Efficiency and Sustainability of CSR Projects

The progressive expansion of Corporate Social Responsibility (CSR) has been accompanied by an increasing interest from regulators and market analysts. Governments and supra-national organisations have issued guidance rules on CSR, while market analysts have created a set of gatekeepers focused on its evaluation, publishing rankings and comparative reports. The UN Global Compact and the sustainability indexes are two relevant examples. The complexity and some of the functions of this CSR infrastructure have common features with the financial system. Information is at the core of both. The distinction between information and noise is central for building up efficient financial markets. The aim of this paper is to analyse how information can be separated from noise in CSR. To this end, we develop a qualitative model that centres on the following variables: the CSR features of the project under consideration, its financial features, its relationship with corporate strategy, the performance metrics for its analysis, the different kinds of risk it involves, and its impact on value creation. This model relies on two common functions that we identify in the CSR infrastructure and the financial system: the defining function and the performance information function. The model is applied to Adidas' CSR policy

Risk analysis through the half-normal distribution

We study the applicability of the half-normal distribution to the probability-severity risk analysis traditionally performed through risk matrices and continuous probability-consequence diagrams (CPCDs). To this end, we develop a model that adapts the financial risk measures Value-at-Risk (VaR) and Conditional Value at Risk (CVaR) to risky scenarios that face only negative impacts. This model leads to three risk indicators: The Hazards Index-at-Risk (HIaR), the Expected Hazards Damage (EHD), and the Conditional HIaR (CHIaR). HIaR measures the expected highest hazards impact under a certain probability, while EHD consists of the expected impact that stems from truncating the half-normal distribution at the HIaR point. CHIaR, in turn, measures the expected damage in the case it exceeds the HIaR. Therefore, the Truncated Risk Model that we develop generates a measure for hazards expectations (EHD) and another measure for hazards surprises (CHIaR). Our analysis includes deduction of the mathematical functions that relate HIaR, EHD, and CHIaR to one another as well as the expected loss estimated by risk matrices. By extending the model to the generalised half-normal distribution, we incorporate a shape parameter into the model that can be interpreted as a hazard aversion coefficient

SME's environmental CSR investment : evaluation, decision and implication

Corporate social responsibility (CSR) is a voluntary yet competitive activity which affects business value. Together with growing concern towards CSR related to environmental issues such as climate change, environmental CSR has attracted many to involve especially small-and medium-sized enterprises (SMEs) as they are seen as the best entity to perform it compare to large corporations. As a primary contributor to green house gas (GHG) emission, SMEs have bigger responsibility to participate for cleaner environment. However, with limited capacity, it is difficult for SMEs to decide between social responsibility and profitability. Limited investment valuation methods add to the complexity. To overcome such barrier, this paper builds up a proposal based on real option valuation (ROV) as a solution that improves small businesses decision making processes in choosing investments that deal with both issues: profitability and CSR, with focus on climate change, a branch of environmental CSR. By incorporating uncertainties and providing flexibility, ROV is able to balance up SMEs' profitability and CSR activities through the creation of strategic options. Based on a case study, it is hope that findings of this paper lighten up these dilemmas and none of SMEs' objectives is sacrificed

Analysing assets' performance inside a portfolio : From crossed beta to the net risk premium ratio

This paper is focused on enlarging the performance inside a portfolio that provides the Treynor ratio by relating portfolio weights with performance indicators. Intuition suggests that the higher the weight of an asset, the higher should be its expected performance. These weights, and the information that we can obtain from their analysis, are not only relevant for investors but also for corporate managers. Nevertheless, the available performance indicators are not linked to portfolio weights. In order to fulfil this gap we answer three questions: which is the minimum risk premium that justifies holding an asset in long position? How can we analyse if the performance of an asset justifies the budget's weight invested in it? And, how can we apply ex-post optimisation to performance analysis? Methodologically, we centre the analysis on the definition of crossed beta and the net risk premium ratio that stems from it. The latter fulfils the axioms of risk/reward performance measures. The three answers to the questions are related to the net risk premium. The analysis in developed for the Mean-Variance and Mean-Gini models. The empirical illustration, based on DJIA assets, that completes the paper shows how the analysis of portfolio weights provides relevant information about the performance of assets

Sustainability and ethics in the process of price determination in financial markets : A conceptual analysis

This paper explores how financial markets can support the practical applicability of Sustainability Development Goals (SDGs) principles and why ethics has a central role in this process. The efficient market hypothesis holds that a financial market is efficient when prices equate value. Extending this assertion to sustainability, it can be said that prices should become equal to sustainable value. Prices can be regarded as the addition of the present value of future expectations and the impact of short-term volatility. This property parallels the existence of two different types of shareholders: long-run shareholders, who are often involved in the management of the corporation, and short-run shareholders, who usually apply speculative strategies to the choice of their investments. The SGDs' principles are logically thought for a long-run horizon. Their impact on corporate value stems mainly from the changes they introduce in environmental and social risk, apart from becoming a potential source of innovation. Nevertheless, their effects on the short-run perspective can be very small unless either market traders assume sustainability as a goal of their own or the sustainability effects are incorporated into prices. We hold that the second issue is safer and preferable. Both involve ethics: the former would require that investors perform any trade from an ethical perspective. The latter needs that the ethical emphasis is placed on the process of price determination. The achievement of this goal demands a wide display of information on sustainability, placed together with financial information, and appropriate regulation. Its analysis considers the principles of behavioral finance

