Hi. Welcome to macroeconomics. This is Kate. This tutorial is on Corporate Social Responsibility, or CSR. As always, my key terms are in red and examples are in green.
So in this tutorial we'll define what CSR is. And you'll understand what it involves. And we'll talk about the following components to CSR, philanthropy, corporate governance, and environmental impacts. So let's start actually thinking about as an investor.
If you were looking to invest in a company, what's your top priority? For most people, it's to make a decent return on your money, right? Absolutely.
But are there other things that you might consider when you're looking to invest in a company? Would you care what the company produces? Would you care how the company produces?
So any company has certain duties or responsibilities to its investors. Obviously, their biggest fiduciary duty is to get them the highest return possible. But they're supposed to do so with care, loyalty, and full disclosure.
So generally, the focus has been on generating strong investment returns, because that's what most investors care about. And so they see that in a quarterly earnings performance. However, what we're going to be talking about in this tutorial is this could also imply that companies do have some social responsibilities.
Most investors are looking for companies with successful management teams. And they're looking to leaders of the company to drive profits and make wise decisions, absolutely. But some investors today are beginning to be concerned with investing in socially responsible firms. There are actually even some funds that contain an index of only companies who follow, for example, high environmental, social, and governance standards. So that's what we're looking at here.
CSR is corporate social responsibility. Typically, it's stated in reference to a corporate social responsibility report, where an entity is providing detail specific to its social or philanthropic environmental and financial activities. So corporate social responsibility is this idea that firms might sometimes voluntarily take measures to-- for lack of a better phrase-- do good things instead of just making all decisions about the bottom dollar.
So being socially responsible can take several different forms. The first way that we're going to talk about it is giving back to the community, or philanthropy, simply doing the right thing. And that goes into fiduciary duty. We'll talk about the governance of companies. And finally, we'll look at producing in ways that are sustainable or helping to preserve for future generations. And that's known as environmental stewardship. OK.
So let's start with philanthropy. Philanthropy is just corporate giving or financial contribution in support of charitable causes. Sometimes companies actually give back to the community directly and other times they set up foundations or endowments.
Some examples of corporate philanthropy that we see are charitable donations. Or it can be in the form of volunteering time for charities and causes or encouraging employees to contribute and then matching those contributions.
How could this be controversial? When I was first reading and researching about this, and how could that be controversial? Although most firms do donate at least some money to charity, there actually is disagreement over this kind of corporate philanthropy.
Some people do feel very strongly that companies are actually obligated to help their communities where they do business. And these people sometimes even suggest that, hey, by giving back, companies can actually even increase their profitability just by improving their image, make people want to do business with them.
But other people who criticize corporate philanthropy actually feel that it goes against doing the right thing for shareholders. So it can go against their fiduciary duty, in a way, as it can increase cost and cut into profits. And some of these people say, you know what, it's really only serving the interests of management instead of the shareholders. The shareholders aren't choosing the companies in which the company is donating money to.
Let's talk about corporate governance now. Corporate governance is the idea-- it's how a company or entity oversees its operational and financial processes. So it has oversight of operating strategy, risk management, capital allocation, and many other items. It's usually managed through a board of directors on behalf of stakeholders.
So when we look at corporate governance, we're looking at how are decisions in the company made. It's all about processes, so rules and procedures for company operations. It's a way that companies can monitor their actions, policies, and decisions so that all interests of all stakeholders involved are being protected.
Traditionally, governance didn't refer to any of this corporate social responsibility stuff that we're talking about here. It really just referred to the areas of the company, like finance and audit. But now a lot of companies are starting to incorporate other things, like sustainability.
So CSR reporting already involves companies disclosing how much they're polluting, so disclosing their pollutants, their energy and water usage. And when we refer to CSR reporting, we're referring to an annual CSR report that includes all of these corporate social responsible activities.
But now the CSR reporting is going beyond that. It's going beyond it as companies are trying to create actual sustainability committees. And this is highlighting the growing importance of including sustainable practices when a company is considering their overall decisions and overall operations.
Finally, let's look at environmental management. It's the management of natural resources and activities that can impact the environment. And it's a method that companies can ensure least harm to the environment. So environmental stewardship, that's what we're looking at here.
It's definitely important to measure the environmental costs of production at the production site itself, right? But for a firm to be concerned about sustainability, they have to go way beyond that. They have to consider the entire production process.
There's a lot that occurs before and after what actually is taking place on site. And that's what the supply chain refers to. Supply chain are singular inputs within a production or operation, all of those little steps along the way.
And so to be effective, it can certainly help by just looking at your production site. But to be really effective, firms have to incorporate sustainable practices along their entire supply chain. And there have actually been some frameworks developed to look at and evaluate sustainability in this holistic manner. And those include something called the Carbon Disclosure Project and the Global Reporting Initiative.
Again, let's take it back to investors for a minute. So socially responsible investing, or SRI, is starting to grow in popularity. And it combines the goals, like we said, of certainly financial return, but also social good for companies.
And it encourages practices that promote environmental protection, consumer protection, human rights, diversity, et cetera. And so it's looking at assessing costs and benefits to society holistically. That's the big idea here for those people who are interested in socially responsible investing.
So the big idea with CSR for you to keep in mind-- the takeaway-- is as investors and others are becoming more concerned about many of these issues, corporate social responsibility has become a significant area of study. That's why we're including it here in this macroeconomics course.
So it looks at corporate practices from financial, economic, sustainability, and environmental perspectives. It's much more holistic. Many investors, though, are still really only concerned with profitability. I mean, we can't deny that.
And so a lot of companies are wary of incorporating these ideas too much if it means increasing costs. So, at least in the United States, corporate social responsibility, yeah, it is happening, but most often it's kind of far away. It's removed from all of the discussions in the company happening involving marketing and brand management or corporate communications, these more traditional things.
So that's just one thing to keep in mind about CSR. It's certainly increasing in popularity, but it has a long way to go in a lot of people's opinion, especially in the United States.
So in this tutorial, we did define CSR. And hopefully now you understand more of what it involves. And we looked at the components to CSR of philanthropy, corporate governance, and environmental impacts.
Thanks so much for listening. Have a great day.