Do investors actually value sustainability? New evidence from investor reactions to the Dow Jones Sustainability Index (DJSI)

• DOI: http://doi.org/10.1002/smj.2752
• Published date: 01 April 2018
• Date: 01 April 2018

RESEARCH ARTICLE

Do investors actually value sustainability? New

evidence from investor reactions to the Dow Jones

Sustainability Index (DJSI)

Olga Hawn

1

| Aaron K. Chatterji

2

| Will Mitchell

2,3

1

Strategy and Entrepreneurship, Kenan-Flagler

Business School, University of North Carolina,

Chapel Hill, North Carolina

2

Duke Strategy, Fuqua School of Business, Duke

University, Durham, North Carolina

3

Strategic Management at Toronto, Joseph L

Rotman School of Management, University of

Toronto, Toronto, Ontario, Canada

Correspondence

Olga Hawn, Strategy and Entrepreneurship,

Kenan-Flagler Business School, University of

North Carolina, CB 3490 McColl Building,

Chapel Hill, NC 27599.

Email: olga@unc.edu

Research Summary: Research exploring investor reac-

tions to sustainability has substantial empirical limita-

tions, which we address with a large-scale longitudinal

financial event study of the first global sustainability

index, DJSI World. We examine investor reactions to

firms from 27 countries over 17 years that are added,

deleted, or continue on the index. We find that once rele-

vant controls and comparisons to observationally equiva-

lent firms beyond the index are included, DJSI events

have only limited significance and/or materiality. None-

theless, investors’valuation of sustainability around the

world has evolved over time, involving diminishing reac-

tions to U.S. firms and increasing benefits, particularly of

continuation on the index, over time. The study highlights

the importance of careful analysis and longitudinal global

samples in making inferences about the financial effects

of social performance.

Managerial Summary: The debate about how investors

perceive corporate social responsibility (CSR) predates

Milton Friedman’s famous statement that the only social

responsibility of business is to increase profits. Although

extensive research has studied whether sustainability con-

tributes to financial performance, we have yet to under-

stand whether investors believe it pays off. This financial

event study of reactions to the addition, continuation, and

deletion from DJSI World, the first global sustainability

index, shows that investors care little about DJSI

announcements. Nonetheless, there is some evidence that

global assessments of sustainability are converging and

that investors may increasingly be valuing continuation

on the DJSI, suggesting that firms may gain at least lim-

ited benefits from reliable sustainability activities.

Received: 20 February 2015 Revised: 28 August 2017 Accepted: 7 September 2017 Published on: 1 February 2018

DOI: 10.1002/smj.2752

Strat Mgmt J. 2018;39:949–976. wileyonlinelibrary.com/journal/smj Copyright © 2017 John Wiley & Sons, Ltd. 949

KEYWORDS

CSR, financial event study, firm value, investors, space,

sustainability, time

1|INTRODUCTION

Strategic corporate social responsibility (CSR) scholars have long been interested in how environ-

mental, social, and governance (ESG) activities affect firms’financial performance (Carroll, 1979;

Cochran & Wood, 1984; Davis, 1973; Waddock & Graves, 1997). The most recent meta-analysis of

251 studies over 35 years suggests that the effect of CSR on shareholder value is small, yet positive

and significant, explaining about 2.2% of the variance in financial performance (Margolis, Elfen-

bein, & Walsh, 2009). However, the underlying evidence for this meta-analysis is unreliable because

it is based on imperfect methods and might be outdated (the last year of published papers used in

the meta-analysis was 2007). For example, a recent replication of one of the foundational studies on

the relationship between CSR and financial performance (Waddock & Graves, 1997)—with a larger

sample and a longer timeframe—showed that the findings from the original study may have limited

generalizability (Zhao & Murrell, 2016). Moreover, only 37% of effects in the meta-analysis empiri-

cally assessed the causal direction in this relationship; that is, the measures of CSR often did not

precede the measures of financial performance (Margolis et al., 2009, p. 29). To reach more reliable

conclusions about the effect of CSR on financial performance, scholars must employ more rigorous

research designs.

Financial event studies, which map stock market reactions to news regarding CSR and use com-

panies as their own matched controls, offer a research design that potentially provides greater reli-

ability. Several studies have taken this approach, examining reactions to events such as addition or

deletion from sustainability indices (Cheung, 2011; Consolandi, Jaiswal-Dale, Poggiani, & Vercelli,

2009; López, Garcia, & Rodriguez, 2007; Robinson, Kleffner, & Bertels, 2011), tending to find

slightly larger effect sizes than those of conventional studies (Margolis et al., 2009, p. 16). Yet, even

event studies of sustainability indices have mixed results (see Appendix A in File S1 for more

details) and suffer from empirical limitations. First, they have not examined what happens to compa-

nies that continue on sustainability indices (i.e., that do not get added or deleted). Second, event

studies typically do not compare abnormal returns of similar firms that are not on the index. Third,

the analyses typically have short time frames and allow only limited insight about changes in how

investors react to the sustainability information over time. Fourth, the samples are often limited to

single regions, typically the United States, while the shareholder reaction to sustainability may vary

in space. Finally, there is limited control for other sources of heterogeneity, such as those than can

be observed in a regression analysis after the event study.

To address these limitations, we undertake a longitudinal financial event study of how investors

react to the news about firms being added, deleted, or retained on the first globally representative

sustainability index, the Dow Jones Sustainability Index (DJSI) World

a

from 1999 to 2015. Every

year, 2,500 largest firms can seek membership in this index by filling out the DJSI survey and

1

http://www.sustainability-indices.com/index-family-overview/djsi-family-overview/index.jsp [May 2, 2016].

950 HAWN ET AL.