Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective

Abstract

Does investing in sustainability leaders affect portfolio performance? Analyzing two mutually exclusive leading and lagging global corporate sustainability portfolios (Dow Jones) finds that (1) leading sustainability firms do not underperform the market portfolio, and (2) their lagging counterparts outperform the market portfolio and the leading portfolio. Notably, we find leading (lagging) corporate social performance (CSP) firms exhibit significantly lower (higher) idiosyncratic risk and that idiosyncratic risk might be priced by the broader global equity market. We develop an idiosyncratic risk factor and find that its inclusion significantly reduces the apparent difference in performance between leading and lagging CSP portfolios. Copyright (c) 2009, The Eastern Finance Association.

Risk and return characteristics of environmentally and socially responsible firms in Spain during a financial downturn: 2008–2011

“…The null hypothesis of equality of variances also should be rejected; the FTSE4Good portfolio induces greater variability and fluctuation in average financial returns and thus offers greater investment risk (see Table 4). This last result contradicts previous studies that find a lower investment risk for such securities (Bechetti et al, 2005;Boutin-Dufresne & Savaria, 2004;Lee & Faff, 2009;Orlitzky & Benjamin, 2001), but it is in line with expectations about the nature and links of profitable securities. That is, securities generally should react with greater sensitivity to market oscillations if they provide a higher market premium, as confirmed by previous research that reveals a positive association between (Campbell & Hentschel, 1992;Anderson, Ghysels & Juergengs, 2009;Ghysels, Santa-Clara & Valkanov, 2005).…”

Corporate Social Responsibility and Access to Finance

“…Lee and Faff, 2009;El Ghoul et al, 2010;Goss and Roberts, 2011). Allocating scarce financial capital to their most productive uses is the fundamental role that financial markets play and in this paper we show that CSR has a significant impact on this capital allocation process: market participants are more willing to allocate scarce capital resources to firms with better CSR performance.…”

“…For example, Lee and Faff (2009) show that firms with high CSR scores have lower idiosyncratic risk, while Goss (2009) shows that firms with low CSR scores are more likely to experience financial distress. Moreover, Ioannou and Serafeim (2010a) show a positive impact of CSR on sell-side analysts' recommendations while Goss and Roberts (2011) find that firms with the worst CSR scores pay between 7 and 18 basis points more on their bank debt compared to firms with higher scores.…”

The Linkage between ESG Performance and Credit Ratings: A Firm-Level Perspective Analysis

“…From a managerial stream of research, several studies highlight the benefits of environmental, social, and governance issues (ESG criteria) on firm value (Fatemi, Glaum, & Kaiser, 2017;Harrison & Wicks, 2013) and financial performance (Friede, Busch, & Bassen, 2015;Lins & Servaes, 2017). Despite the increasing interest in this issue, the effect of environmental, social, and governance issues on overall firm risk by jointly considering debt financing still remains an open, entangling debate (Albuquerque, Durnev, & Koskinen, 2014;Lee & Faff, 2009). From a financial perspective, scholars and practitioners call for the need to integrate ESG objectives into credit scoring evaluations and lending policies adopted by financial intermediaries (Attig, El Ghoul, & Guedhami, 2013;Birindelli, Ferretti, Intonti, & Iannuzzi, 2015;Zeidan, Boechat, & Fleury, 2015).…”