The Corporate Sustainability Discount Puzzle
25 Pages Posted: 1 Aug 2006
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
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