Linking Corporate Social Responsibility and Corporate Performance: A Moderated Approach

Abstract

Purpose- This study is an attempt to analyze the impact of Corporate Social Responsibility Expenditure on Corporate Performance and evaluates the moderating effect of Sustainable Business Practices related to water conservation and waste management. The focus of the study is on non-financial firms working in Pakistan, a developing country confronting environmental sustainability issues.

Design/Methodology/Approach- For the purpose of conducting this study, a panel sample consisting of 25 non-financial firms listed on Pakistan Stock Exchange for the years 2018 to 2024 has been taken, with 175 firm-year observations. Panel regression methods were used, with the use of software STATA. The financial measures adopted for analyzing firm performance were ROA, ROE, and Revenue. For the moderating role of Sustainable Business Practices, an index was created based on the disclosure of firms engaged in sustainable practices related to water conservation and waste management.

Findings- The findings suggest that Corporate Social Responsibility Expenditures itself does not systematically translate into higher firm performance and the direct effects on profitability measures are found to be weak. However, the interaction between Corporate Social Responsibility Expenditure and Sustainable Business Practices is positive and statistically significant for ROA and ROE which indicates that Corporate Social Responsibility Expenditures can only contribute to profitability when it is rooted in substantive sustainability practices. While, revenue performance is mainly driven by the firm size rather than CSR-related investments.

Practical Implications- The results show that there is a need for the alignment of the Corporate Social Responsibility activities with sustainable efforts to bring about the expected financial gains. Companies need to focus on incorporating their Corporate Social Responsibility efforts within their sustainability activities instead of having symbolic or standalone Corporate Social Responsibility activities, while policy makers should promote regulatory frameworks that incentivize substantive environmental engagement.

Originality/Value-The study advances CSRE and corporate performance literature by highlighting conditional nature of CSR financial effects in an emerging economy. By highlighting the moderating role of water related Sustainable Business Practices in Pakistan, the study provides novel evidence on how CSR expenditure can be transformed into tangible profitability outcomes.