The impact of polarity score on real option valuation for multistage projects

In most cases, the valuation of the investments characterized by various stages with a high level of uncertainty is done through the compound real option valuation (ROV). This decision making support can consider various types of uncertainty that can affects these investment phases, such as that linked to technology. Specifically, within the category of uncertain investments there are the broadband opportunities that can be valued as real options in order to quantify the risks associated with the investment. However, since ROV theory has no definitive way to determine model parameters based on market information, we propose one that can adjust them dynamically. In this paper, to include this aspect in the project valuation, we have unified the ROV with the sentiment analysis, a natural language processing technique that allows us to quantify the polarity of expressions in natural language numerically. In particular, the inherent risks related to the different phases of the project can be extracted from the information present in the surrounding environment and published in newspapers. From there, we obtain a sentiment score which, through appropriate manipulations, manages to modify the evaluation of the success probabilities of each stage. Then, we embed these success probabilities in the ROV in order to provide a valuation methodology that includes the impact of information on the investment decision

Analysing assets’ performance inside a portfolio: From crossed beta to the net risk premium ratio

This paper is focused on enlarging the performance inside a portfolio that provides the Treynor ratio by relating portfolio weights with performance indicators. Intuition suggests that the higher the weight of an asset, the higher should be its expected performance. These weights, and the information that we can obtain from their analysis, are not only relevant for investors but also for corporate managers. Nevertheless, the available performance indicators are not linked to portfolio weights. In order to fulfil this gap we answer three questions: which is the minimum risk premium that justifies holding an asset in long position? How can we analyse if the performance of an asset justifies the budget’s weight invested in it? And, how can we apply ex-post optimisation to performance analysis? Methodologically, we centre the analysis on the definition of crossed beta and the net risk premium ratio that stems from it. The latter fulfils the axioms of risk/reward performance measures. The three answers to the questions are related to the net risk premium. The analysis in developed for the Mean-Variance and Mean-Gini models. The empirical illustration, based on DJIA assets, that completes the paper shows how the analysis of portfolio weights provides relevant information about the performance of asset

Analysing assets' performance inside a portfolio : From crossed beta to the net risk premium ratio

This paper is focused on enlarging the performance inside a portfolio that provides the Treynor ratio by relating portfolio weights with performance indicators. Intuition suggests that the higher the weight of an asset, the higher should be its expected performance. These weights, and the information that we can obtain from their analysis, are not only relevant for investors but also for corporate managers. Nevertheless, the available performance indicators are not linked to portfolio weights. In order to fulfil this gap we answer three questions: which is the minimum risk premium that justifies holding an asset in long position? How can we analyse if the performance of an asset justifies the budget's weight invested in it? And, how can we apply ex-post optimisation to performance analysis? Methodologically, we centre the analysis on the definition of crossed beta and the net risk premium ratio that stems from it. The latter fulfils the axioms of risk/reward performance measures. The three answers to the questions are related to the net risk premium. The analysis in developed for the Mean-Variance and Mean-Gini models. The empirical illustration, based on DJIA assets, that completes the paper shows how the analysis of portfolio weights provides relevant information about the performance of assets

Efficiency and Sustainability of CSR Projects

The progressive expansion of Corporate Social Responsibility (CSR) has been accompanied by an increasing interest from regulators and market analysts. Governments and supra-national organisations have issued guidance rules on CSR, while market analysts have created a set of gatekeepers focused on its evaluation, publishing rankings and comparative reports. The UN Global Compact and the sustainability indexes are two relevant examples. The complexity and some of the functions of this CSR infrastructure have common features with the financial system. Information is at the core of both. The distinction between information and noise is central for building up efficient financial markets. The aim of this paper is to analyse how information can be separated from noise in CSR. To this end, we develop a qualitative model that centres on the following variables: the CSR features of the project under consideration, its financial features, its relationship with corporate strategy, the performance metrics for its analysis, the different kinds of risk it involves, and its impact on value creation. This model relies on two common functions that we identify in the CSR infrastructure and the financial system: the defining function and the performance information function. The model is applied to Adidas’ CSR polic

SME's environmental CSR investment : evaluation, decision and implication

Corporate social responsibility (CSR) is a voluntary yet competitive activity which affects business value. Together with growing concern towards CSR related to environmental issues such as climate change, environmental CSR has attracted many to involve especially small-and medium-sized enterprises (SMEs) as they are seen as the best entity to perform it compare to large corporations. As a primary contributor to green house gas (GHG) emission, SMEs have bigger responsibility to participate for cleaner environment. However, with limited capacity, it is difficult for SMEs to decide between social responsibility and profitability. Limited investment valuation methods add to the complexity. To overcome such barrier, this paper builds up a proposal based on real option valuation (ROV) as a solution that improves small businesses decision making processes in choosing investments that deal with both issues: profitability and CSR, with focus on climate change, a branch of environmental CSR. By incorporating uncertainties and providing flexibility, ROV is able to balance up SMEs' profitability and CSR activities through the creation of strategic options. Based on a case study, it is hope that findings of this paper lighten up these dilemmas and none of SMEs' objectives is sacrificed