Hazardous Waste
Regulatory Problems
Ozone Depleting Chemicals
Substantial Emissions
Agricultural Chemicals
Climate Change
Other
10
SAM
• Based on an industry-specific questionnaire
that is sent out to the 2,500 largest
corporations
• Dow Sustainability Index
CRITERIA
Eco-Efficiency
Environmental
Reporting
SUB-CRITERIA
GHG Emissions
Water Use
Energy Use
Waste Generation
DESCRIPTION
GHG, Water, Energy and Waste
aggregated together and given a score
0-100 (i.e. no data at the level of wáter
or energy specifically)
0-100
11
Natural capital metrics
carbon and other Greenhouse Gas (GHG) emissions,
water use, resource dependency, air/land/water
pollutants, waste.
Financial: externality valuation ($), impact ratio
(proxy for potential contingent resource liability),
profit at risk.
12
Correlations
Data
Source
Variable
Truc KLD SAM SAM KLD
ost
Trucost
1
Total Damage
1.00
KLD
2
Total Concerns
0.61 1.00
SAM
3
Eco-efficiency
0.35 0.46 1.00
SAM
4
Reporting
0.32 0.44 0.76 1.00
KLD
5
Total Strengths
0.23 0.38 0.66 0.58 1.00
13
Principal Component Analysis
• Reduce the dimensionality of a data set
• Convert a set of observations of possibly correlated variables
into a set of values of linearly uncorrelated variables called
principal components
Data Source
SAM
SAM
KLD
KLD
Trucost
Environmental
Performance Variable
Eco-efficiency
Reporting
Strengths Total
Concerns Total
Total Damage
Eigenvalue
Variation Explained
Cumulative Variation
Explained
Component
(rotated)
1
0.87
0.85
0.85
0.11
0.32
2.32
46.34%
46.34%
2
0.26
0.24
0.11
0.92
0.83
1.66
33.17%
79.50%
14
Environmental Ratings
Two components?
Energy and Water Usage
GHG emissions
SAM Eco-efficiency
Environmental Reporting
SAM Reporting
Beneficial Products &
Services, Pollution
Prevention, Recycling, Clean
Energy, Communication, Mgt
Systems
KLD Strengths
Hazardous Waste,
Regulatory Problems,
Substantial Emissions,
Climate Change
Total damage to the
environment associated with
firm activity
KLD Concerns
Trucost Total
Damage
Processes
Outcomes
Principal Components
15
80% of original data
What does the market respond to?
Variables
Tobin’s q
1
PC environmental
processes
2
0.116
(0.005)**
0.030
PC environmental
outcomes
(0.568)
Trucost Total Damage
KLD Total Concerns
SAM Eco-efficiency
SAM Reporting
KLD Total Strengths
Leverage
Growth
Capital Intensity
Firm Size
0.000
(0.408)
-0.051
(0.273)
0.004
(0.018)*
0.002
(0.240)
-0.030
(0.518)
-0.042
(0.000)**
0.036
(0.230)
0.090
(0.043)*
-0.174
(0.000)**
Market values better environmental
processes, but is not concerned with
outcomes
Only one of original ratings variables
affects financial performance
…too much information?
-0.042
(0.000)**
0.041
(0.162)
0.088
(0.050)*
-0.168
(0.000)**
16
Implications
• Process measures may be more easily communicated
and assessed
– Preferred to outcome performance measures that are
harder to attain, evaluate and rank.
– Consistent with Rennekamp (2012): More readable
disclosures lead to stronger reactions from small investors
• Performance or output measures might be outdated
– Ex Toxic Releases (2012 releases just out)
• If process measures are more abundant and can be
easily fed into ratings methodologies, they will
influence market valuation
17
Issue with Disclosure
• Companies may excel at reporting,
governance and the utilization of
environmental performance systems, yet they
may still emit substantial amounts of
pollution.
18
Carbon Disclosure Project
Concentration Ratio
Leverage
•
•
Questionnaire sent to S&P500
companies requesting climate
strategy information
1,839 observations from 20052009: 560 unique firms
Growth
Capital Intensity
Firm Performance
Firm Size
Transparency Strength
Resolutions
CA
RGGI
RPS
GHG Emissions
GHG Emissions2
Observations
Firms
McFadden’s R=squared
Log-likelihood
(1)
(2)
-0.58
(0.353)
0.03
(0.683)
-0.28
(0.459)
0.28**
(0.031)
0.10
(0.908)
0.60***
(0.000)
2.02***
(0.000)
0.19
(0.340)
0.61**
(0.049)
-0.01
(0.962)
0.01
(0.958)
-0.01
(0.863)
0.03**
(0.029)
-0.47
(0.442)
0.01
(0.867)
-0.27
(0.432)
0.27**
(0.032)
-0.06
(0.942)
0.58***
(0.000)
2.01***
(0.000)
0.20
(0.295)
0.63**
(0.043)
0.00
(0.996)
-0.03
(0.891)
0.07
(0.304)
1839
1839
549
549
0.2367
-974.4
0.2334
-978.6
19
0.5
-0.5
0.0
Odds Ratio (log)
1.0
1.5
Disclosure vs. GHG Emission
4
6
8
10
12
14
16
18
GHG Emissions (log)
Likelihood of disclosing increases as a firm approaches either end
of the environmental performance spectrum.
