Corporate Social Responsibility: An Emerging Form of Risk Management in Europe

In today's complex global environment, sophisticated money managers continuously seek new ways to beat the market and distinguish themselves from their competitors. On a recent study trip to France and Belgium, the authors encountered innovative approaches to risk management in the form of corporate social responsibility (CSR). During a series of meetings, we discovered the ways in which CSR is being used in daily business practices, ratings agencies, governmental initiatives and strategic NGO collaboration. Amid this multipronged approach, we identified a common theme, namely, the idea of controlling for downside risk by exploiting additional information on firms' CSR activities. Included activities were how firms set up and monitored their governance structure, what social and human rights policies were implemented and how firms controlled their environmental footprint. This paper further explores this trend from the various stakeholders' standpoints, examines the impact and highlights some of the barriers to increased adoption of CSR by investors and company management. Our discussions with European business and political professionals suggest that this use of extrafinancial information is not a momentary fad but rather a lasting structural change in the way investments are made in the European securities markets. However, given the long-term horizon of CSR strategies, concrete and consistent results are yet to be determined.