The term social responsibility has gained a lot of attention in the business world over the years. Companies are coming forward and working on issues like environmental sustainability & protection, employee welfare, and gender equality.
Patagonia, Klean Kanteen, Bombas, and Ben & Jerry’s are just a few examples of socially responsible businesses. Several businesses have chosen social responsibility as a medium to give back to society, loyal consumers, and their investors.
Social responsibility to investors has also become crucial nowadays. They value brands that are actively developing strategies that have a positive impact on society. After all, it helps investors take advantage of corporate resources as well as the company’s reputation.
This post talks about the reasons why businesses have a social responsibility to investors. However, before we move forward, let’s find out what corporate social responsibility is. It will give you better clarity on the subject.
Table of Contents
- What is Corporate Social Responsibility (CSR)?
- How Does Corporate Social Responsibility (CSR) Work?
- 6 Primary Reasons Companies Have a Social Responsibility to Investors
- 1. Social Responsibility Matters to Investors
- 2. Socially Responsible Companies are More Accountable and Transparent
- 3. Relationship Between CSR and Capital Market
- 4. Social Responsibility Improves Public Perception of Your Brand
- 5. It Ensures Business Success and More Profits
- 6. Better Customer Engagement
- Why Do Investors Expect a Company to Act Ethically and Show Social Responsibility?
- Investors Expectation for Social Responsibility
What is Corporate Social Responsibility (CSR)?
CSR or Corporate Social Responsibility is a practice of being socially accountable. It is accurate to say that it is a self-governing business model that assists a company in being socially responsible to itself, its investors, and the general public.
Yes, nowadays, companies have a social responsibility to investors as well. After all, shareholders care about where and how a company is investing their money. Investors expect a company to be ethical and socially responsible.
There are various ways a company carries out CSR. They could run it as a separate campaign or as part of a long-term goal.
Their CSR program may include the following responsibilities:
- Offering job training to needy people
- Pledging to ensure environmentally-friendly operations
- Giving to not-for-profit organizations
For example, the Coca-Cola Company launched the 5by20 program in 2010 to empower 5 million female entrepreneurs globally by 2020. More than 5 million women have benefited from this initiative. Women across the globe received business skill training, financial services, mentoring networks, and more from Coca-Cola.
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How Does Corporate Social Responsibility (CSR) Work?
If you look at the past outcomes and records, there is enough data to suggest that organizations that use CSR methods generate higher income.
Indeed, they benefit from healthy public relationships and by having satisfied customers. In return, the result also satisfies stakeholders.
It is accurate to argue that CSR is a socially responsible investment as it is made into a socially responsible company. It is growing in popularity because of less risk and better returns. Moreover, CSR programs can have a considerable impact on a company’s overall market value.
According to a Babson College analysis, a CSR program can raise the market value by 6% while reducing risk up to 4%.
Let us look at why businesses today have a social responsibility to investors and what investors think about it.
6 Primary Reasons Companies Have a Social Responsibility to Investors
For any company, establishing a reputation for social responsibility is a difficult task. It takes an excellent deal of dedication to the community and society.
In addition to this, the company has to maintain a fair working environment for employees. Showcasing a transparent governance structure to the public, customers, and investors is no piece of cake for any entity. Raising funds for CSR initiatives is another major issue for companies.
Nonetheless, if a company can effectively communicate its efforts to investors, their initiatives could be a huge success. After all, corporate responsibility matters a lot to investors in current times. They give importance to brands bringing positive impact to the society and are transparent about its progress.
Nowadays, investors invest in businesses that are part of some ESG (Environmental, Social, and Governance) initiatives.
Below are a few key reasons why companies have a social responsibility to investors.
1. Social Responsibility Matters to Investors
While it is not legally required for a company to engage in socially responsible investments (SRI), many companies prioritize it. One of the main reasons for the same is that it is exceptionally crucial to investors.
Investors nowadays are concerned about where their money is being invested. Some investors believe that a business must have a positive impact on society beyond its profits and loss.
According to John David, the head of Rathbone Greenbank Investments, CSR has evolved beyond its strict dictionary definition.
According to Gartner, In 2020, around 85 percent of shareholders considered ESG factors in their investments. Investors may perceive companies with poor corporate sustainability disclosure as a risky investment option in the coming years.
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2. Socially Responsible Companies are More Accountable and Transparent
It is another reason for companies to have a social responsibility to investors. Undoubtedly, businesses that engage in socially responsible investing appear to be more promising and appealing to investors.
Every investor investing in a company has one goal. They look for higher investment returns. When a company helps its community and society while remaining transparent in its dealings without compromising on finances, it gives confidence to investors.
Why would an investor not want to invest in a company with a transparent investment portfolio that makes a positive impact on society with its actions?
A report of 2016 by Aflac concludes that most investors do not see a company’s investment in corporate social responsibility as a waste of money. On the contrary, it shows them that the company will never commit financial fraud or engage in unethical behavior.
According to the study, 61% of investors believe that CSR is an ethical corporate act. Furthermore, it reduces the risk involved in investment.
Today, investors know that customers expect a company to show good business behavior. Any irresponsible company will be penalized by its customers.
A survey on international corporate social responsibility reveals that nine out of 10 people would boycott an irresponsible business.
Another report says the company that does not stand on the responsibility might lose up to 39% of its potential customer base.
So we can say, companies that want to appear accountable to their shareholders must also have a social responsibility to investors.
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3. Relationship Between CSR and Capital Market
The capital market is a financial marketplace that enables people to buy and sell long-term debt and equity-backed securities. It is essential for businesses because it facilitates the transfer of funds between two parties.