20
Correlation between
KLD Strenghts and
KLD concerns:
0.413**
21
Investor decision making process
• We need a better understanding of what
information is used by investors
– For example, would investors favor more accessible,
standardized information on CSR?
• Surveys
– Berry and Junkus (2012) 5,000 Individual investors,
demographics of investors
– Cohen et al., (2011) 750 retail investors,
• Lower use of CSR variables as compared to economic and
governance information
• Venue most preferred for investors: third parties and
financial professionals and advisors
22
SRI & Behavior
• Further research should study in more details
investors’ responses to different types of CSR
data: format, framing and salience
– How is the information provided?
– What is the source of the information?
– How often is it updated?
• Experiments & simulations?
– Elliott et al (2014)
23
SRI and Time
• Trade-off between social benefits of a healthy environment and
private cost to business: devoting resources to environmental
management detracts from profit maximization (Friedman, 1970)
• Firms can generate competitive advantage through proactive
environmental strategies (Porter and Van der Linde, 1995;
Reinhardt, 1999)
– Ability to innovate, market opportunities
– Unexploited inefficiencies
– Risk mitigation
• The financial effects of firm environmental behavior may be time
dependent, thus resolving the conundrum of whether it does or
does not pay to be green.
24
Short-term
Long-term
Financial
Performance
(ROA)
(Tobin’s q)
Reduction of
GHG
-
+
No cost on carbon
emissions
No hidden
efficiency gains
Market anticipates
regulations
High performing firms
are better positioned
to minimize future
regulatory scrutiny
and compliance costs
Data 900 firms -2004-2008
• Environmental performance- Trucost
• Total GHG Emissions, Direct GHG Emissions, Supply Chain
GHG Emissions, Water Abstraction, General Waste, Heavy
Metals, Natural Resources
• Environmental practices – KLD
• Environmental strengths, environmental concerns
• Financials- Compustat
• ROA, Tobin’s Q, Log of annual change in sales ratio, Log of
total debt divided by total assets, Log of capital expenditures
divided by total sales, Log of total assets
• Tobin’s q
– Firm’s market value/ replacement cost of assets
(Chung and Pruitt (1994)).
ROA(t+1)
Total GHG Emissions
Water Abstraction
General Waste
VOCs
Heavy Metals
Natural Resources
KLD Concerns
KLD Strengths
Disclosure
Growth
Leverage
Capital Intensity
Firm Size
n
Number of firms
Tobin’s q
(t+1)
0.019
(0.009)*
-0.750
(0.107)**
-0.001
(0.001)
0.001
(0.002)
0.001
(0.001)
-0.001
(0.002)
0.001
(0.001)
0.002
(0.003)
0.001
(0.003)
0.001
(0.005)
0.007
(0.002)**
-0.001
(0.001)
0.000
(0.002)
-0.047
(0.005)**
3316
1095
-0.007
(0.011)
-0.007
(0.041)
0.017
(0.017)
-0.019
(0.033)
0.026
(0.016)
0.091
(0.055)
-0.098
(0.049)*
-0.060
(0.082)
0.045
(0.022)*
-0.010
(0.009)
-0.089
(0.059)
-0.568
(0.086)**
2678
880
27
Implications
• Relationship between environmental and financial
performance varies between short- and long-term horizons
• We show the importance of contrasting different measures
of performance
• Our results suggest that managers adopting a short-term
perspective will eschew proactive strategies in favor of less
risky and more immediately profitable investments.
• On the other hand a forward-looking manager who
anticipates a shift toward conditions more amenable to
proactive environmental behavior will gain competitive
advantage over a longer time horizon by developing the
necessary resource base and capabilities.
28
Towards
a behavioral research approach
• It is important to examine the different ways in which
managers as well as investors conceptualize economic
value and thereby, indirectly, sustainability and
corporate social responsibility.
• Field experiments and simulations to better
understand investors’ behavior
• Response to non financial information:
– Format, framing and salience
– System of investors’ evaluation: rewards and promotion
– Demographics (education background, gender etc…)
29
Thank you
30