Corporate Social Responsibility (CSR) is becoming increasingly important in the business world as companies strive to address issues related to climate change, human capital, and corporate governance. It has emerged as a general sustainability framework used by companies to report on their environmental and social impacts and practices. Examples include efforts to lower carbon footprints, invest in environmentally conscious businesses, and purchase fair-trade products. Research has shown that CSR reporting can also be used to increase a company’s financial performance (CFP). This literature review aimed to explore the effects that CSR disclosure has on a company’s financial performance.

The first paper summarized in this review examined the association between share prices and the level of CSR disclosure of large UK companies. The study provided evidence of the incremental value of CSR disclosure in a country where environmental and social disclosure is high on the agenda. It found that higher levels of CSR disclosure are associated with higher share prices, with companies operating in environmentally sensitive industries showing a stronger association with share prices.

The second paper examined the nature of the relationship between CSR and corporate financial performance. It found that there is not a ‘one size fits all’ approach to CSR disclosure and that there are firm-specific factors that need to be considered in determining the CSR-CFP link. This paper concluded that there is a point where the marginal impact of CSR disclosure on CFP turns positive for an individual firm.

The third paper analyzed whether the environmental information disclosure level practiced by companies affects their profitability and value. It focused on the environmental element of CSR to determine its sole effect on a company’s value. The paper found that companies that disclosed environmental information are, on average, larger in terms of total assets and income and provide a higher return on investment. Therefore, environmental disclosure is a determinant of a company’s profitability or value.

The fourth paper examined how company value (share price) is related to CSR disclosure and evaluated the impact of making CSR disclosure mandatory and how that affects CFP. It found that when CSR disclosure was voluntary, there was a positive and significant relationship between CSR and share price. Whereas, when CSR disclosure became mandatory, there was a significant negative relationship.

Overall, these studies highlight the importance of CSR disclosure for companies’ financial performance. It is evident that there is no universal approach to CSR disclosure, and companies need to consider firm-specific factors in their disclosure practices. The studies also suggest that CSR disclosure is associated with higher share prices and can have a positive impact on a company’s value and profitability.

In conclusion, the increasing awareness of climate change, human capital, and corporate governance issues has led to the implementation of CSR disclosure practices in companies’ annual reports. CSR is a general sustainability framework used by companies to report on their environmental and social impacts and practices. CSR reporting is growing in importance, and research has indicated that it can be used to increase a company’s financial performance. The literature review has explored the effects that CSR disclosure has on a company’s financial performance, with the studies highlighting the importance of CSR disclosure for companies’ financial performance and the fact that there is no universal approach to CSR disclosure.

The literature on the topic of CSR reporting and its impact on a company's overall value has looked at various accounting theories including legitimacy theory and stakeholder theory. Legitimacy theory suggests that a company has a social contract with the society it operates in, and its long-term success is dependent on meeting society's expectations. Strong CSR activities and disclosure can help to legitimize a company's operations and increase its value. Stakeholder theory suggests that companies that focus on the interests of stakeholders are supported by shareholders who invest in them and enable them to operate more effectively. Companies that provide benefits to stakeholders tend to attract more investment opportunities, retain employees more easily, and have access to capital at lower costs.

Studies have shown that there is a positive and significant impact of CSR disclosure on financial performance, with increases in revenue and share price. The disclosure of CSR activities can reveal a company's current strategy and readiness, enabling institutional investors to make better cash flow projections and future income. It can also positively impact a company's image and reputation among investors, leading to an increase in overall value. The level and success of CSR disclosure depend on the country in which the company operates and specific company factors that can influence the relationship between CSR and financial performance. Environmental performance is a critical aspect of CSR performance, and companies that report on their environmental practices tend to have better financial performance.

However, the lack of standardization of CSR makes it challenging to compare CSR disclosure research and check for legitimacy. Different CSR issues have varying degrees of urgency and impact, depending on the sector, and using a weighting scheme that varies across sectors could more accurately reflect social concerns. There are also issues around how CSR is measured and presented, and the benefits of CSR implementation for small companies may not outweigh the costs.

Therefore, while CSR disclosure can have a positive impact on a company's financial performance, it is dependent on various factors. Companies need to carefully consider the relevance and urgency of CSR issues for their individual operations and sector to determine the most effective CSR strategy for increasing their overall value.

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