What Is Corporate Social Responsibility (CSR)?

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DEFINITION

Corporate social responsibility (CSR) is the business practice of joining environmental and social policies with a business’ economic goals and operations. It is based on the idea that businesses can reduce their adverse social and environmental impact on the world.

How Corporate Social Responsibility Works

Corporate social responsibility is a way of doing business that aims to increase a company's social impact while meeting business objectives such as growth and revenue goals. It can also refer to any effort to improve a company's eco-friendliness or carbon footprint. Companies can deploy CSR efforts as a standalone program or as part of a broader campaign.

Companies may create CSR programs that involve every part of their business and often have dedicated staff members and resources for CSR.

Types of Corporate Social Responsibility

In 1991, researcher Archie B. Carroll, came up with a 'pyramid of corporate social responsibility.' His pyramid included the four components of CSR – economic responsibility (make profits), legal responsibility (follow laws), ethical responsibility (be fair) and philanthropic responsibility (be charitable).

These components have evolved over time into the following types of CSR:

  • Economic responsibility: According to Carroll, maximizing profits consistently was the firm's responsibility. Of course, that definition has evolved to include business practices that not only help maximize profits but help make an impact.
  • Environmental responsibility: Efforts made by companies to adopt business practices keeping in mind their environmental impact. This could include companies committed to shirking their carbon footprint or working in other ways to mitigate adverse impacts of global warming and climate change.
  • Ethical responsibility: Efforts made by companies to adopt fair and ethical business practices. That could mean anything from offering equal to or better than minimum wages to employees, to using ethically sourced raw material.
  • Philanthropic responsibility: Some companies may opt to give away a portion of their earnings or executive time to charities or towards charitable causes. For example, in 1946, Target made a commitment to give away 5% of the company's profits back to the community.

Examples of Corporate Social Responsibility

CSR programs vary in scope, but a few examples might include:

  • Giving to nonprofit groups, such as local food banks, by supplying volunteers or through monetary donations
  • Offering job-training programs for those in need
  • Pledging to ensure diversity in the workforce
  • Focusing on shrinking the company’s carbon footprint through improved supply chain efficiency

For example, outdoor and sport apparel-maker Patagonia has a number of programs as a part of its CSR efforts. These include a living wage program, a migrant worker program, a fair trade program as well as a fair labor program among others.

Another example of a company's corporate social responsibility is Starbucks' commitment to global human rights. This commitment is spelled out in official corporate policy and includes compliance requirements across the firm's business units. From hiring to supply chain to the way the company works with its business partners, adhering to this social mission affects all levels of Starbucks' operations.

Benefits of Corporate Social Responsibility

Though CSR programs are often the result of pressure from within the community, research shows that, once instilled, these programs often receive broad support from within the company, too.

One report found that 92% of S&P 500 and Russell 1000 companies published reports charting their efforts related to CSR and sustainability in 2020. In 2011, that figure was less than 20%.

There's little doubt that CSR programs should exist in every business. Companies with robust CSR programs can benefit from better public relations and have happier customers. Improved company profits usually result, in turn satisfying stakeholders.

In some cases, the positive financial impact of CSR is clear. For example, a shift toward renewable energy sources, like solar panels at corporate campuses, might result in lower electricity costs over time.

A report by Babson College reviewed hundreds of CSR program studies. The reviewers found that the programs can have a strong impact on a company's market value and brand and lower risk. The report's findings found that CSR programs have the potential to do the following:

  • Increase market value by up to 6%
  • Reduce systemic risk by up to 4%
  • Reduce the cost of debt by 40% or more
  • Raise price premium by up to 20%
  • Reduce staff turnover rate by up to 50%

A lot of companies publish CSR reports and provide success metrics, however, it is very difficult to measure the actual impact of CSR activities beyond the numbers provided by the companies.

Corporate Social Responsibility vs. Environmental, Social, and Corporate Governance

CSR is similar to environmental, social, and corporate governance (ESG) principles. The leading difference is that CSR is an internal function, while ESG is an external one.

Corporate Social Responsibility (CSR) Environmental, Social, and Corporate Governance (ESG)
Success of programs measured from within Success of programs measured from the outside
Used by a business to improve its impact on society Used by investment groups to guide decisions

With CSR programs, it's up to those inside the company to measure the success of their actions. They decide which programs to continue, and rework those that aren't performing as well.

ESG, on the other hand, is a metric that outside analysts can use to compare the effect of different corporate efforts to address environmental and social issues.

Many investment groups gauge companies based on their pledge to integrate ESG criteria. Institutional investors and mutual fund companies may outline how ESG guidelines are incorporated into their philosophies in their annual reports.

The framework for ESG reporting stems from the Global Reporting Initiative (GRI), which is a private standards body that seeks to standardize corporate sustainability reporting. It has been working toward this goal since the late 1990s.

In 2006, the United Nations launched the Principles for Responsible Investment (PRI), a program that institutional investors can use to merge ESG values into their decision-making process. More than 3,000 investors and groups have signed on to the PRI, pledging to stand by ESG six principles.

Individual investors may want their investments to reflect their values. They can buy into mutual funds and exchange traded funds (ETFs), grouped by their commitment to CSR. Examples of this include the iShares MSCI KLD 400 Social ETF (DSI) and the SPDR SSGA Gender Diversity Index Fund (SHE).

Key Takeaways

  • Corporate social responsibility (CSR) involves actions taken when a company seeks to improve its environmental and societal impact.
  • CSR also includes companies adopting fair and ethical business practices.
  • Research suggests that a commitment to CSR can positively affect a company’s finances and employee morale.
  • CSR is similar to ESG, a process by which investors make decisions based on CSR programs and a company's environmental impact.

Frequently Asked Questions (FAQs)

Why is corporate social responsibility important?

Big businesses committing to social and environmental causes can make a big a difference. However, CSR is important for businesses not just because it is good for their brand. Research suggests that CSR can potentially help companies increase their market value, reduce systemic risks and even retain employees. A 2019 survey suggested that 77% of consumers were motivated to give their business to companies committed to making the world a better place.

What is mainly driving the move toward more corporate social responsibility?

Companies moving towards practices aligned with environment, social and governance (ESG) criteria one of the driving forces behind CSR in recent years. While ESG has its roots in CSR, ESG is more focused on driving environmental impact, sustainability, and positive changes towards social justice.

Updated by
Mrinalini Krishna
mrinalini krishna
Full Bio
Mrinalini is the senior investing editor at The Balance and is an expert in investing, financial journalism, digital media, and more. She's been a journalist for more than 10 years at organizations such as the Financial Times and Investopedia, and she has a master's in business and economic reporting from New York University.
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