Which Dimensions of Social Responsibility Concern Financial Investors?

Abstract

Social and environmental ratings provided by social rating agencies are multidimensional. Using the six sub-ratings provided by the Vigeo rating agency, we perform a principal component analysis and we highlight three main socially responsible (SR) dimensions related to (1) the direct non-financial stakeholders (employee, customers and suppliers), (2) the indirect stakeholders (environment and society) and (3) the financial stakeholders (stockholders and debt holders).We explore the link between stock returns and these three SR dimensions. Our main result is that, for each SR dimension, investors ask for an additional risk premium when they decide to hold non SR stocks. The cost of equity is thus lower for socially responsible firms. The average premium over the period 2003-2010 is larger for the components "direct non-financial stakeholders" and "financial stakeholders" than for the component "indirect stakeholders". For this last component, the premium obviously exists only since the end of 2008. Environment and community involvement have only recently become a more important risk factor in investors' minds. About the former risk premia ("direct non-financial stakeholders" and "financial stakeholders"), investors appear to penalize firms with the worst behavior in respect to their direct non-financial stakeholders and reward firms with good corporate governance practices

The effects of social ratings on firm value

“…A c c e p t e d M a n u s c r i p t tices and f rm value we complement the results of Mǎnescu (2011) and Girerd-Potin et al (2013) in showing that CSR is an additional factor in f rm valuation. From a detailed examination of market reactions we suggest that f rm value is increasing with the aspects directly related to the f rm (strategy, activity) and to its direct stakeholders.…”

“…Moreover, their results show a positive and strong relationship between corporate social irresponsibility and f nancial risk. In the same way, on a sample of Stoxx Europe 600 f rms and using Vigeo ratings, Girerd-Potin et al (2013) f nd that investors ask for an additional risk premium to hold non-socially responsible stocks. Bouslah et al (2013) show that the impact of social performance on f rm risk depends on CSR dimensions, and they are different for listed (S&P500 members) and non-listed f rms.…”

“…Galema et al (2008) suggest that the empirical difficulty in highlighting the impact of CSR on returns may 11 One may conclude that CSR is becoming a new remunerated risk factor (as in Arbitrage Pricing Theory). Girerd-Potin et al (2013) introduced a "non-social" risk factor in a valuation model based on Fama-French (1993)'s one to estimate the risk premium for different CSR dimensions. 12 The study focuses on f rms producing alcohol, tobacco and gaming.…”

Corporate social responsibility and firm financial risk reduction: On the moderating role of the legal environment

“…In this paper, we follow the methodology of Girerd‐Potin et al. () by calculating a global CSR rating representing the average of the six Vigeo components.…”

“…Girerd‐Potin et al. () transformed the Vigeo ratings (‐ ‐, ‐, =, +, ++) into numbers, from 0 for the worst social performance to +4 for the best social performance, as was previously done in the methodology of the Advanced Sustainability Performance Index (ASPI), now replaced by the Euronext Vigeo Eurozone 120: where is the sub‐rating concerning the dimension j = HRTS, ENV, HR, CIN, CG, and BB for human rights, environment, human resources, community involvement, corporate governance, and business behavior, respectively.…”