Definition
Corporate Social Responsibility (CSR) is a business practice that combines environmental and social policies with the economic goals and processes of the company. It is based on the idea that companies can reduce their negative social and environmental impact on the world.
How Does Corporate Social Responsibility Work?
Corporate social responsibility is a way of doing business that aims to increase the company’s social impact while achieving growth and revenue goals. It can also refer to any effort to improve the company’s environmental friendliness or its carbon footprint. Companies can implement CSR efforts as an independent program or as part of a broader campaign.
Types of Corporate Social Responsibility
In 1991, researcher Archie B. Carroll created the “Pyramid of Corporate Social Responsibility.” This pyramid included four components of CSR – economic responsibility (profit generation), legal responsibility (compliance with laws), ethical responsibility (fairness), and philanthropic responsibility (charity).
These components have evolved over time into different types of corporate social responsibility:
- Economic responsibility: Generating profits consistently is considered a company’s responsibility. Of course, this definition ensures business practices that not only help achieve profits but also contribute to impact.
- Environmental responsibility: Efforts made by companies to adopt business practices considering their environmental impact. This can include companies committed to reducing their carbon footprint or working in other ways to mitigate the negative effects of global warming and climate change.
- Ethical responsibility: Efforts made by companies to adopt fair and ethical business practices. This can mean anything from providing equal or better wages than the minimum for employees to using ethically sourced raw materials.
- Philanthropic responsibility: Some companies may choose to donate a portion of their profits or executive time to charities or philanthropic causes. For example, in 1946, Target pledged to allocate 5% of its profits to the community.
Examples of Corporate Social Responsibility
CSR programs vary in scope, but some examples may include the following:
- Donating to nonprofit groups, such as local food banks, by providing volunteers or through financial donations.
- Offering job training programs for those in need.
- Committing to ensuring diversity in the workforce.
- Focusing on reducing the company’s carbon footprint by improving supply chain efficiency.
For example, Patagonia, the outdoor and sportswear company, has several programs as part of its CSR efforts. These programs include a fair wage program, a migrant worker program, a fair trade program, as well as a fair labor program and others.
Another example of CSR is Starbucks’ commitment to global human rights. This commitment is outlined in the company’s official policy and includes compliance requirements across the company’s business units. From hiring to supply chain to how the company interacts with its business partners, the commitment to social mission affects all levels of Starbucks’ operations.
Benefits of Corporate Social Responsibility
Although CSR programs are often a response to pressure from the community, research indicates that once these programs are implemented, they often enjoy broad support from within the company as well.
A report found that 92% of S&P 500 and Russell 1000 companies published reports outlining their CSR and sustainability efforts in 2020. In 2011, this percentage was less than 20%.
There is no doubt that CSR programs should be present in every business. Companies with strong CSR programs can benefit from better public relations and happier customers. Typically, improving a company’s profits leads to satisfying stakeholders.
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In some cases, the positive financial impact of corporate social responsibility is clear. For example, transitioning to renewable energy sources, such as solar panels on the company campus, may lead to lower electricity costs over time.
The Babson Center for Advanced Studies conducted a review of hundreds of studies on corporate social responsibility programs. The reviewers found that these programs can have a strong impact on the company’s market value and brand, and reduce risks. The report’s findings indicated that corporate social responsibility programs have the potential to achieve 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
- Increase price premiums by up to 20%
- Reduce employee turnover rates by up to 50%
Note: Many companies publish corporate social responsibility reports and provide success metrics; however, it is extremely difficult to measure the actual impact of corporate social responsibility activities beyond the numbers provided by companies.
Corporate Social Responsibility vs. Environmental, Social, and Governance
Corporate social responsibility (CSR) resembles the principles of environmental, social, and governance (ESG). The main difference is that CSR is an internal function, while ESG is an external function.
Corporate Social Responsibility (CSR) Environmental, Social, and Governance (ESG)
Measuring success of programs from the inside Measuring success of programs from the outside
Used by companies to improve their impact on society Used by investment groups to guide decisions
With corporate social responsibility programs, it is up to those within the company to measure the success of their initiatives. They decide which programs to continue and reshape those that are not working well.
On the other hand, environmental, social, and governance is a measure that external analysts can use to compare the impact of various companies’ efforts in addressing environmental and social issues.
Many investment groups evaluate companies based on their commitment to incorporating ESG standards. Institutional investment firms and mutual fund companies may illustrate how principles of ESG are integrated into their philosophy in their annual reports.
The framework for ESG reporting derives from the Global Reporting Initiative (GRI), a private standards body that seeks to standardize corporate sustainability reporting. This goal has been pursued since the late 1990s.
Note: In 2006, the United Nations launched the Principles for Responsible Investment (PRI), a program that institutional investors can use to integrate ESG values into their decision-making processes. More than 3,000 investors and groups have signed the PRI principles, committing to uphold six ESG principles.
Individual investors may want their investments to reflect their values. They can invest in mutual funds and exchange-traded funds (ETFs), pooled based on their commitment to corporate social responsibility. Examples include the iShares MSCI KLD 400 Social ETF (DSI) and the SPDR SSGA Gender Diversity Index Fund (SHE).
Frequently Asked Questions (FAQs)
Why is corporate social responsibility important?
Large companies’ commitment to social and environmental issues can make a significant difference. However, corporate social responsibility is important for companies not just because it is good for their brand. Research indicates that corporate social responsibility can help companies increase their market value, reduce systemic risks, and even retain employees. Polls in 2019 indicated that 77% of consumers felt enthusiastic about giving their business to companies committed to making the world a better place.
What primarily drives the increase in corporate social responsibility?
The movement of companies toward practices aligned with environmental, social, and governance (ESG) standards is one of the driving forces behind corporate social responsibility in recent years. While ESG has its roots in corporate social responsibility, it focuses more on achieving environmental impact, sustainability, and positive changes toward social justice.
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Updated by Mrinalini Krishna
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we verify facts and maintain the accuracy, reliability, and quality of our content.
Harvard Business School. “5 Examples of Corporate Social Responsibility That Were Successful.”
Archie B. Carroll. “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Pages 40-43.
Target. “2021 Target Corporate Social Responsibility Report,” Page 11.
Patagonia. “Social Responsibility.”
Starbucks.com. “Global Human Rights Statement.”
Porter Novelli. “PN Purpose Tracker: Employee Perspectives on Responsible Leadership During Crisis,” Page 3.
Governance & Accountability Institute. “92% of S&P 500® Companies and 70% of Russell 1000® Companies Published Sustainability Reports in 2020, G&A Institute Research Shows.”
Babson College. “Project ROI: Defining the Competitive and Financial Advantages of Corporate Responsibility and Sustainability,” Page 3.
Global Reporting Initiative. “About GRI.”
Principles for Responsible Investment. “About the PRI.”
Babson College. “Project ROI: Defining the
Source: https://www.thebalancemoney.com/corporate-social-responsibility-csr-4772443
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