Are companies just shifting CSR problems?

Corporate responsibility is not just about doing good, but also about committing the necessary resources for genuine impacts

Featured faculty: Zhou Xiaolu
Written by Putro Harnowo

Corporate social responsibility, or CSR, is an integral part of modern business strategy. Traditional CSR practices have revolved around charity, philanthropy, and volunteering, but the growing demand for sustainable business practices has transformed CSR activities into a broader scope well beyond simply giving back to society.

While regulators worldwide have now imposed mandatory CSR and sustainability reporting, a genuine desire to contribute to society may motivate corporate good deeds. However, the late American economist Milton Friedman famously argued that “there’s no such thing as a free lunch.” For businesses, CSR can improve brand perception and build public trust, but it comes at a cost.

Zhou Xiaolu, Assistant Professor of Accounting at the Chinese University of Hong Kong (CUHK) Business School, notes that CSR activities can be seen from two viewpoints: either firms genuinely care about the social and environmental impacts over profits, or they seek to enhance brand value and ultimately boost profits. An extensive body of literature shows the latter is more prevalent.

“CSR investment mostly depends on stakeholders’ demand and what the firm can offer cost-effectively,” says Professor Zhou. “Firms are constrained by limited resources to keep their reputation and meet regulatory requirements, so managers need to balance the various aspects of CSR.”

As companies face growing pressure to act responsibly on several fronts, navigating all dimensions of social responsibility becomes more challenging. Her latest study, Substitution between corporate social responsibility activities: Evidence from hiring and mistreating unauthorised workers and pollution, sheds light on the practicality of CSR initiatives and reveals that increasing one facet of social responsibility may lead to a reduction of another domain.

“When a regulation mandates one aspect of CSR to improve, managers may prioritise compliance and reduce investment in other CSR activities. Those with the highest marginal cost or the lowest return are most likely to be curtailed, resulting in a substitution among CSR initiatives,” she adds.

Evidence from the fields

In the study, Professor Zhou collaborates with Huang Ying and Li Ningzhong of the University of Texas at Dallas, and looks into a US government policy called E-Verify that allows companies to verify with the federal data whether their employees are eligible to take the job.

Nine states require universal E-Verify, compelling all employers to verify the work authorisation of employees. Meanwhile, 13 states enforce public E-Verify, which only orders public employers and contractors to verify all of their employee data. The researchers find that this policy profoundly influences CSR activities.

The Pew Research Centre’s report shows that the US had around 8.3 million undocumented workers in 2022, or almost five per cent of the workforce, who often took low-paying jobs in manufacturing, metal mining, electric power generation, and waste treatment. Fear of deportation left them vulnerable to workplace abuses, such as underpayment and unsafe working conditions.

“Firms are constrained by limited resources to keep their reputation and meet regulatory requirements, so managers need to balance the various aspects of CSR.”

Professor Zhou Xiaolu

The researchers analyse the Occupational Safety and Health Administration data from 2000 to 2018 and discover that the adoption of a universal E-Verify mandate reduces the likelihood of labour violations due to hazardous chemicals by 1.4 per cent and the likelihood of being fined for labour violations by 5.9 per cent.

Progress in one CSR area can undermine another

The researchers then compare the E-Verify data from 2000 to 2018 with the pollution data of 39,063 plants from the Toxic Release Inventory Programme that details the release of toxic chemicals to the air, water, and ground. Around eight per cent of observations in the sample are in states with universal E-Verify mandates, and 14 per cent are in states mandating public E-Verify.

The analyses suggest that when states adopt the universal E-Verify, pollution increases by 10 to 11 per cent with the effect becoming stronger over time. The public E-Verify mandate leads to a four to five per cent increase in pollution.

In states with a higher fraction of undocumented workers, toxic releases increase by 17 to 22 per cent after the universal E-Verify mandate and 13 to 15 per cent after the public E-Verify mandates.

Further analyses find that E-Verify mandates do not lead to financial constraints, and the increased pollution is mainly attributed to reduced emission efficiency. This means that companies substitute between different types of CSR activities as a trade-off when one area demands more attention.

“CSR substitution is a rational business decision to reallocate resources. Therefore, stakeholders may need to evaluate CSR holistically rather than in isolated aspects,” says Professor Zhou. “A company’s true commitment to sustainability can be understood by looking at the full picture and the trade-offs the company makes.”

Keeping accountability on responsibility

As many countries increasingly enforce certain aspects of CSR, such as Germany’s compulsory seats in supervisory boards for worker representatives, Australia’s mandatory environmental rehabilitation funds, and the like, the study shows that such policies may reduce other CSR activities. The substitution may occur gradually, making the hidden trade-offs harder to detect.

“When crafting policy, legislators should consider safeguards to prevent backsliding in other CSR domains. However, the optimal design will depend on many factors, such as regulatory context, industry characteristics, and resource constraints,” says Professor Zhou.

Furthermore, she notes that although substitution can theoretically apply to all CSR activities, the study does not imply that substitution should exist or should only exist for pollution.

“Cost and benefit trade-offs vary by firm and context, so it is difficult to have a one-size-fits-all prescription for CSR substitution,” she adds. “While our results show substitution between labour standards and pollution control, not all CSR activities are interchangeable, and some trade-offs are just impractical.”

Future studies could explore substitutions among other CSR activities and, if possible, develop a more robust framework for empirically identifying the most substituted activity.