Carnegie Council’s Policy Innovations, August 2007
Companies in almost every sector of American business say they embrace Corporate Social Responsibility (CSR) not only because it’s the right thing to do, but because it strengthens their brands. They also recognize that a stronger brand is a more valuable one, which is especially important since the U.S. Financial Accounting Standards Board (FASB) has, just this year, issued standards for reporting how much brands and other intangible assets are worth. As Laurance Allen, founder of Value News Network, says, “[FASB’s actions] will clearly accelerate the integration of intangibles into mainstream financial analysis, directly affecting share price.” The problem is, no one has been able to show exactly what impact a strong CSR commitment and implementation have on brands, let alone measure it. Until now.For the first time, Holding Associates, together with CoreBrand, KLD, and its client sponsor, developed a way to measure CSR’s value to brands. By merging CoreBrand’s data on brand value and its components 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. As part of the project, we recommended testing our hypothesis of CSR’s impact on brand value through a CoreBrand/KLD data merge. Merging brand valuation data from the CoreBrand’s Brand Power database and rating data from KLD’s research, the team determined that, among the 456 companies for which the partners had sufficient data to perform the analysis, not only is the impact on brand of CSR measurable, but it also appears to be growing.
CoreBrand analyzed two years of data, 2003 and 2006, and found that in 2006, CSR represented s small but significant percentage of a brand’s value. The analysis of 2003 data confirmed these results. Even more compelling, it appears that the percentage of brand value represented by CSR is trending up. 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 buyer must already understand a brand’s personality – perhaps have incorporated the brand into her life and even identity – or her to value the brand’s place in and 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 Cone, the Boston cause-branding firm, bears out. In Cone’s 2004 study, consumers value product quality (98%) and price (97%) over support of a social issue (80%). Clearly CSR is not a primary purchase motivator, and so in 2007, Cone changed the survey design 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 already are familiar with the brand.
We also analyzed which of KLD’s seven categories of social responsibility has the most impact on brand value. Given all the press over the last few years about environmentalism, the team assumed that would be the strongest driver of brand, but it was not. 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 therefore stock price.
However intriguing the early results of the Holding Associates/CoreBrand/KLD project, they are just the beginning. Brand and reputation experts still need to look at issues such as benchmarks for industry segments and individual companies; how public perceptions of corporate citizenship compare with expert ratings of performance on citizenship; and most important to the sustainability of CSR efforts and the holy grail of brand/CSR integration efforts, the financial value of CSR as measured by its impact on brand valuation. Then, finally, will we have actionable metrics on which to gauge the success of CSR and develop rational funding strategies. Cost-cutting rationale for CSR from, for example energy savings, is only one measure of CSR’s benefit. The opportunity side, enhancing brand value, could end up being even more profitable.