American companies in nearly every sector say they embrace corporate social responsibility (CSR) not only because it's the right thing to do, but also because it strengthens their brands. They also recognize that a stronger brand is a more valuable one, which is an important factor since the U.S. Financial Accounting Standards Board (FASB) issued standards this year for reporting how much brands and other intangible assets are worth.
American companies in nearly every sector say they embrace corporate social responsibility (CSR) not only because it's the right thing to do, but also because it strengthens their brands. They also recognize that a stronger brand is a more valuable one, which is an important factor since the U.S. Financial Accounting Standards Board (FASB) issued standards this year for reporting how much brands and other intangible assets are worth. According to Laurance Allen, founder of Value News Network, FASB's actions will accelerate the integration of intangibles into mainstream financial analysis, affecting share price. The problem is that no one has been able to show exactly what impact CSR implementation has on brands, let alone measure it. Until now.
Holding Associates and its client sponsor CoreBrand KLD have developed a way to measure CSR's value to brands. By merging CoreBrand's data on the components of brand value with KLD's socially responsible investment ratings, we were able to explore how much of a brand's value is attributable to its socially responsible actions. We determined that, among the 456 companies for which the partners had sufficient data, the impact of CSR on brands is not only measurable but also appears to be growing.
CoreBrand analyzed data from 2003 and 2006 and found that, in 2006, CSR represented a small but significant percentage of a brand's value. The 2003 data confirmed these results, and it appears that the percentage of brand value represented by CSR is trending upward. At the same time, all other identifiable contributors to corporate brand value—advertising, market cap, and the industry in which a company competes—appear to be flat or declining.
Another interesting finding was that the relationship between brand and CSR was strongest for familiarity, not for favorability. That is, if a company is well known in its community, its CSR activities will strengthen its brand more than they would if the company were less well known. The implication is that CSR's impact is strongest with customers who are already familiar with the company, enhancing relationships with existing clients or consumers. A customer must already understand a brand's personality—perhaps have incorporated the brand into her life and even identity—for that customer to value the brand's contribution to society at large.
While favorability was less affected by CSR, the study did show a relationship between CSR and one aspect of CoreBrand's favorability metrics, the investment potential of the brand. That is, brands that are stronger in CSR are seen as a better investment than brands whose performance in CSR is not as well rated. Consumers generally make purchase decisions on quality and price, not on CSR actions, as research by Boston cause-branding firm Cone shows. In Cone's 2004 study, consumers value product quality (98 percent) and price (97 percent) over support of a social issue (80 percent). Clearly CSR is not a primary purchase motivator, so Cone changed the survey design in 2007 to show the effect of social issues as a differentiating factor between two brands of equal price and quality, reinforcing our finding that CSR is most effective with those who are already familiar with the brand.
We also analyzed KLD's seven categories of social responsibility to determine which one has the most impact on brand value. Given all the press over the last few years about environmentalism, we hypothesized that that category would be the strongest driver of brand. In fact, environmentalism was only weakly correlated to favorability, only slightly enhancing the perception of management. KLD's categories of CSR that have the most impact on brand value appear to be the more traditional factors such as corporate governance and diversity. This is in keeping with the finding that the greatest impact of CSR-brand integration is with investors, as both issues directly affect a company's risk profile and stock price.
Though these early results are intriguing, they are just the beginning. Brand and reputation experts need to look at the following issues: benchmarks for industry segments and individual companies; how public perceptions of corporate citizenship compare with expert ratings of performance on citizenship; and, most importantly, the sustainability of CSR efforts and their financial value as measured by impact on brand valuation. Then, finally, will we have actionable metrics on which to gauge the success of CSR and develop rational funding strategies. The cost-cutting rationale for CSR from energy savings, for example, is only one measure of CSR's benefit. The opportunity side—enhancing brand value—could end up being even more profitable.
Carol Holding is president of Holding Associates, Inc.