Strategic timing of corporate social responsibility investments under reputational risk

Abstract

We analyze a company’s corporate social responsibility (CSR) investments from a real option perspective to determine the value of the CSR investments and the optimal time to invest in CSR, taking into account reputational risk. Previous studies on CSR investments as real options often assume that companies can invest in CSR solely at the time of maturity and that investment costs are known at the outset. Our study extends this research by incorporating realistic viewpoints: Companies can invest in CSR at multiple points in the future; postponing CSR investments may result in reputational losses; and the costs associated with such investments undergo stochastic evolution. We determine the value of CSR investments and answer the question of when to optimally invest in CSR. We examine a real-world example of the palm oil scandal involving Sinar Mas and Nestlé in 2008-2010 and explain why Nestlé repeatedly postponed investing in CSR, i.e., delayed the termination of its contract with Sinar Mas.