Companies are making their social and environmental positions more visible. Examples abound, like Starbucks’s Race Together campaign to bring awareness about race relations in the United States and Clorox’s Green Works line of environmentally friendly cleaning products. A large number of firms are also reporting that they are following the Global Reporting Initiative (GRI), the gold standard for corporate social responsibility (CSR) disclosures.

Throughout this global health crisis, firms known for their CSR practices, like TIAA, have chosen a more humane way of cutting costs, by offering buyouts to their employees rather than laying them off.

CSR also took the center stage at Davos the last two years, and commentary by Blackrock’s CEO drew further attention to the topic. The shift from shareholder primacy to corporate purpose that encompasses environment and multiple stakeholders, such as customers, employees, and suppliers, garnered a mixed reception in the mainstream press. On August 24, 2019 The Economist ran a special report on corporate purpose, and argued that “collective” capitalism will suffer from the lack of accountability and lack of dynamism. At the same time, many recent news articles suggest that CSR could result in positive firm outcomes.

Similar dichotomy exists in theoretical literature on CSR with the Friedman versus Freeman debate. Friedman’s view, expressed in a well-known article published in The New York Times in 1970, placed CSR as an agency problem and a sub-optimal use of a company’s resources. Freeman laid the basis for the stakeholder theory, which asserts that by accounting for the interests of other stakeholders, firms win their support. While popular press and theoretical literature continue the debate, the recent empirical academic literature has already tested many assertions made by mainstream press, and is mostly supporting the view that doing good is good for all stakeholders, including shareholders.

Recent academic research shows that during the 2008-2009 financial crisis, firms with higher social capital earned higher stock returns. As CSR activities increase customer loyalty, systematic risk decreases and firm value also increases.

Among our findings, to be published in a forthcoming issue of the Journal of Corporate Finance, product market perception (aka brand value) is one of the channels through which CSR improves firm value. According to prior academic studies and the Economist Intelligence Unit, nearly three quarters of CEOs consider brand, trust, and reputation as the primary catalysts for undertaking CSR. We examine whether that is true using BAV, a large proprietary dataset on product market perception that relies on consumer surveys to generate metrics of brand value for attributes like quality, trustworthiness, distinctiveness and innovation. We measure CSR using scores from KLD Research and Analytics, Inc., which has been acquired in 2010 by MSCI Inc., the world’s largest provider of Environmental, Social and Governance (ESG) Indexes. KLD provides CSR metrics that help investors and other stakeholders to understand a company’s ESG risks and opportunities. We study 364 firms over 2001-2014 years.

Incidently, Clorox is one of the top rated firms in BAV and CSR. Nike, another highly rated firm in brand value and CSR, has invested heavily in waste reduction in its manufacturing processes. In 2012, the company launched its flyknit technology, which allows one-piece upper body in shoes manufacturing, reducing waste by 60%. And IBM is notorious for greening its supply chain and Employee Charitable Contribution Campaign, which promotes employees to donate their time, talent and money to communities. These companies are ranked among the top 10 in BAV and CSR.

Our findings indicate that CSR activities that are more visible to consumers, specifically community and environmental engagements, have a more significant impact on market perception. This result is economically meaningful: one standard deviation increase in the CSR measure increases the product market perception measure by 10.5%. When breaking CSR into strengths and concerns, we find that both community and environmental strengths positively impact product market perception, but the negative impact of concerns is not significant. This result suggests that the strengths components of CSR are more visible. We find that there is no association between most other components of CSR, namely, employee friendliness, diversity, corporate governance, and product market perception. The association between CSR and product market perception is stronger for companies in standardized goods industries, where the cost of switching for consumers is lower and differentiation and quality play an important role.

Our study also shows that CSR indirectly through its improvement of product market perception increases the market to book ratio and the profit margin of companies. One standard deviation change in product market perception increases firm value by 5.8%. These results support a shift to business models that incorporate social purpose.

When examining the impact of CSR on companies’ values and portfolio returns, investors should account for the indirect impact of improved consumer perception and brand value.

The data and analysis support Freeman’s view that CSR is good for shareholders after all.

Katsiaryna Salavei Bardos, PhD is an associate professor of finance at Fairfield University, Mine Ertugrul, PhD and Lucia Silva Gao, DBA are associate professors of finance at University of Massachusetts, Boston.