Does it pay to be really good? addressing the shape of the relationship between social and financial performance

Abstract

Building on the theoretical argument that a firm's ability to profit from social responsibility depends upon its stakeholder influence capacity (SIC), we bring together contrasting literatures on the relationship between corporate social performance (CSP) and corporate financial performance (CFP) to hypothesize that the CSP‐CFP relationship is U‐shaped. Our results support this hypothesis. We find that firms with low CSP have higher CFP than firms with moderate CSP, but firms with high CSP have the highest CFP. This supports the theoretical argument that SIC underlies the ability to transform social responsibility into profit. Copyright © 2012 John Wiley & Sons, Ltd.

Unraveling the effects of environmental outcomes and processes on financial performance: A non-linear approach

“…The inverse U-shape we found also opposes findings of a positive U-shape in previous research, most notably in Barnett and Salomon (2012). However, this study used a comprehensive measure of social performance (based on KLD data) that conflates outcome and process dimensions.…”

“…In the other model, they associated high financial performance with either very high or very low levels of social performance, implying a U-shaped curve. Subsequently, Barnett and Salomon (2012) found evidence of a U-shaped relationship between social and financial performance. In particular, they observed that benefits vary across the range of corporate social performance, such that when the capacity to influence stakeholders accumulates, benefits are generated that balance and then exceed the costs of socially responsible initiatives.…”

“…Finally, building on Barnett and Salomon (2012), when firms accumulate a certain level of investment in low carbon initiatives, the accrued capacity to respond to stakeholders starts to generate positive net returns. Reinhardt (1998) and Orsato (2006) suggested that high environmental performance might enhance product differentiation, allowing the firm to apply premium prices or win new customers.…”

“…Barnett and Salomon (2012) provided evidence of a U-shaped relationship between corporate social performance and financial performance, showing that while engaging with socially and environmentally responsible practices is initially costly for firms, after a certain point, these costs are paid off and offset by the benefits from improved relations with stakeholders.…”

Risk and return characteristics of environmentally and socially responsible firms in Spain during a financial downturn: 2008–2011

“…In parallel with the various corporate social responsibility qualification and rating agencies (e.g., Ethical Investment Research Services -EIRIS-, Sustainable Asset Management -SAM-, Sustainable Investment Research International -SiRi-, Forum Ethibel), several investment funds and stock market indexes feature only businesses that comply with strict environmental and social demands (e.g., FTSE4Good Index, Dow Jones Sustainability Index, Domini 400 Social Index; EscrigOlmedo, Muñoz-Torres & Fernandez-Izquierdo, 2013). Furthermore, as previous research has suggested, firms' financial performance might benefit from their environmental and social responsibility, according to the direct positive association of corporate environmental and social performance (CESP) with financial performance (Barnett & Salomon, 2012;Margolis, Elfenbein & Walsh, 2007;Orlitzky, Schmidt & Rynes, 2003).…”