Hoping to win over customers in a market that is increasingly focused on companies’ environmental, social, and governance efforts, businesses from Amazon, Zoom, and Honda to the likes of Gap, Karl Lagerfeld and Tommy Hilfiger brand-owner GIII, Vestiaire Collective, and even Shein have taken to touting their good deeds in corporate social responsibility (“CSR”) reports. CSR reports let companies spotlight what they have done for workers, consumers, communities, and the environment – essentially all their goals beyond simply making a profit.
Research shows that CSR statements that highlight companies’ “environmental sustainability, community support, cause-related marketing, and employee enablement,” among other things are linked to rising sales. But a question worth considering is when companies find success with CSR disclosures, are they bringing in new customers – or are extra sales coming from their existing customer base alone?
In a recent study of several hundred Chinese companies, a colleague and I put the question to the test. We found that a CSR disclosure lowers a business’s dependence on current customers by 2.1 percent. That is welcome news for businesses. It means those additional sales are coming from new customers, who are indeed impressed by the company’s CSR efforts.
But the findings were not all positive. To sell more products, companies generally need to buy more supplies. So, a logical follow-up question is: Does a company’s CSR disclosure lead it to source purchases from new suppliers? In fact, we found the opposite. Companies that released CSR disclosures seemed to scare away new suppliers. This is probably because suppliers often bear the costs when a company chooses to prioritize social responsibility.
Becoming dependent on suppliers comes at a cost to businesses. When suppliers know a company depends on them, they tend to demand payment in cash rather than credit. That can hurt a company, because it now has less cash for investments.
So, while CSR reports impress customers, they appear to antagonize suppliers – and that comes at a price.
Why it Matters
Prior research has shown that CSR disclosures can boost sales, but it is long been unclear whether these additional sales are sourced from old customers or newly acquired ones. Our work brings clarity that businesses can use in making decisions. The findings are also of interest to lawmakers, regulators, and corporate responsibility advocates who are debating making CSR reports mandatory.
The U.S. does not require businesses to release CSR reports, but some countries do. One is China, which in 2008 mandated that all public companies submit annual CSR reports starting in 2009. This created the conditions for the nearly natural experiment we conducted.
Interestingly, the U.S. Securities and Exchange Commission has reportedly considered making some form of corporate social responsibility reporting mandatory, including, by way of climate reporting rules. (In March, the Securities and Exchange Commission voted to adopt its highly anticipated climate-related disclosure rules for public companies, a move that will require companies listed on U.S. exchanges to disclose certain climate-related risks for the first time.) In the absence of broader CSR requirements (and climate reporting requirements for non-publicly-traded entities), many American corporations will continue to voluntarily report on these issues.
In other words, the need for empirical evidence on the cost and benefits of CSR disclosure is greater than ever.
Vivek Astvansh is an Associate Professor of Quantitative Marketing and Analytics at McGill University.
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