RESEARCH ARTICLE
Socially responsible investing worldwide: Do markets value corporate social responsibility?
Guillermo Badía,
Maria C. Cortez,
Luis Ferruz,
Corresponding Author
Guillermo Badía
Faculty of Social Science, Nebrija University, Madrid, Spain
Faculty of Economics and Business, University of Zaragoza, Zaragoza, Spain
Correspondence
Guillermo Badía, Faculty of Social Science, Nebrija University, Santa Cruz de Marcenado 27, 28015, Madrid, Spain.
Email: gbadia@nebrija.es
Search for more papers by this authorMaria C. Cortez
NIPE - School of Economics and Management, University of Minho, Braga, Portugal
Search for more papers by this authorLuis Ferruz
Faculty of Economics and Business, University of Zaragoza, Zaragoza, Spain
Search for more papers by this authorGuillermo Badía,
Maria C. Cortez,
Luis Ferruz,
Corresponding Author
Guillermo Badía
Faculty of Social Science, Nebrija University, Madrid, Spain
Faculty of Economics and Business, University of Zaragoza, Zaragoza, Spain
Correspondence
Guillermo Badía, Faculty of Social Science, Nebrija University, Santa Cruz de Marcenado 27, 28015, Madrid, Spain.
Email: gbadia@nebrija.es
Search for more papers by this authorMaria C. Cortez
NIPE - School of Economics and Management, University of Minho, Braga, Portugal
Search for more papers by this authorLuis Ferruz
Faculty of Economics and Business, University of Zaragoza, Zaragoza, Spain
Search for more papers by this authorFunding information: European Social Fund, Grant/Award Number: 17030/5423/440030/91101; Fundação para a Ciência e a Tecnologia, Grant/Award Number: UID/ECO/03182/2019; Gobierno de Aragón, Grant/Award Number: G/17030/5423/440030/11101; Ministerio de Economía y Competitividad, Grant/Award Number: ECO2015-66240P
Abstract
This study examines the performance of socially responsible stock portfolios based on Environmental, Social, and Governance (ESG) ratings in four regions: North America, Europe, Japan, and Asia Pacific. Our findings reveal that the financial impact of socially responsible investing is geographically dependent, varies over time, and relies on the screening dimension considered. Our results support the errors-in-expectations hypothesis in the European and Japanese markets, but any mispricing of socially responsible stocks faded over time as markets become aware of the financial implications of corporate social responsibility. In the Asia Pacific market, the results are consistent with the shunned-stock hypothesis. Furthermore, the results suggest that ESG value-relevant information is properly valued in North America. Overall, we conclude that different markets have gone through different stages with regard to their understanding of the impact of sustainable practices on firm valuations.
Supporting Information
| Filename | Description |
|---|---|
| csr1999-sup-0001-supinfo.docxWord 2007 document , 48.8 KB | Data S1. Supporting Information. |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Asem, E. (2009). Dividends and price momentum. Journal of Banking & Finance, 33(3), 486–494.
- Auer, B. R. (2016). Do socially responsible investment policies add or destroy European stock portfolio value? Journal of Business Ethics, 135(2), 381–397.
- Auer, B. R., & Schuhmacher, F. (2016). Do socially (ir) responsible investments pay? New evidence from international ESG data. The Quarterly Review of Economics and Finance, 59, 51–62.
- Bauer, R., Koedijk, K., & Otten, R. (2005). International evidence on ethical mutual fund performance and investment style. Journal of Banking and Finance, 29(7), 1751–1767. https://doi.org/10.1016/j.jbankfin.2004.06.035
- Bebchuk, L. A., Cohen, A., & Wang, C. C. (2013). Learning and the disappearing association between governance and returns. Journal of Financial Economics, 108(2), 323–348.
- Belghitar, Y., Clark, E., & Deshmukh, N. (2014). Does it pay to be ethical? Evidence from the FTSE4Good. Journal of Banking & Finance, 47, 54–62.
- Bollen, N. P. (2007). Mutual fund attributes and investor behavior. Journal of Financial and Quantitative Analysis, 42(3), 683–708.
