Why is CSR important for investors?

John Ditchfield, co-owner of Castlefield Advisory Partners, comments: "CSR is generally used to describe activities undertaken by companies which reflect their responsibilities to the public and not just shareholders.

"So, for example, when an insurance or investment group donates time or technical support to a charity or non-governmental organisation, it is doing this to promote wide social wellbeing and not just to further its own interests or the interests of its shareholders."

But Leon Kamhi, head of responsibility for Hermes Investment Management, believes there has been a change in what CSR has come to mean for investors and practitioners.

He explains: "Historically, a company’s CSR activities have been about charitable giving and helping local communities in schools, homes for the elderly and the like.

"Today, CSR is becoming an integrated part of how a company operates as they need to demonstrate what they are doing as part of their business for customers, employees and society at large." 

CSR is becoming more important for investors because they are more concerned about where and how their money is invested. Anna Sofat

John David, head of Rathbone Greenbank Investments, also believes the term CSR has "grown beyond its strict dictionary definition".

He comments: "It is now an umbrella term for all the ways in which a company should have regard for its impact on the world beyond its profit and loss.

"Whereas CSR, for the most part, used to be little more than a nice marketing add-on to pad out an annual report, the new generation of consumers demand something far more authentic."

Mr David adds: "Over the last 20 years we have seen CSR become fully integrated into business strategy – covering how business relates to the environment and society more broadly."

Sandra Crowl, member of the investment committee at Carmignac, agrees that CSR goes further than a mere description of a company's activities. 

She says: "CSR goes beyond the legal and compliance obligations of good governance, putting social and environmental concerns equally at the heart of their businesses for long-term sustainable gains."

Nuances

CSR can mean slightly different things to different investors, as there are nuances in terms of how investors view a company's CSR activities, but the essence is the same, as Rose Beale, thematic analyst in the responsible investment team at Columbia Threadneedle Investments, elaborates.

"For us, CSR reflects the programme of activities undertaken by a company to demonstrate awareness of, and improve the situation for those affected by, any of a number of social and environmental issues.

"It does not include activities delivered to meet corporate objectives or legal requirements."

Ms Beale adds: "CSR is typically concerned with relations with external beneficiaries, communities and the wider environment, and generally not directed at internal issues such as employee wellbeing or resource efficiency.

"Approaches to CSR vary; they may relate to the core activities of the business and the context in which it operates – and hence be important for investors – but rarely is this the case."

Why is it important?

Mr David believes CSR – or a responsible business culture more broadly – is important in two ways.

He says: "Firstly, a company with strong CSR values will likely have a high degree of transparency and seek to communicate its CSR efforts to a wider stakeholder base.

"Investors like information, as it helps us to separate the wheat from the chaff, those who talk a good game, and those who deliver action.

"Secondly, an emphasis on CSR policy development suggests a senior management team which recognises the materiality of non-financial issues to a company’s valuation."

He lists non-financial factors, such as staff morale, environmental efficiency and social licence to operate, which can make the difference between a successful business and a failure.

"Companies doing more than just paying lip service to CSR reporting are therefore showing investors that they operate a high standard of risk management," Mr David adds.

According to Ms Crowl: "As more investors are becoming attune to sustainability issues, we can see the companies that are being left behind and are suffering financially as a result. 

"Inevitably, companies that do not consider their social responsibilities become a poor investment."

She gives as an example the consumer staples sector, where companies that were once global brand leaders are now being shunned for not being more concerned about consumer product safety in their supply chains, and have seen valuations fall by as much as 30 per cent to 40 per cent year-to-date.

Ms Crowl adds: "Energy companies that aren’t investing enough in new renewable sources have also met with investors’ disdain. Similarly, with the rise of electric vehicles, we are seeing increasing scrutiny of battery companies to provide information about where key materials are being sourced from, given the poor record of child labour abuses in cobalt mining."

It is also becoming more important, the more people know about CSR, Anna Sofat adds.

Ms Sofat, founder and managing director of Addidi Wealth, says: "As the demand for transparency increases, a company’s supply chain and its standards are important factors in CSR.

"CSR is becoming more important for investors because they are more concerned about where and how their money is invested."

Getting it right

So which sort of companies are getting it right? What should investors interested in investing along CSR lines be looking out for?

Mr Kamhi states positive CSR activities can be found across various sectors and industries, whether consumer goods, financials or telecoms giants.

Examples he gives include:

• Telecommunications companies providing fixed and mobile connections to remote areas.
• Food companies ensuring there is no child labour employed among their suppliers.
• Banks providing customers with financial products they need.

"This is of great importance for investors as the CSR issues are important for the sustainable long-term value of the companies themselves."

Ms Sofat points out that "relationships with the local community and charities are often part of a company’s social responsibility programme. Gender and diversity issues also fall under the CSR umbrella". 

This is clearly seen in grass-roots movements such as the 30 Percent Club, which has resulted in more boards across the FTSE All-Share taking notice of the need to diversify their boards of directors along gender, racial and cultural lines.

And she believes it is getting easier for investors to see who is doing it right, not just those who are doing it wrong. 

Ms Sofat explains: "CSR scores are one way of measuring how a company is doing and wealth managers are beginning to pay more attention to them.

"Managers of 100 per cent ethical funds already have clearly mandated rules about who they invest with, and report very stringently about a company’s CSR policies."

So it is not just about avoiding those companies who are hitting the headlines for the wrong reasons, but those who are quietly doing it right behind the scenes.

simoney.kyriakou@ft.com