By Dorothy Hinchcliff

Do industries perform better financially when they do things like prevent pollution or treat their workers equitably? A new, award-winning study concludes the answer may be "yes" for one group and "no" for another.

Consumer industries with greater corporate social performance tend to perform better financially than those that don't, but the opposite is true for industrial industries, says The Economics and Politics of Corporate Performance.

The three California university professors who did the study and wrote the paper are David P. Baron at the Graduate School of Business at Stanford University, Maretno A. Harjoto at the Graziadio School of Business and Management at Pepperdine University, and Hojo Jo in the Department of Finance at the Leavey School of Business at Santa Clara University. The paper received the 2009 Moskowitz Prize for Socially Responsible Investing, an award that was announced October 26 at the SRI in the Rockies conference in Tucson, Ariz.

When they looked across all firms, the authors found corporate financial performance and social performance to be largely unrelated. But that result doesn't necessarily apply to individual firms, which might be able to improve the bottom line by making social improvements, the study says. In fact, the report concludes that more research on individual firms is needed to determine whether increased social efforts make firms financially stronger.

Social pressure, on the other hand, hurt the financial performance of the overall group and industrial firms, the study found. It was social pressure from private groups, such as nongovernmental organizations (NGOs) and social activists, rather than from government, that was responsible for the impact.

"The lower CFP [corporate financial performance] then makes the firm a weaker target, so social pressure increases. So why do firms increase their CSP [corporate social performance] in response to social pressure if doing so is not rewarded and results in greater future social pressure? On explanation is that firms increase their CSP because it is morally required and do so despite the cost. In contrast, for firms in consumer industries an increase in CSP in response to an increase in social pressure increases CFP, so being responsive could be motivated solely by financial performance objectives," the report says.

Another interesting finding was that firms with a high proportion of their shares held by institutional investors have lower corporate social performance and face less social pressure. "The causation, however, is likely to be that institutional investors shun firms with high CSP, possibly because high CSP is (weakly) associated with worse financial performance, and also shun firms facing social pressure. ... Social pressure from NGOs and social activists thus appears to reduce the likelihood that institutional investors will hold shares of that firm, as does greater CSP," the study says.

The study looked at data from 1996 through 2004 on 2,010 firms provided by KLD Research & Analytics, which has the most comprehensive and widely used database on corporate social performance. Because data wasn't available for all firms in all years, the study also looked at a subgroup of 486 firms, most of which were in the S&P 500, for which data was available for all the years.

To read the study, click here.