It is no secret that the management concept of integrating social and environmental concerns in business operations has become increasingly popular over the last years, resulting in an important shift towards “greener” and more responsible business practices. In December 2020 KPMG published its annual survey on Sustainability Reporting, presenting a graph with key global quantitative trends over the last 27 years. The graph shows a huge increase in sustainability reporting and implicitly emphasizes firms growing interest in corporate citizenship and Corporate Social Responsibility (CSR), both on a broader SME level (N100), but also within the world’s 250 largest companies (G250). Such a shift surely is encouraging when it comes to linking business activity to society and the environment, but, although it appears beneficial, its timeframe and the relevant immediacy with which a marginal model transformed into a commercialized practice cannot help but raise questions.
Implementing CSR practices implies a proactive stakeholder engagement in a set of activities ranging from pro bono work to philanthropy, environmental protection and more. Its design and fulfillment can be quite lengthy and resource consuming for firms. They need to formulate a strategic plan to support their CSR mission and adopt appropriate approaches based on the stakeholder groups they are involving and their motivation for intervention. Even after the establishment of the CSR agenda, however, they need to devote specific resources, human capital and funds to guarantee the successful implementation of these activities. Despite all that, firms have been increasing the percentage of profit they dedicate to CSR. For instance, the Walt Disney company spent alone $338.2 million in “corporate giving” during 2019. Given the for-profit nature of businesses, their overwhelming enthusiasm towards sustainability and CSR strikes as odd, especially given its relatively recent timing. Theoretically, CSR activities diminish company profitability; under a purely accounting perspective, these expenditures do not incur revenues. This consideration makes one wonder what factors can potentially be driving such a change in corporate behavior.
Government regulation has certainly shaped CSR practices, since it is the most direct force to be exerted on businesses. In fact, the term Corporate Social Responsibility was initially introduced in 1953 and the first reporting regulations date back to the 60-70s with very few countries passing relevant legislation. However, the increasing social pressure by NGOs and the scientific community facilitated CSR legislation to gain momentum and enter the global political agenda, with sustainability and environmental regulation being amongst the most regulated dimensions of CSR. At the same time, advancements in the area of “green technologies” and improvements in production methods eased the transition of businesses towards corporate and environmental sustainability. Still, they do not wholly explain such a huge shift. Companies are required to abide by these legislations, so naturally they should be viewed purely as a corporate obligation towards governmental authorities. On the contrary, firms are genuinely excited about improving their CSR practices, participating in corporate voluntarism and are proud of their charitable donations. Many even go a step further by committing to using 100% sustainably sourced production inputs, renewable energy and upcycling.
A rationale which can, however, justify firms going the “extra mile” to demonstrate CSR is rooted in the bargaining power of consumers. As the circulation of information has increased tremendously, withholding information from the general public has become increasingly difficult for firms. Concurrently, globalization has expanded the competitors’ range far beyond the limits of geographical location, especially in the consumer goods industry, thus making comparison between firms all over the world easier. The intensity of competition across business sectors has increased the degree of substitutability of goods since consumers are more sensitive to price changes. Businesses need to once again establish a differentiating feature to attract and maintain a loyal customer base and the change in consumers’ priorities with regards to their purchases has provided exactly that.
Younger generations of consumers are now more educated on matters pertaining to sustainability practices and business ethics than before and usually, all else equal, they place additional value to a product whose firm has strong CSR, increasing their willingness to pay. This phenomenon, along with the popularization of sustainability by mass media, have contributed to the creation of a “demand within demand” for each market, targeting the most sustainable and environmentally friendly version of each product category. This relatively recent but growing demand incentivizes already existing players to shift their production methods and new ones to enter the market, because the first to supply this demand can capture a substantial percentage of market share and increase sales, but also charge premium prices and boost profitability. The clothing industry in an obvious example, where traditionally fast fashion brands like ZARA and H&M have launched sustainable clothing lines and at the same time many smaller brands built around the concept of sustainability have emerged. Supplementary, many corporations use CSR methodologies as a strategic move to improve public image and built a repeating customer base. Cause-related marketing for example, a promotional strategy according to which sales are linked to a charitable or public cause, is often used by companies as an indirect way of product advertisement.
Strong CSR strategies, which incentivize firms to go beyond minimum governmental requirements, can have a considerable effect on business performance and profitability. In a constantly evolving market where consumer preferences become more and more sophisticated, firms can use their CSR strategy as a new differentiative trait, because it simply pays off. In fact, researchers have found a positive relationship between social and financial performance of businesses. It is most probable that such a commitment would not have been observed had CSR not been profitable. This doesn’t go to say that the final outcome of firms’ CSR is to be condemned, quite the contrary, it is beneficial for communities. What needs to be distinguished, however, is that pretending that this shift is driven purely by good intentions and the shared vision of firms to “make the world a better place” is one-sided and unrealistic. Given that businesses heavily rely on the impact of CSR practices to build goodwill and gain customer trust it is more useful to rather comprehend the mechanism through which consumer preferences and bargaining power affect the course of actions for firms’ CSR. Demonstrating an even stronger demand for sustainable goods and socially responsible firms will only help push for an increased level on transparency and engagement in Corporate Social Responsibility.