Can Investing in Corporate Social Responsibility Lower a Company’s Cost of Capital?

Abstract

This paper investigates the effect of corporate social responsibility (CSR) ratings on the ex ante cost of capital of more than 2300 listed US companies in a panel from 2003 to 2010. It examines if financial markets value continuous investment in corporate social responsibility activities through higher market capitalization and lower cost of capital. We show that firms' sustainability strategy varies across industry sectors, whereas customer-orientated companies like telecommunications or automobile outperform asset-driven sectors such as real estate or chemical companies. Furthermore, we predict a 10-bp positive effect for one standard deviation of firms' intensive allocation of resources in sustainable activities. Managers of companies with a low or intermediate CSR score may consider improving their performance. A good starting point is usually to draw up a companywide CSR agenda, possibly guided by a dedicated CSR task force. In addition, by improving their CSR ratings a company may get access to additional resources, ranging from the growing ethical investment industry to that part of the labor force for whom CSR performance matters when choosing an employer.