The Corporate Sustainability Discount Puzzle

25 Pages Posted: 1 Aug 2006

See all articles by Darren D. Lee

Darren D. Lee

ESG Research Services Australia

Robert W. Faff

University of Queensland

Date Written: July 2006


Does investing in a global portfolio of leading corporate sustainability firms add to, detract from, or have no material impact on portfolio performance? To answer this question we undertake an analysis of leading and lagging corporate sustainability firms using data from the Dow Jones Sustainability World Index. An analysis of two mutually exclusive equally weighted leading and lagging global corporate sustainability portfolios finds that leading sustainability firms do not underperform the market portfolio. However, we find a portfolio of lagging corporate sustainability firms outperforms both the market portfolio and a leading corporate sustainability portfolio. Interestingly, we find leading/lagging corporate social performance (CSP) firms exhibit lower/higher idiosyncratic risk, which may provide a possible explanation for the returns premium of lagging CSP firms. Our findings are robust to country, industry, size, style (value/growth), momentum (country, industry and stock) and corporate sustainability industry ranking.

Keywords: Corporate Sustainability, Dow Jones Sustainability Index, Cost of Equity Capital, Large Firms, Corporate Sustainability Discount, Portfolio

JEL Classification: G11, G14, G19

Suggested Citation

Lee, Darren David and Faff, Robert W., The Corporate Sustainability Discount Puzzle (July 2006). Available at SSRN: or

Darren David Lee (Contact Author)

ESG Research Services Australia

4070 Brisbane, Queensland

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072

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