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Corporate Social Responsibility

Updated on May 15, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Corporate Social Responsibility (CSR) Definition

Corporate Social Responsibility (CSR) is a business approach companies follow to make a social impact and focus beyond profits. Its main purpose is to enhance the company’s image, earn customer loyalty, and generate more sales. Corporate social responsibility activities also benefit society and the environment as businesses work for the collective good.

Corporate Social Responsibility

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There are four main types of corporate social responsibility – environmental, ethical, philanthropic, and economic. CSR is extremely important now as consumers know about the negative externalities caused by production activities. Therefore, companies are extra careful about their compensating activities. Common CSR initiatives include donating to charity, providing disaster relief, promoting renewable energy, encouraging gender equality, addressing racial discrimination, etc. 

Key Takeaways

  • Corporate social responsibility is a business strategy currently used by many companies that attaches a social aspect to them.
  • The public and businesses are subject to the many benefits of corporate social responsibility. First, it benefits society, as companies contribute a part of their revenue. Secondly, the company gains by earning a reputation and thus, making profits.
  • Firms make it a point to heavily publicize their CSR initiatives, as making customers aware of it is equally important as doing good to society.

Corporate Social Responsibility Explained

Corporate social responsibility is a very prominent approach adopted by most businesses. Some popular examples of corporate social responsibility include Starbucks, Apple, and Levi Strauss, among others.

The benefits of CSR extend to both society and the company. Thus it is necessary to carefully weigh the impacts of CSR initiatives and design them to maximize the positive effects. 

For this, companies have to define their purpose and goals. Then, they can revisit their mission and vision. Next, by conducting a SWOT analysis, they can identify the best opportunity and decide on the type of CSR approach. Then, they must communicate with their stakeholders and divide responsibilities. 

Social responsibility should be made a part of corporate governance and followed religiously. Finally, it is important to measure the impact and publicize it. Also, studies should be carried out at regular intervals and corrections introduced. 

Corporate Social Responsibility initiatives play a pivotal role in modern business by fostering ethical practices and sustainability. It enhances a company’s reputation, builds trust among stakeholders, and attracts socially conscious consumers and investors.

By addressing environmental, social, and ethical concerns, CSR contributes to a more responsible and equitable corporate landscape, positively impacting society while ensuring long-term business viability.

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Objectives

Corporate social responsibility activities serve as a multifaceted approach that seeks to align business interests with broader societal and environmental concerns, fostering a more responsible and sustainable corporate culture. Let us understand the objectives through the points below.

  • Ethical Conduct: CSR aims to promote ethical behavior within corporations, encouraging them to adhere to high moral standards in their operations and decision-making processes.
  • Environmental Stewardship: It seeks to reduce a company’s environmental footprint, focusing on sustainable practices and eco-friendly initiatives to combat climate change and resource depletion.
  • Community Engagement: CSR fosters strong relationships with local communities by supporting social initiatives, charitable causes, and community development projects, thereby enhancing a company’s social license to operate.
  • Employee Well-being: It places emphasis on ensuring the well-being and development of employees, encompassing fair wages, safe working conditions, and opportunities for professional growth.
  • Transparency and Accountability: CSR aims to enhance transparency in reporting and accountability for corporate actions, promoting trust among stakeholders, including shareholders, customers, and regulatory bodies.
  • Long-term Sustainability: The ultimate goal of CSR is to contribute to the long-term sustainability and success of a company, not just in terms of profitability but also in terms of its impact on society and the environment.

Types

There are four important types of corporate social responsibility initiatives through the explanation below.

Corporate Social Responsibility Types

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  1. Environmental CSR – Companies focus on environmental protection and conservation in this category. They launch initiatives to reduce pollution or emission, offset carbon footprint, recycle waste, and use renewable energy sources.
  2. Ethical CSR – The ethical responsibility of a business has to do with the moral values and ethical beliefs of organizations. It usually covers all the stakeholders of the company – employees, suppliers, and investors. Issues like gender equality, reasonable working hours, high minimum wage, etc., fall under ethical CSR.
  3. Philanthropic CSR – Businesses’ donations and contributions made to charity are considered philanthropy. Helping malnourished children or rescuing people in war-torn regions come under this.
  4. Economical CSR – The last type of social responsibility focuses on the financial aspects of environmental, ethical, philanthropic, and social initiatives. A company should not just make profits but also practice fair measures like paying taxes responsibly to support the economy.

Scope

Corporate social responsibility initiatives have a broad scope, encompassing various aspects of responsible business conduct, from environmental sustainability to social welfare. Let us understand its scope through the discussion below.

  • CSR includes initiatives to reduce a company’s environmental impact, such as sustainable sourcing, energy efficiency, waste reduction, and emissions control.
  • It encompasses efforts to support local communities through philanthropy, education, healthcare, and social programs, contributing to improved quality of life.
  • CSR promotes ethical behavior within the organization, focusing on fair trade, responsible marketing, and compliance with laws and regulations.
  • Companies engage in CSR by offering fair wages, safe workplaces, opportunities for skill development, and work-life balance to ensure employee satisfaction and retention.
  • Encouraging ethical conduct throughout the supply chain is part of CSR, promoting fair labor practices and responsible sourcing.
  • CSR involves creating products and services that meet ethical and sustainable standards, as well as maintaining transparency in marketing and customer interactions.
  • CSR extends to sound corporate governance, ensuring that businesses are accountable, transparent, and follow ethical principles.
  • Companies can leverage innovation and technology to address social and environmental challenges, contributing to the betterment of society.

