As part of an interdisciplinary team (the S&O Center at HEC Paris) interested in organizational strategy and financial accounting, we feel that understanding the financial implications of a sustainable business model is important to help businesses reach their sustainability goals.
A burning question that involves both strategic and financial aspects in this area is, Does corporate social responsibility pay off for a company? In our paper “Do Investors Actually Value Sustainability Indices?,” we sought to address specifically whether inclusion in the Dow Jones Sustainability Index (DJSI) World, arguably the leading international sustainability index, offers benefits to listed companies.
THE EFFECT OF THE DJSI WORLD INDEX ON INVESTOR BEHAVIOR
Every year the DJSI selects firms for membership in a group of leading performers in corporate economic, environmental, and social sustainability, assessing such issues as corporate governance, labor practices, climate change mitigation, and supply chain standards.
The composition of the index changes from year to year, with firms being added, deleted, or maintaining their status on the list.
Previous research has found that a firm’s addition to, continuation on, or deletion from the DJSI had little impact on stock price and trading volume when compared to other firms in the same industry with similar profitability.
A firm’s addition to the DJSI has little impact on stock price and trading volume. Photo ©anyaberkut / AdobeStock
Our work confirmed these findings but we went further to investigate the effect of the DJSI on a company’s visibility among analysts and on the percentage of shares held by long-term investors. To do this, we compared firms in the DJSI to other firms that had a strong CSR performance but were not listed on the Dow Jones index. Our “control group” was composed of firms that had a marginal CSR performance difference compared to the DJSI firms, identified using criteria employed by the DJSI.
GRABBING THE ATTENTION OF KEY STAKEHOLDERS
Examining the effects of CSR visibility is important, first of all, because of the resources firms devote to these activities. For instance, more and more firms are setting up information systems, issuing CSR reports, and paying external CSR assurance providers to audit CSR information. CSR raters use this information to assess firms’ CSR activities. It is natural to raise question, therefore, of whether the considerable resources devoted to sustainability index inclusion yield positive market effects, on top the intrinsic benefits of CSR activism.
Second, the number and importance of sustainability indices has dramatically increased over time, which calls for an empirical examination of the effects of inclusion in these indices.
Do the considerable resources devoted to sustainability index inclusion yield positive market effects, on top the intrinsic benefits of CSR activism?
In our research, we found that addition to, or continuation on the DJSI attracts more attention from financial analysts, with more reports being written about these firms. It also leads to an increase in the percentage of shares held by long-term investors, indicative of a trend that professional investors are increasingly paying more attention to CSR-visible firms. Therefore, firms may accrue a benefit from CSR activities and more specifically, inclusion in the DJSI.
We found [indications] of a trend that professional investors are increasingly paying more attention to CSR-visible firms.
Inclusion to DJSI leads to an increase in the percentage of shares held by long-term investors. Photo ©anyaberkut / AdobeStock
INCREASING IMPORTANCE OF SUSTAINABILITY BENCHMARKS
The influence of sustainability indices may not have reached its full potential. Confronted with daunting climate challenges and the mounting demands of civil society, the impact of sustainability indices cannot but grow over time.
Analyst surveys, for example, indicate that CSR performance is becoming a more important factor in investment decisions. According to
CFA Institute (2017), 78% of analysts take environmental, social, and governance performance into consideration for their investment decisions.
Our research contributes to building a more complete understanding of how CSR engagement, CSR visibility, and sustainability indices matter for organizational strategy and for investors.
As this is an area that is evolving, we feel that further research will be in order in a decade to observe whether the trends revealed in this paper have become the norm. Nonetheless, our research contributes to building a more complete understanding of how CSR engagement, CSR visibility, and sustainability indices matter for organizational strategy and for investors.