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How Can a Ratings-based Method for Assessing Corporate Social Responsibility (CSR) Provide an Incentive to Firms Excluded from Socially Responsible Investment Indices to Invest in CSR?

Abstract

Socially Responsible Investment (SRI) indices play a major role in the stock markets. A connection between doing good and doing well in business is implied. Leading indices, such as the Domini Social Index and others, exemplify the movement toward investing in socially responsible corporations. However, the question remains: Does the ratings-based methodology for assessing corporate social responsibility (CSR) provide an incentive to firms excluded from SRI indices to invest in CSR? Not in its current format. The ratings-based methodology employed by SRI indices in their selection processes excludes many corporations by creating limited-membership lists. This received ratings-based structure is yet to offer an incentive for most of the excluded corporations to invest in improving their levels of CSR. We, therefore, ask under what circumstances a ratings-based method for assessing CSR could provide an incentive to firms excluded from SRI indices to invest in CSR. In this article, we attempt to offer a theoretical reply to this question. We show that when all firms are publicly ranked according to SRI index parameters, such indices can indeed create a market incentive for increased investment by firms in improving their performance in the area of social responsibility. We further show that this incentive tapers off as the amount of investment required exceeds a certain point or if the amount of payback on that investment fails to reach a certain threshold.

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Correspondence to Avshalom Madhala Adam.

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“In the long run, we believe the application of these standards helps to encourage greater corporate social responsibility and to align the investment process with the needs of society and the environment”, http://www.domini.com

Appendix 1: The balance point mathematical calculations

Appendix 1: The balance point mathematical calculations

$$ a(M + cS^2 - dS) + (1 - a)S\, > \,aM $$
(6.1)
$$ acS^2 - adS + (1 - a)S\, > \,0 $$
(6.1.1)
$$ acS^2 + S(1 - a - ad)\, > \,0 $$
(6.1.2)
$$ a*c*S\, > \,a + ad - 1 $$
(6.1.3)
$$ S\, > \,\frac{{a + ad - 1}} {{ac}} = \frac{d} {c} + \frac{1} {c} - \frac{1} {{ac}} = {\hbox{balance}}\,{\hbox{point}} $$
(6.2)

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Adam, A.M., Shavit, T. How Can a Ratings-based Method for Assessing Corporate Social Responsibility (CSR) Provide an Incentive to Firms Excluded from Socially Responsible Investment Indices to Invest in CSR?. J Bus Ethics 82, 899–905 (2008). https://doi.org/10.1007/s10551-007-9600-4

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Keywords

  • corporate social responsibility
  • social responsible investment
  • ethical investment
  • corporate social performance
  • financial performance
  • theory of SRI