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How Well Do Social Ratings Actually Measure Corporate Social Responsibility?

Authors


  • We gratefully acknowledge KLD's Peter Kinder, Institutional Shareholder Services' Joe Henzlik, and the Investor Responsibility Research Center's Jennifer Hodge and Michael Langlais for providing, and helping us to understand, the datasets. We appreciate comments from Michael Barnett, Graham Bullock, Helen Liang, Will Mitchell, Robert Salomon, Bill Simpson, Ralf Steinhauser, and participants in the 2006 Institutions and Innovation Conference at the Harvard Business School.

Abstract

Ratings of corporations' environmental activities and capabilities influence billions of dollars of “socially responsible” investments as well as some consumers, activists, and potential employees. In one of the first studies to assess these ratings, we examine how well the most widely used ratings—those of Kinder, Lydenberg, Domini Research & Analytics (KLD)—provide transparency about past and likely future environmental performance. We find KLD “concern” ratings to be fairly good summaries of past environmental performance. In addition, firms with more KLD concerns have slightly, but statistically significantly, more pollution and regulatory compliance violations in later years. KLD environmental strengths, in contrast, do not accurately predict pollution levels or compliance violations. Moreover, we find evidence that KLD's ratings are not optimally using publicly available data. We discuss the implications of our findings for advocates and skeptics of corporate social responsibility as well as for studies that relate social responsibility ratings to financial performance.

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