Corporate Social Responsibility Ratings and Financial Performance: An Analysis of Sub-Ratings in Europe

Abstract

In a previous research article, we studied the relationship between aggregate Corporate Social Responsibility (CSR) ratings issued by the European rating agency, Vigeo, and accounting and stock market performance of a sample of European companies. Because the Vigeo CSR ratings are the sum of sub-rating scores assigned in the following six categories: Business Behavior (BB), Community Involvement (CIN), Corporate Governance (CG), Environment (ENV), Human Resources (HR), Human Rights (HRts), the purpose of the present article is to perform a detailed analysis of the Vigeo sub-ratings in order to confirm and extend the findings of our prior research. The overall objective of the present study is to deepen our investigation into the sub-ratings by measuring their impact on accounting and stock market performance by first using a “Prospective” approach in which the subsequent performance of the sample companies is predicted by their CSR sub-ratings. We then perform a “Retrospective” analysis which looks at the accounting and stock market performance of companies at time N-1 as compared with the CSR sub-ratings issued at time N (in other words, whether the performance predicts the ratings). With respect to the Prospective approach, a negative relationship is found between the CSR sub-ratings and the subsequent accounting and stock market performance of the sample companies. The results of the Retrospective analysis indicate that the sub-ratings are: (1) positively related to the market capitalization (i.e. size) of the sample companies; (2) negatively related to the difference between the risk of the companies and the average risk of their industry sectors; (3) negatively related to the difference between the market return of the sample companies and the average market return of the companies in the sector. The Retrospective approach confirms the three concepts developed in our previous work namely “political visibility”, “priority” and “downgrading”. In addition, certain sub-ratings, namely: environment (ENV), human resources (HR) and community involvement (CIN) dominate in the aggregate ratings, possibly due to their greater visibility and ease of measurement as compared with corporate governance (CG), human rights (HRts), and business behavior (BB), which are more difficult to measure and require a deeper understanding of the individual companies.