Corporate social responsibility plays an essential role in the capital market since it is crucial in ensuring publicly-traded corporations’ capital market. The capital markets often value corporations with social responsibility.
Most investors who are looking for long-term investments prefer a company that follows sustainable business practices.
4. Social Responsibility Improves Public Perception of Your Brand
Social responsibility to investors is crucial in several ways. Out of them, one is, they play smart when it comes to community investing. They do not invest in any random company that is getting success.
Apart from financial success, the reputation of the company matters a lot to them. If people have a negative view of a brand or company, it would be risky to invest in that entity.
As a result, companies include corporate social responsibility in their long-term strategies and company goals.
In the competitive era, a company needs to stand out in a crowd of competitors. Every brand wants to build its own unique identity for sustainable investing and better financial performance. If you look at big brands, such as Microsoft, Disney, Bosch, and Netflix, you will find that they make a unique brand identity to capture a sizable market.
These are big brands but think about small companies. How would they compete against these large corporations? Well, participating in socially responsible investing can help them in this regard.
Social responsibility should be a critical aspect of any company. After all, it helps companies to communicate with potential clients, bring positive societal impact, and work toward financial gain. When a company contributes to or promotes awareness for a social cause, it keeps them in the public eye. Thus we can say Corporate Social Responsibility helps with branding as well.
CSR helps a company create trust with its target audience and retain customers. And these are the two main goals of branding.
Needless to say, investors appreciate such companies. Most investors believe that having a good CSR strategy can help businesses earn trust and loyal customers. It is seen that even if a company is going through a financial crisis, loyal customers do not leave it and try to uplift their condition. Investing in such a business is always risk-free for stakeholders.
A survey conducted in 2015 confirms that more than 50% of people do not mind paying more for a service/product if the brand focuses on sustainability.
Today, more and more people prefer companies that are not just profit-oriented but also understand social responsibility.
All-in-all, we can say SR can significantly influence customers’ perception of a brand. And investors pay attention to brand image.
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5. It Ensures Business Success and More Profits
A company’s participation in social responsibility to investors is one of the parameters of business success. Businesses that keep environmental and social concerns in their business strategies are always the first choice of investors.
Stakeholders often combine CSR and business success because they know such companies are more successful in the long run. As a result, a lot of organizations from varying industries are implementing this concept.
It was once regarded to be a luxury item. Even today, not every organization can afford it; however, those who can undoubtedly get profit.
Several companies doubt it. They think about how they can make a profit by being socially responsible. Well, CSR has multifaceted benefits to a company. Not only does CSR enhance their image, but it also makes a positive impact on their sales.
Additionally, it helps with employee retention. And the company that has low turnover often has increased productivity and revenue.
Frequent turnover causes a loss of productivity. It may take a newcomer one or two years to catch up to the productivity of established employees.
Furthermore, socially responsible organizations demonstrate their moral principles in their business. They raise concerns for issues and try to resolve them by different means.
Today buyers care about local, national, and global issues. Actually, these issues influence their buying decisions.
For instance, if a company is showing concern for social issues and taking positive action to resolve them, people will appreciate it and buy more from it.
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6. Better Customer Engagement
Customer engagement is the first step to customer loyalty and trust. Until a company wins the trust of its potential customers, it can not make its business profitable.
Most investors nowadays believe that if a company is socially responsible, it will better engage with its customers.
From this point of view, social responsibility to investors is crucial. Most investors monitor a company’s customer engagement before investing.
Companies that practice corporate social responsibility connect with members of society in a variety of ways. Those members, in most cases, are potential customers who later become loyal customers of the company.
In the era of online marketing, word-of-mouth is still a promising marketing method. If a company or band is doing something good for society, people talk about that brand to potential customers.
In short, customer engagement is crucial for a long-term relationship. Moreover, it impacts profitability.
These are a few reasons which represent why companies have a social responsibility to investors.
Why Do Investors Expect a Company to Act Ethically and Show Social Responsibility?
As we discussed above, participating in social responsibility has tons of benefits for a company. Apart from financial profit, it uplifts the company’s overall status. Therefore, it is natural for investors to expect a firm to act ethically and show social responsibility. After all, they are investing their money; they have the right to expect the company to make profits and not undermine the value of their stock.
Risk-free investment is one of the biggest reasons investors want a company to showcase its social responsibility. It assures them that the company will not be engaged in illegal activities ever.
In general, socially responsible businesses are honest in their endeavors and follow a code of ethics regarding social responsibility. Moreover, they don’t prefer getting involved in any illegal activities. As a result, investors don’t have to worry about their stock price dropping.
Investors may suffer significant financial losses if a corporation fails to act ethically or demonstrate a sense of social responsibility. Investing in a socially responsible company makes them feel that their stocks are in good hands.
See Related: Different Types of Social Responsibility to Know
Investors Expectation for Social Responsibility
In most cases, the return on socially responsible investments is determined based on the impact on the community, not on a monetary return.
Still, investors measure the potential for returns on their investment no matter the kind of investment it is. As a result, they have some expectations for social responsibilities from companies.
A few of the skills a shareholder should expect from a company include:
Investors expect the company to get professional recognition and create a brand image among potential customers. Since shareholders are concerned about their own investments, they care about the company’s work and their commitment to society and environmental sustainability.
Also, investors want companies to protect their projects from unexpected situations and be prepared for unforeseen problems. The company should be capable of tackling the issues when they arise. A good investor often understands the value of mutual effort and engagement to achieve a common goal. We think it should be a precondition for a successful partnership between an investor and a company.
So these are a few reasons companies have a social responsibility to investors. If you’re an investor, you can consider investing in a company that has a positive social impact. There are several ESG financing options in the market that you can check out.