When Principles Pay -CSR & the Bottom Line- Geoffrey Heal

1. When Principles Pay-CSR & the Bottom Line-Geoffrey Heal Chapter 1. IntroductionChapter 2. Social Environmental Performance January 29,2013 Chull-Young Lee SEN Winter School

2. Adam Smith (1776) : Invisible HandMilton Friedman(1970) : Profit Maximization History

3. Corporate Environments • Stakeholders: Shareholders, Employees, Customers, Banks, Suppliers, Community, Society, Government • Non-Market Forces: Regulations, Legal System, Regulatory Bodies, NGOs, Capital Market, SRI

4. Limitations of Invisible Hand:Market Failures E nvironment: External Costs S ocial: Justice & Fairness G overnance: Shareholders

5. Environment: External Costs • Total Cost(Social Cost)= Private Cost + External Cost

6. Social : Justice & Fairness • Distribution of Income • Human Rights

7. G overnance: Shareholders • Primacy: Profits vs Shareholders • Conflict of Interest: Shareholders & Management

8. CSR • Value Alignment: Corporate’s values vs Societal values • Corporate Strategy: Long-term Growth & Development

9. Benefits of CSR • Reduction of Conflicts : Corporation vs Society

10. Risk Management : bad press, NGO actions, consumer boycott, law suits

11. Waste Reduction : - BP’s greenhouse reduction program: $630M in savings and extra revenue • Du Pont’s chemical reduction program: Sales of clean-up services generated $1B revenue/yr • Dow chemical's energy saving projects(1981-1993): 204% return on investment

12. Regulatory Protection • Brand Equity • Employee Productivity • Cost of Capital

13. What the Data Tell Us • Corporate Profits • Stock Price • Market to Book Ratio: Stock Market Valuation Book Value of Co’s Assets “Good CSR is positively correlated with superior financial performance.” =

14. Pollution & Stock Price • Hamilton’s 1995 Study: Based on U.S. EPA’s TRI(Toxics Release Inventory) “Average impact of TRI’s annual data releasing firms was $4.1M of stock-market values down.” • Dasgupa, Laplate & Mamingi’s 2001 Study: In Argentina, Chile, Mexico & Philippines, “Inferior performance of a firm(filed of a complaint to a government authority) dropped 5-15% stock price drop.” “ Superior performance of a firm (meeting expected standards) raised 20% stock price up.” • Korean’s 2004 Study: “A firm listed on Monthly Violation Report by Ministry of Environment experienced average 9.7% stock price drop.”

15. Environmental & Financial Performance • Dowell, Hart & Yeung(DHY) Study: S&P 500, U.S. “Shows positive correlation between environmental performance and Market-to-Book ratio.” • Social Performance and Market-to-Book • Research by Heal, Fisman & Nair 2008: “Correlation is high especially among heavy advertisers, ie, when corporate image and brand equity are important.” • “Cause Related Marketing is effective.” • EX: Coca Cola, Evian, BT Group, Bono’s Red

16. SRI : Investment Returns * Domini Social Index (1991-2001)DSI S&P500 5 Years 20% 18.4% 10 Years 18.9% 17.4% * Calpers’ Engagement with 42 Companies(1987 – 1992) : Outperformed 41% over S&P500 * Pax World Balanced Fund ($1.1B) : 17th among 293 mutual funds (5 Years: 1996-2001) * Korean Stock Market KRXSRI Index KRX SRIKOSPI 2009. 1. 2 – 11. 30 41.8% 35.5% DJSI Korea DJSI KoreaKOSPI 2006. 1. 1 – 2010. 4. 5 37.8% 24.7% ARK(Value Investing+SRI) ARK KOSPI 2003. 7. 16 – 2010. 5. 4 301.8% 139.89%

17. Appendix: Blended Value Map Social Financial Blended Value Spectrum • Social Entrepreneurship • Strategic • Philanthropy Corporate Social Responsibility • Global Poverty, • Emerging Markets • & • Int’l Development Environmental Sustainability Socially Responsible Investment Non-Profit Management & Governance • Social Capital Market Sustainable Development