Looking after your employees is good for business with new research finding that it brings in 35 per cent more investment from socially responsible funds.
The study looked at 1,585 US corporations and 47 socially responsible investment (SRI) funds and found that those companies who treated their employees best had the most money poured into them by SRI funds.
Onur Tosun, of Warwick Business School, looked at a host of indicators as to why SRI funds invest in different firms and found employee relations as the most important and it was especially noticeable in the construction, transportation, financial sector and personal services industries – which covers anything providing a service for people from law and accounting to cleaners and beauty shops.
Dr Tosun said: “This increased investment makes sense as firms investing in their employees signal high corporate social responsibility (CSR), which in turn potentially enhances a firm’s reputation and prestige.
“Firms can improve their employee relations in a number of ways: for example by improving the working conditions for employees, fair wages and even by organising social events.
“A good example is Pride Transport, a Utah-based trucking company. It uses employee engagement as a competitive advantage to keep good drivers. Not only is their pay competitive, but they find accommodation for them while they are on the road and help their families while the truckers are away.
“Improvements in this area of CSR have been known to boost loyalty, employee contribution, and motivation through which productivity, firm performance and firm value increase. Naturally, this would draw funds’ investment.
“My research also shows firms in specific sectors can benefit more from increased CSR efforts, but on the whole CSR investment is a worthwhile endeavour for any firm looking to attract SRI funds.”
In the paper Is Corporate Social Responsibility Sufficient Enough to Explain the Investment by Socially Responsible Funds? Dr Tosun used the Kinder, Lydenberg and Domini Index (KLD) to measure 1,585 US companies’ CSR scores in employee relations, society, governance and environment.
To look at the sensitivity of SRI funds towards CSR Dr Tosun measured the responses of 47 funds to the changes in firms’ CSR strategy by using the US Forum for Sustainable and Responsible Investment, which also goes by the name of US SIF, which shows their screening criteria for investment and the Thomson Reuters’ S12 database, which reveals the type and amount of shares funds hold.
The study found that a one standard deviation point increase in employee relations saw the SRI funds whose criteria centred on CSR invest 17.2 per cent more, while a one point rise in society realised a 16.6 per cent increase in SRI investment, for environment it was 10 per cent and governance 10.4 per cent. SRI funds sensitive to the changes in firms’ CSR increase their ownership in firms by 15 per cent when those companies have a higher CSR score in all areas by one standard deviation point.
“I found strong evidence that SRI funds increase their ownership in firms who increase their CSR policies,” said Dr Tosun. “Specifically, my results indicate SRI mutual funds with high CSR sensitivity have distinctively higher ownership in firms when those companies improve CSR in employee relations. Plus a one point increase in the employee relations area of CSR in firms resulted in 35 per cent more investment by SRI funds that concentrated its investing criteria on employee relations, which was the most of any of the criteria.
“Increases in society CSR, such as improving housing in a bad neighbourhood by a construction company or covering education fees for local children, also sees firms gain a significant growth in investment. McDonald’s is a good example, it has a society focus CSR. Ronald McDonald House Charities provides free ‘home away from home’ accommodation to families while their child is in hospital.”
To make sure it is SRI funds responding to changes in firms’ CSR strategy and not the other way round Dr Tosun examined what new SRI funds did when looking at which firms to invest in.
“The results showed the new funds responded to higher employee relations scores as well, so the causal relationship must be that way round,” said Dr Tosun.
The research also showed SRI Mutual Funds perform better than the Nasdaq in 2007, 2008, and 2011.
Dr Tosun added: “These results indicate that SRI portfolios had higher returns than the market around the financial crisis. This may be useful for investors seeking reliable investment options during times of financial instability and high uncertainty.”
The paper Is Corporate Social Responsibility Sufficient Enough to Explain the Investment by Socially Responsible Funds? has been submitted for publication in a number of finance journals.