Examples

Now that we understand the basics, objectives, and scope of corporate social responsibilities activities, let us apply this theoretical knowledge to practical application through the examples.

Example #1

Let’s begin with a simple example. Firm PQR sells electronic devices and appliances. Due to the mounting concern about e-waste management, PQR has decided to introduce an e-waste collection program. Through this program, individuals who own a PQR product can collect and sell any e-waste to their nearest PQR store by weight. 

That is, customers can sell 1 pound of e-waste for $5. Also, customers selling e-waste from PQR products will get an additional $3 per pound. The firm will recycle the collected e-waste. Customers will be able to visit their PQR membership account and check the contributions made by them and others. They can also view the total quantity of e-waste recycled, recycling videos, etc.

Through this program, PQR sells itself. For example, only those individuals who own a PQR product can participate in this program, encouraging others to buy from the company. Also, it has a good image among the public for addressing a significant issue. Further, the company can segregate the components and sell them as scrap.

Example #2

Here are the recent examples of two electric power distribution companies, Duke Energy Corporation and Southern Company. Following a United States Supreme Court ruling on June 30, 2022, which restricted the authority of the Environmental Protection Agency (EPA) to control and regulate emissions by power plants run on coal and gas; the two companies have decided to closely work with their stakeholders to reduce emissions and work towards decelerating climate change.

Many investors are already extremely conscious about investing in companies. With the rising popularity of impact investing and Environmental, Social, and Governance (ESG) investing, firms have been pressured to limit the negative effects on society and the environment. Duke Energy has decided to retire from operating its coal-powered plant by 2035, while Southern Co. is on its transition to net zero emissions by 2050

Importance

CSR in today’s world is a huge part of corporate governance and a company’s ethics. Even if not mandatory, every company has a social responsibility. However, it should not be considered an expenditure but an investment for better long-lasting gains.

Corporate social responsibility initiatives are important because it can increase the reputation and project an ethical image of the firm. Hence, people are generally motivated to buy from such firms, as they too want to be a part of their contribution to society. Moreover, it creates a bond between the company and the people, thus ensuring customer loyalty.

Often, governments provide subsidies to such firms, as they contribute to fulfilling national goals. The subsidies include tax credits, rebates, and other incentives. These factors help companies improve sales and avail incentives, thus, increasing profits.

Finally, CSR initiatives have the potential to kick-start commercial activity. Usually, in times of crisis, consumers are unable to spend. When companies with corporate social responsibility work together by contributing a part of their profits, customers are in a position to spend money. One activity propels another, and the economy is operating at full efficiency in no time. 

Advantages

Let us understand the advantages of CSR through the points below.

  • Companies engaging in CSR build a positive image and reputation, which can attract customers, investors, and talented employees who align with their values.
  • CSR can give a competitive edge by differentiating a company from competitors and appealing to socially conscious consumers.
  • By demonstrating a commitment to ethical and responsible practices, businesses can gain trust and loyalty from stakeholders, including shareholders and communities.
  • CSR initiatives can help identify and mitigate risks, such as environmental or social issues, minimizing potential damage to the brand and bottom line.
  • CSR encourages responsible resource management, contributing to long-term business sustainability and profitability.

Disadvantages

Despite the various advantages mentioned in the section above and throughout the article, there are a few points that prove to be a disadvantage. Let us discuss them through the points below.

  • Implementing CSR initiatives can be costly, especially for smaller businesses, impacting short-term profitability.
  • Some companies engage in CSR for the sole purpose of improving their image without making substantial changes, leading to accusations of greenwashing.
  • Managing CSR programs can be complex, requiring expertise and resources, which may divert attention from core business activities.
  • Lack of standardized CSR metrics and guidelines can make it challenging to measure and compare the impact of different initiatives.
  • High expectations from stakeholders may lead to disappointment if CSR efforts fail to meet all social and environmental goals.

Frequently Asked Questions (FAQs)

What is the purpose of corporate social responsibility?

The purpose of CSR is to contribute to society, augment the company’s profile, earn customer loyalty, and hence make profits. 

What is corporate social responsibility in business ethics?

CSR as a part of business ethics is gaining prominence now. Companies must take up social responsibility, as customers notice this. If firms do not give back to society, customers will hesitate to buy from them.

Why do companies engage in corporate social responsibility?

Companies with corporate social responsibility engage in it for three reasons: to convince the public that the business is ethical and give the organization a social facelift, which will help them make more profits. Secondly, CSR has the potential to propel economic activities in times of crisis, which will again benefit the company in the long run. Lastly, not all businesses focus solely on the profit side. Some might actually want to give back to society.

Is corporate social responsibility mandatory?

No. CSR is not mandatory in most countries. However, in today’s world, if companies are reluctant to take up CSR activities, they might lose customers.

This has been a guide to Corporate Social Responsibility & its definition. We explain its purpose, scope, examples, advantages, and disadvantages. You can learn more from the following articles – 

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