A major reason for advisors to care about whether firms are socially responsible or not was revealed by researchers at the SRI in the Rockies conference in New Orleans.
Corporations that are socially responsible pay less for equity financing than those that are not, according to researchers who won the prestigious Moskowitz Prize, an award in its 16th year that recognizes the best new SRI research.
The 2011 winners, chosen by a panel of 11 judges, were announced October 3 at the SRI in the Rockies conference. Produced by First Affirmative Financial Network, the conference is a major gathering of financial advisors, investors, money managers and others interested in sustainable investing.
Winning the prize were Sadok El Ghoul, Omrane Guedhami, Chuck C.Y. Kwok and Dev R. Mishra for their paper, Does Corporate Social Responsibility Affect The Cost of Capital? Lloyd Kurtz, chief investment officer for Nelson Capital Management, a registered investment advisory (RIA) firm owned by Wells Fargo and based in Palo Alto, Calif., has organized the competition for many years and introduced Kwok and Ghoul to the attendees.
Kwok is a professor who teaches international finance and China business courses at the Darla Moore School of Business at the University of South Carolina, where he has been recognized as an outstanding teacher. Ghoul is an associate professor at the University of Alberta in Edmonton. Guedhami also is a professor at the Moore School and Mishra is a finance professor at the Edwards School of Business at the University of Saskatchewan.
Kwok said other research on this topic has been controversial because it relied on backward-looking measures. "It had been using historical data or realized returns, which aren't very precise, and that's why people don't trust the findings," he said.
Instead, said Ghoul, their team came up with forward-looking measures, the kind analysts would use, that among other things included applying a discount rate to future cash flows. The team looked at a sample of 2,809 U.S. firms over the period 1992 to 2007.
"From this measure, we found that socially responsible firms enjoy a lower cost of capital, which is big news," said Kwok.
Kwok and Ghoul said the factors that most contributed to reducing corporations' equity costs are good employee relations, environmental policies and product strategies that emphasize high quality. The results also show that two "sin" industries -- tobacco and nuclear power -- in particular face a higher cost of equity. The findings support arguments that firms with socially responsible practices have higher valuation and lower risk, the research found.
Regarding product strategies, Ghoul said that firms with long-term, well-developed companywide quality programs tended to have lower capital costs, while those that had paid substantial fines for price fixing, collusion or other antitrust violations had higher ones.
Kwok added the researchers also found firms that were socially responsible tended to get more attention from analysts, who focus more on good news and tend to screen out firms with bad news. "Subconciously or consciously, they want to cover more on [socially responsible] companies, so the firms get more exposure to media," he said.
"This research should embolden those firms that are very socially oriented and they should feel good at the same time. They are being rewarded financially and it's being recognized, " Kwok said.