Note from Editors:
Corporate giving is good. However, social performance goes deeper into each firm or organization is doing for social good. This is a key result in a study done by Heron Foundation on philanthropy and social performance.
by Clara Miller
In early August, I posted an excerpt from my annual letter as president of the Heron Foundation. In the letter, I discuss some of the things we think we learned by examining all the enterprises our endowment is #invested in for social performance in 2014. One of which was the degree to which corporate philanthropy signified good social performance.
One reader provided a significant comment, which I think merits a public response.Steven Ellis, president of Colorado Capital Management wrote:
“Perhaps the biggest revelation in your study is your last bullet point which reports that corporate #charitable giving appears to be negatively correlated, or at a minimum uncorrelated, with social performance. For me, this was counter-intuitive. It suggests that much corporate philanthropy is some form of “guilt money” or “green-washing”. I think many of us would like to know if that is the case, but even if it is, I’m not sure we want to discourage it (on the assumption that more philanthropy is better than less philanthropy).
“If it becomes conventional wisdom that corporate philanthropy is a false indicator for the social performance of a company, this could potentially lead to a large reduction in corporate giving and/or damage the reputation of those firms which give generously as part of a sincere commitment to social responsibility.”
His worries on our findings about corporate charitable giving also concerned us internally, but we have come to a different conclusion, at least for now. I should make it clear that at this point we have found corporate giving to be a “false positive” rather than “negatively correlated” with good ESG performance.
So while some companies perform well with, for example, social factors that are essential to their success (workforce treatment, health and safety practices, low legal citations relative to their peers, training, compensation, etc.), they don’t necessarily also have substantial, formal giving programs. More importantly, corporate giving, however laudable, is often present even where there is negative performance on #business-critical ESG factors such as those noted. It appears it may be correlated with large size more than any other factor. And since ESG ratings tend to weight giving fairly heavily, it therefore can mask business practices (both positive and negative) that we believe have much more real #impact on the world.
Our motivation was not to uncover “green washing” or “guilt money,” (although we don’t think either of these practices is positive), but arose from simple curiosity about finding companies where positive environmental, social and governance (ESG) performance was baked into the management and business model, thus making positive performance over time more likely. This would include, for example, prevention of problems (as opposed to cleanup and mitigation). We thought this was indicative of smart management and thus material to risk assessment.
As a result, we looked “under the hood” of the positive social indicators in most ESG rating data. Aspects of the “S” and “G” categories in particular are not very rigorous, i.e., non-material, self-reported and unauditable. In developing a customized positive screen, we tried to improve on what we have found to be current practice. We just eliminated corporate giving as either a positive or a negative indicator, given a large number of alternative possibilities, in favor of other more robust data that reveals essential management practices.
Personally, I think that corporate giving is a generally a good thing, but the variety of motivations involved (marketing, sales and promotion, supply chain stabilization, public relations, regulatory compliance, risk management–along with human decency) make it a mediocre candidate for inclusion as a standard performance metric. Moreover, I believe that the truly excellent companies — and their management — do the right thing as a matter of course, have done so since before ESG ratings were a gleam in #philanthropic investors’ eyes, and will continue to do so.
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Note: Featured Image credit to changealife.today