5. CSR, certification and standards

Question 1

What is CSR?

Answer 1

Newman et al (2020):

There is no common definition of CSR or way to measure it.

CSR could refer to firm activities that go beyond the law in incorporating social, environmental, ethical, and consumer concerns in their business operations.

In this paper, the authors differentiate between:

management-related CSR -> beyond compliance activities like having a CSR policy, being a member of standards groups, or having certifications

community-related CSR -> involving. in local environment protection activities, participate actively in poverty alleviation or education initiatives

Crifo & Forget (2015):

Also agree that there is no one single definition, but use the European Commission one:
“beyond legal constraints, firms take responsibility for their impacts on society with the double aim of maximizing the creation of shared value for their shareholders and stakeholders and identifying, preventing and mitigating their possible adverse impacts”

They also say that CSR decisions are made as an answer to market imperfections (such as externalities, public goods, altruism, asymmetric information, or basically REAL LIFE)

Schwartz and Carroll (2003):

CSR is a mix of economic, legal, and ethical responsibilities of businesses

Question 2

Does CSR affect firm performance?

Answer 2

Newman et al (2020):

The evidence that exists on the effects of CSR on firm performance is mixed:

• POSITIVE (improve firm performance): when it enables lower production (environmental) costs, product differentiation, or innovation (in form of managerial processes and tech upgrading)
• NEGATIVE (decrease profits and managerial slack): when managers favor their responsibilities to stakeholders and not shareholders (BASTARDS)

Question 3

Is there empirical evidence of the impact of CSR on firm efficiency?

Answer 3

YES!
Newman et al (2020) develop a CSR index based on 2 indicators:

• the extent to which a firm has a well-developed CSR strategy at the management level going beyond compliance with existing regulations
• the extent to which a firm engages in beyond compliance CSR related activities undertaken by the individual firm

They did a study encompassing four consecutive rounds of Vietnamese enterprise surveys (2011-2014) to find out how CSR impacts firm efficiency, to look if competitiveness in an industry changes that, and if firms use CSR strategically to offer lower compensation for employees.

FINDINGS:

• Adding 1 additional activity to a firm’s strategic CSR portfolio gives on average 0.3% increase in labor productivity (the effect is stronger in non-competitive industries)
• The positive relationship between CSR and firm efficiency is stronger for domestic firms compared to foreign or state operate firms because in Vietnam local linkages are very strong (dependant on local community)
• beyond compliance CSR activities don’t impact productivity while community-related CSR has a positive effect on productivity

Question 4

Does the effect of CSR on productivity change with the level of competitiveness in an industry (empirical evidence)?

Answer 4

YES!

Newman et al (2020):

They measure the industry-level competition using the HHI (Herfindahl-Hirschmann) index expressed as the sum of the squared market shares within an industry in a specific period of time.

A high HHI means that there is a lower level of competition while a low HHI means that there is a higher level of industry competition.

Then they regress productivity (measured as revenue per employee) on CSR index, HHI index, and other control variables.

RESULT!
Firms in more competitive sectors have a lower CSR score.

Question 5

Does the effect of CSR on productivity change with the level of competitiveness in an industry (in theory)?

Answer 5

Competition has an impact on CSR adoption and firm performance.

If enterprises compete for socially responsible consumers, CSR activities may be boosted by competition and that will improve in turn the industry’s efficiency.

Firms could also use CSR for their own purposes - to raise entry barriers for other firms or influence the regulatory system - this would then reduce productivity in the industy.

Question 6

What are the drivers of CSR?

Answer 6

Crifo & Forget (2015):

• deterring public regulation by regulating oneself or as a measure to reduce an expected fine
• as a response to social pressure from NGOs and civil society (especially effective for consumer-oriented firms where image and branding are important)
• altruistic motives (genuinely wanting to contribute to something, but it’s tricky because it can also be for image concerns)
• differentiation in the market & attract more ethically concerned consumers
• competition (live up to the industry standards or use CSR as a tool to block other players from entering the same market)
• address incomplete contracts that cannot oversee all future externalities
• to attract skilled talent that is also willing to to work for less money

Question 7

What is the impact of sustainability standards on farmer outcomes and their environmental performance?

Answer 7

Meemken (2021) says that there are mixed results in the literature: some farmers benefit economically from adopting standards while others can’t afford the certification costs.

Empirical evidence suggests that standards might be more effective in improving worker conditions on large farms than small ones (because small farms can’t be individually audited).
Also, less than 1% of small farms in Peru (the study area) participate in certification schemes while 20% of larger farms do.

Question 8

Why do sustainability standards have heterogeneous implications for small and large farms?

Answer 8

Meemken (2021) says that large farms that adopt certifications have higher incomes due to economies of scale and decreasing marginal cost of meeting those standard requirements (basically it’s more expensive for small farms to do that)

Another explanation could be due to the differences in types of crops and their different standards -> large farms produce fruits and veggies that always sell, while small farms tend to produce traditional export crops (coffee, cocoa, etc.)