- Borgers, A., Derwall, J., Koedijk, K., & Ter Horst, J. (2013). Stakeholder relations and stock returns: On errors in investors' expectations and learning. Journal of Empirical Finance, 22, 159–175.
- Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management, 35(3), 97–116.
- Brammer, S., Brooks, C., & Pavelin, S. (2009). The stock performance of America's 100 best corporate citizens. The Quarterly Review of Economics and Finance, 49(3), 1065–1080.
10.1016/j.qref.2009.04.001 Google Scholar
- Brzeszczynski, J., & McIntosh, G. (2014). Performance of portfolios composed of British SRI stocks. Journal of Business Ethics, 120(3), 335–362.
- Capelle-Blancard, G., & Monjon, S. (2012). Trends in the literature on socially responsible investment: Looking for the keys under the lamppost. Business Ethics: A European Review, 21(3), 239–250.
- Capelle-Blancard, G., & Monjon, S. (2014). The performance of socially responsible funds: Does the screening process matter? European Financial Management, 20(3), 494–520.
- Carhart, M. (1997). On persistence in mutual fund performance. The Journal of Finance, 52(1), 57–82.
- Carvalho, A., & Areal, N. (2016). Great places to work®: Resilience in times of crisis. Human Resource Management, 55(3), 479–498.
- Chen, X., & Scholtens, B. (2018). The urge to act: A comparison of active and passive socially responsible investment funds in the United States. Corporate Social Responsibility and Environmental Management, 25(6), 1154–1173.
- Collison, D. J., Cobb, G., Power, D. M., & Stevenson, L. A. (2008). The financial performance of the FTSE4Good indices. Corporate Social Responsibility and Environmental Management, 15(1), 14–28.
- Consolandi, C., Jaiswal-Dale, A., Poggiani, E., & Vercelli, A. (2008). Global standards and ethical stock indexes: The case of the Dow Jones sustainability Stoxx index. Journal of Business Ethics, 87(1), 185–197.
- Cooper, M. J., Gutierrez, R. C., Jr., & Hameed, A. (2004). Market states and momentum. The Journal of Finance, 59(3), 1345–1365.
- Cortez, M. C., Silva, F., & Areal, N. (2009). The performance of European socially responsible funds. Journal of Business Ethics, 87(4), 573–588.
- Cunha, F. A. F. S., Oliveira, E. M., Orsato, R. J., Klotzle, M. C., Oliveira, F. L. C., & Caiado, R. G. G. (2020). Can sustainable investments outperform traditional benchmarks? Evidence from global stock markets. Business Strategy and the Environment, 29, 682–697.
- Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analysts Journal, 61(2), 51–63.
- Derwall, J., Koedijk, K., & Ter Horst, J. (2011). A tale of values-driven and profit-seeking social investors. Journal of Banking & Finance, 35(8), 2137–2147.
- Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), 2835–2857.
- Eccles, R. G., Serafeim, G., & Krzus, M. P. (2011). Market interest in nonfinancial information. Journal of Applied Corporate Finance, 23(4), 113–127.
10.1111/j.1745-6622.2011.00357.x Google Scholar
- Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. Journal of Financial Economics, 101(3), 621–640.
- Fama, E. F., & French, K. R. (2012). Size, value, and momentum in international stock returns. Journal of Financial Economics, 105(3), 457–472.
- Fama, E. F., & French, K. R. (2015). A five-factor asset pricing model. Journal of Financial Economics, 116, 1–22.
- Fama, E. F., & French, K. R. (2017). International tests of a five-factor asset pricing model. Journal of Financial Economics, 123(3), 441–463.
- Fama, E. F., & French, K. R. (2018). Choosing factors. Journal of Financial Economics, 128(2), 234–252.
- Filbeck, G., Gorman, R., & Zhao, X. (2009). The “best corporate citizens”: Are they good for their shareholders? Financial Review, 44(2), 239–262.
