Cost-benefit analysis must drive sustainability investment, says Dr. Marc Orlitzky. He explains why CSR may not improve financial performance.
Rigorous cost-benefit analysis and research must underlie sustainability investment, says Dr. Marc Orlitzky (University of South Australia). In this Thought Leadership post, he discusses why CSR may not improve financial performance. Thought Leaders are leading academics and practitioners: world experts on sustainability issues.
Once upon a time I believed wholeheartedly that corporate social responsibility (CSR) and sustainability would lead to economic pay-offs. I believed in a win-win scenario: firms that did good for society and nature would do better economically over time; and higher financial performance would in turn allow these organizations to do even more good. Some of my early studies sought to provide evidence for such a virtuous cycle.
Today, I am a skeptic. Now I believe that the uncritical pursuit of CSR doesn’t help individual companies and actually harms markets. Not all sustainability projects make economic sense for companies. And when investors (or other market actors, such as governments) support corporate sustainability unrelated to economic fundamentals, dangerous market fluctuations can result. Such reinforcement can be bad for companies, too: they are pushed to increase what may be ill-considered spending on sustainability.
What has changed my thinking? And how should companies and investors act more thoughtfully regarding sustainability.
The Unintended Consequences of Sustainability
We cannot assume that sustainability’s economic effects are positive because:
- Sustainability can be defined in many different ways. Generalizing about the impact of sustainability or CSR overlooks the great variety of actions possible in this area.
- Research has not shown a conclusive business case for sustainability. Sustainability and CSR can have firm-level pay-offs, but it’s extremely difficult to predict which specific sustainability projects increase, let alone maximize, economic returns.
- Investors and other market actors often have inadequate information about a company’s sustainability actions. They can easily end up acting on incomplete or inaccurate information.
A More Rational Response
To avoid unquestioning pursuit of sustainability:
- Companies should only invest in sustainability projects for which rigorous cost-benefit or net present value analyses have incontestably shown the economic superiority of sustainability investments. I often see sustainability initiatives implemented with only a vague goal of enhancing an organization’s legitimacy or image and without comprehensive accounting of economic costs and trade-offs.
- Market actors should seek the best possible information on corporate sustainability actions and their relationship to economic fundamentals. One way to do this is to rely on more objective, tangible, or trustworthy metrics, perhaps generated by independent rating agencies.
Some believe that governments could make markets more rational, ensuring that investors have the necessary information on economic fundamentals and act accordingly. This optimism about government intervention is misplaced because many governments do not consider their actions’ unintended consequences. In addition, their decisions and policies are often influenced by special interest groups. For example, many governments in the European Union are even more uncritical about CSR and green investments than investors and the public at large. Some governments are even making CSR disclosures mandatory. This trend toward mandatory reporting will only exacerbate pressures toward ever greater organizational expenditures on sustainability and data collection, without regard to the underlying economic fundamentals.
Return to Economic Fundamentals
Let’s bury the myth that there are no widespread trade-offs between social or green action and a healthy economy. Relationships between CSR and economic performance are highly variable and complex, and we need to act on objective data and facts rather than engaging in wishful thinking. We must become more rational about “socially responsible” actions that have so many emotional and moral connotations.
Currently the battle of ideas seems to be won by the true believers, who prioritize “humanistic,” social and green causes over prudent business decision making. I believe, however, that financially prudent managerial choices based on economic fundamentals will ultimately be best for society and nature because there is some empirical evidence that high economic growth facilitates social and environmental progress ( e.g. Benjamin Friedman’s The moral consequences of economic growth) — not the other way around.
About the Author
Dr. Marc Orlitzky is Chair in Management at the University of South Australia. His major research interests are in market behavior, business ethics, corporate governance, and methodology. He has published many widely cited papers and won numerous awards for his work. He co-authored Toward Integrative Corporate Citizenship: Research Advances in Corporate Social Performance (2008) and co-edited Corporate Governance and Business Ethics (2010).
Orlitzky, M. (2013). Corporate social responsibility, noise, and stock market volatility. Academy of Management Perspectives, 27(3), 238–254.
(I present a more detailed model of the unintended consequences of CSR and sustainability.)
Orlitzky, M. (2011). Institutional logics in the study of organizations: The social construction of the relationship between corporate social and financial performance. Business Ethics Quarterly, 21(3), 409–444.
(I present evidence that research on CSR and sustainability may, to a large extent, be shaped by researcher ideology.)
Friedman, B. (2005). The moral consequences of economic growth. New York: Knopf.
(This book describes economic growth as a prerequisite for social and/or environmental sustainability.)
Originally published at https://www.nbs.net on May 18, 2021.