Does Improving a Corporation’s Sustainability Performance Also Improve Its Business Operations?

Corporate social responsibility (CSR) or corporate sustainability has been a hotly debated topic since its inception after the Second World War. In the 1970s, Milton Friedman famously argued its incompatibility with profit-making companies.  However, perspectives have shifted to align philanthropic behavior with business models, and incorporate sustainability into corporate strategy. The purpose of this study was to further explore the relationship between corporate sustainability and operational performance, represented by cost of debt.

The Capstone team investigated the relationship between a set of corporate social responsibility factors from the CSRHub database and data on the cost of corporate debt from the Bloomberg database. The team found that a 12-variable model for sustainability explained 9.3% of the variance in the cost of debt, or an estimated $343.4 billion in interest expenses for a group of 1,625 companies. Five of the 12 variables in the model had a direct relationship with cost of debt; three of the variables had an inverse relationship; and four variables had no significant relationship. Based on the results of the study and related prior research, the effect discovered may be due to unintentional lender sensitivity to certain sustainability-related issues.

The sustainability factors that had the most effect on debt varied by industry category and for those companies that had higher interest rates compared to those with lower ones. In general, better Board and Compensation & Benefits scores decreased debt cost. Strong Product and Energy & Climate Change scores can potentially enable companies with higher cost of debt to decrease their interest expenses. Companies with average and below average cost of debt in service and heavy industries benefitted from strong Environmental Policy & Reporting and Resource Management practices, while those in light industries were helped by stronger Human Rights & Supply Chain performance.