10.1111/j.1540-6288.2009.00217.x Google Scholar
- Filbeck, G., & Preece, D. (2003). Fortune's best 100 companies to work for in America: Do they work for shareholders? Journal of Business Finance & Accounting, 30(5–6), 771–797.
10.1111/1468-5957.05362 Google Scholar
- Freeman, R. (1984). Strategic management: A stakeholder perspective. Boston, MA: Piman.
- Friedman, M. (1970). The social responsibility of business is to increase its profits. New York Times, September 13, pp. 122–126.
- Galema, R., Plantinga, A., & Scholtens, B. (2008). The stocks at stake: Return and risk in socially responsible investment. Journal of Banking & Finance, 32(12), 2646–2654.
- Geczy, C. C., Stambaugh, R. F., & Levin, D. (2003). Investing in Socially Responsible Mutual Funds. Working paper, University of Pennsylvania. Available at SSRN: abstract 416380. Accessed in October 2018.
- Gil-Bazo, J., Ruiz-Verdú, P., & Santos, A. A. (2010). The performance of socially responsible mutual funds: The role of fees and management companies. Journal of Business Ethics, 94(2), 243–263.
- Global Sustainable Investment Alliance – GSIA. (2016). Global Sustainable Investment Review 2016. Retrieved on January 2019 from www.gsi-alliance.org
- Global Sustainable Investment Alliance – GSIA. (2018). Global Sustainable Investment Review 2018. Retrieved on February 2019 from www.gsi-alliance.org
- Halbritter, G., & Dorfleitner, G. (2015). The wages of social responsibility—Where are they? A critical review of ESG investing. Review of Financial Economics, 26, 25–35.
- Herz, B., & Rogers, J. (2016). Measuring what matters: Industry specificity helps companies and investors gain traction on sustainability. Journal of Applied Corporate Finance, 28(2), 34–38.
- Hoepner, A., Oikonomou, I., Scholtens, B., & Schröder, M. (2016). The effects of corporate and country sustainability characteristics on the cost of debt: An international investigation. Journal of Business Finance & Accounting, 43(1–2), 158–190.
- Hoepner, A. G., Yu, P. S., & Ferguson, J. (2010). Corporate Social Responsibility across Industries: When can who do well by doing good? Working paper, University of St. Andrews. Available at SSRN: abstract 1284703. Accessed in January 2018
- Hong, H., & Kacperczyk, M. (2009). The price of sin: The effects of social norms on markets. Journal of Financial Economics, 93, 15–36.
- Humphrey, J. E., Lee, D. D., & Shen, Y. (2012). Does it cost to be sustainable? Journal of Corporate Finance, 18(3), 626–639.
- Jensen, M. (2001). Value maximisation, stakeholder theory, and the corporate objective function. European Financial Management, 7(3), 297–317.
10.1111/1468-036X.00158 Google Scholar
- JSIF - Japan Sustainable Investment Forum (2017). White paper on sustainable Investment in Japan 2017. Retrieved on November 2018 from www.jsif.jp.net
- Kempf, A., & Osthoff, P. (2007). The effect of socially responsible investing on portfolio performance. European Financial Management, 13(5), 908–922.
- Lee, D. D., Faff, R. W., & Rekker, S. A. c. (2013). Do high and low-ranked sustainability stocks perform differently? International Journal of Accounting & Information Management, 21(2), 116–132. https://doi.org/10.1108/18347641311312267
10.1108/18347641311312267 Google Scholar
- Louche, C., & Lydenberg, S. (2006, July). Socially responsible investment: Differences between Europe and the United States. Paper presented at: Proceedings of the International Association for Business and Society, vol. 17, pp. 112–117.
- Merton, R. C. (1987). A simple model of capital market equilibrium with incomplete information. The Journal of Finance, 42(3), 483–510.
- Miralles-Quirós, J. L., & Miralles-Quirós, M. M. (2019). Are alternative energies a real alternative for investors? Energy Economics, 78, 535–545.
- Miralles-Quirós, J. L., Miralles-Quirós, M. M., & Nogueira, J. M. (2019). Diversification benefits of using exchange-traded funds in compliance to the sustainable development goals. Business Strategy and the Environment, 28(1), 244–255.
