Risk less as you go sustainable
Corporate Social Responsibility (CSR) has gained a growing importance, during the last years, among academics, managers and citizens and its impact on firm’s performance is the center of several debates worldwide. As a matter of fact, according to the majority of CEOs worldwide, CSR is considered an “important” or “very important” task for their firms (UN Global Compact-Accenture). In recent years, top managers allocated a considerable amount of time and resources to develop social responsible strategies, revealing that the cost of equity capital reduction is one of the main reasons to adopt sustainable practices in their companies. Empirical evidences demonstrated that firms with stronger environmental, social and governance practices are perceived less risky by market and investors. Recent researches showed that sustainability can reduce the cost of equity capital for firms and improve their access to finance, due to the less perceived riskiness degree of more sustainable companies without any significant geographical difference worldwide.
The firms’ cost of equity capital, that can be defined as “the discount rate the market applies to firms’ expected future cash flows to arrive at current stock price” is a pivotal value for managers in order to plan their firm’s strategy.
On this way, Social Responsible Investments (defined by The Social Investment Forum in 2006 as “an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis”) that go beyond mere compliance are able to generate lower cost of equity for firms, and investors reward those firms that make higher CSR disclosures. Evidences demonstrated that buying stocks with high socially responsible ratings and selling stocks with low socially responsible ratings is possible to lead higher returns (about 9% per year). This means that a growing number of investors incorporate SRI in their investment decision because they prefer firms with a higher environmental commitment for their portfolios. These companies seem to be more environmental friendly and more profitable for their investors at the same time.
Thus, superior sustainable practices are able to improve corporate financial performance and firm’s value consequently.
More sustainable companies generate higher returns and achieve cost cutting through innovation prevails but are also perceived less risky by the stock market and investors benefiting from a lower cost of equity capital and, as a consequence, of better access to finance.
These considerations could be useful for politicians and regulatory authority to improve firm’s sustainability and the amount of non-financial disclosure for listed firms in the future. This would protect investors worldwide and rewarding the more sustainable firms that adopt, free of any engagements, massive voluntary disclosure and sustainable policies.
Risk less as you go sustainable.
LUM Jean Monnet University