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"Forty-five percent of U.S. households prefer an environmental, social and governance (ESG) approach to investing… Among those between the ages of 30 and 39, this increases to 64%, and for those younger than 30, it is 67%."
-- Cerulli Associates
    October 2018

"The vast majority of Canadian investors are interested in responsible investments (RI) that incorporate environmental, social and governance (ESG) issues, and they would be more likely to choose responsible investments if their financial advisor suggested suitable RI options for them."
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May 26, 2014

How Ethics Benefits Corporate Profits

By Ron Robins, Founder & Analyst - Investing for the Soul
This article first featured in Vision magazine, www.vision.ae

Just as strong ethics are necessary for beneficial relationships with friends and family, so they are vital for driving a company’s long-term financial performance. A company′s strong ethical culture equates with honesty, respect for employees, clients and shareholders alike.

I began to understand the value of ethics in company affairs more than 40 years ago. As a financial analyst for a Canadian investment management firm, I saw that companies with an ethical corporate culture appeared to have above average profits. Over time, this "ethical culture" became identified and branded as corporate social responsibility (CSR). However, my belief that companies with strong ethics have higher profits was not academically confirmed until 2004.

That research, conducted by the University of Iowa, found a significant positive association between corporate social performance (CSP) and corporate financial performance (CFP). It also discerned a virtuous circle whereby CSP increased CFP, then CFP increased CSP, and so forth.

As an analyst, I know that the calibre and tenacity of management and workforce are probably the most important determinants for corporate success. And companies with good reputations are likely more successful in attracting them, as the findings in a 2013 CR Magazine & Allegis Group Services survey illustrates. Of 1,010 US adults surveyed, "69 per cent of Americans would not take a job with a company that had a bad reputation, even if they were unemployed".

Another factor I have observed is that robust CSR policies often grant firms a lower cost of financing, with investment in good employee relations, environmental policies and product strategies rewarded with a reduced cost of equity.

Strong ethics and CSR positively influence supplier relations, too, and so help maximise profits. It has been observed that the quality of a firm′s network partners can decline after the commission of an unethical act. Equally, litigation costs resulting from bad ethics can destroy profits. This has been evident for banks in recent years. My view is that these legal penalties have been insufficient to date. But there is hope of further substantial justice forced by markets.

Some would argue that a focus on ethics can actually impair a company’s profitability. But a study published by the US National Bureau of Economic Research in 2011, revealed something really fascinating. It found that out of 3,000 publicly traded companies, the more a company is corporately "irresponsible" (might equate with being unethical) the more it tries to be corporately socially responsible.

If CSR activities were not beneficial to corporate finances, then why would irresponsible companies turn to CSR? And why do most large public companies today engage in CSR? Because they believe that CSR enhances reputation and improves corporate performance and profitability.

Thus, I predict ever-higher ethical and CSR standards for companies everywhere. Furthermore, companies will need to issue standardised and independently audited CSR reports to meet the demands of their stakeholders, including shareholders and stock analysts who increasingly value this information. Everyone will be able to evaluate the effectiveness of a company′s ethics and CSR activities as they relate to its operations and profitability.

We see that a strong culture of ethics -- required for successful personal relationships -- similarly benefits corporate profitability in many ways. This includes attracting and retaining a loyal workforce, optimising a firm’s reputation, reducing a company’s cost of equity, enhancing supplier relations, and mitigating litigation and associated costs. Yes, higher corporate ethics is a requirement for all companies interested in driving their financial performance. And it is a caring capitalism.

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Disclaimer: This website does not make investment recommendations. Nothing in this site should be interpreted as a recommendation or solicitation to buy/sell any securities or investments. Investing for the Soul is a source of general information and resources for ethical investing and socially responsible investing (SRI). Investors should consider their actions thoroughly and consult their financial advisers and other professionals, prior to taking any investment action. This website does not necessarily agree with the opinions expressed in articles on its pages or offered on the web pages to which it might be linked. Such opinions are the responsibility of the writers themselves. Furthermore, this site does not offer or provide any warranties, representations, guarantees, implied or otherwise, as to the accuracy, legality, copyright compliance, timeliness or usefulness of the information, materials or services on this, or other sites, to which it is linked. Also, Mr. Ron Robins is not an investment advisor, nor is he licensed with any professional investment related body, and thus is not able to, nor does he make, any investment recommendations.


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