- Miralles-Quirós, J. L., Miralles-Quirós, M. M., & Nogueira, J. M. (2020). Sustainable development goals and investment strategies: The profitability of using five-factor Fama-French alphas. Sustainability, 12(5), 1842.
- Miras-Rodríguez, M. M., Carrasco-Gallego, A., & Escobar-Pérez, B. (2015). Are socially responsible behaviors paid off equally? A cross-cultural analysis. Corporate Social Responsibility and Environmental Management, 22(4), 237–256.
- Mollet, J. C., von Arx, U., & Ilić, D. (2013). Strategic sustainability and financial performance: Exploring abnormal returns. Journal of Business Economics, 83(6), 577–604.
10.1007/s11573-013-0664-6 Google Scholar
- Mollet, J. C., & Ziegler, A. (2014). Socially responsible investing and stock performance: New empirical evidence for the US and European stock markets. Review of Financial Economics, 23(4), 208–216.
10.1016/j.rfe.2014.08.003 Google Scholar
- Neher, A. L., & Hebb, T. (2016). The responsible investment atlas–an introduction. In The Routledge Handbook of Responsible Investment (pp. 53–57). New York, NY: Routledge.
- Newey, W. K., & West, K. D. (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review, 28, 777–787.
- Pereira, P., Cortez, M. C., & Silva, F. (2019). Socially responsible investing and the performance of Eurozone corporate bond portfolios. Corporate Social Responsibility and Environmental Management, 26, 1407–1422.
- Renneboog, L., Ter Horst, J., & Zhang, C. (2008a). The price of ethics and stakeholder governance: The performance of socially responsible mutual funds. Journal of Corporate Finance, 14(3), 302–322.
- Renneboog, L., Ter Horst, J., & Zhang, C. (2008b). Socially responsible investments: Institutional aspects, performance, and investor behavior. Journal of Banking & Finance, 32(9), 1723–1742.
- Revelli, C., & Viviani, J. (2015). Financial performance of socially responsible investing (SRI): What have we learned? A meta-analysis. Business Ethics: A European Review, 24(2), 158–185.
- Sakuma, K., & Louche, C. (2008). Socially responsible investment in Japan: Its mechanism and drivers. Journal of Business Ethics, 82(2), 425–448.
- Sandberg, J., Juravle, C., Hedesström, T. M., & Hamilton, I. (2009). The heterogeneity of socially responsible investment. Journal of Business Ethics, 87(4), 519–533.
- Sauer, D. A. (1997). The impact of social-responsibility screens on investment performance: Evidence from the Domini 400 social index and Domini equity mutual fund. Review of Financial Economics, 6(2), 137–149.
10.1016/S1058-3300(97)90002-1 Google Scholar
- Schröder, M. (2007). Is there a difference? The performance characteristics of SRI indices. Journal of Business Finance and Accounting, 34(1), 331–348.
- Statman, M. (2006). Socially responsible indexes: Composition, Performance and Tracking-Error. Journal of Portfolio Management, 32(3), 100–109.
- Statman, M., & Glushkov, D. (2009). The wages of social responsibility. Financial Analysts Journal, 65(4), 33–46.
- Statman, M., & Glushkov, D. (2016). Classifying and measuring the performance of socially responsible mutual funds. The Journal of Portfolio Management, 42(2), 140–151.
- Utz, S., & Wimmer, M. (2014). Are they any good at all? A financial and ethical analysis of socially responsible mutual funds. Journal of Asset Management, 15(1), 72–82.
10.1057/jam.2014.8 Google Scholar
- Van de Velde, E., Vermeir, W., & Corten, F. (2005). Corporate social responsibility and financial performance. Corporate Governance: The International Journal of Business in Society, 5(3), 129–138.
10.1108/14720700510604760 Google Scholar
- Yen, M. F., Shiu, Y. M., & Wang, C. F. (2019). Socially responsible investment returns and news: Evidence from Asia. Corporate Social Responsibility and Environmental Management, 26(6), 1565–1578.
