Abstract
In this paper, we explore the relationship between a firm’s environmental policies and their risk-adjusted stock returns, using a sample of stock exchange-listed Australian firms over the period of 2010–2018. We observed a positive and statistically significant relationship suggesting that a firm’s environmental policies partially explain their stock performance. Moreover, we found that investors in the Australian market significantly value a companies’ efforts to reduce emissions, and that this primarily drives the investors’ observed reaction to a firm’s social corporate policies. Next, we formed portfolios and observed that portfolios formed on high environmental, social, and governance (ESG) Environmental Pillar scores consistently outperformed those formed on low-ESG Environmental Pillar scores. Overall, our results lend support to the notion that investors in the Australian market value information about a firm’s social policies.
Highlights
The field of socially responsible investing (SRI) has been a locus of active study in the academic world since the 1990s
Examining the broader context of the corporate social responsibility (CSR) literature, we find that much of the research positions itself on the premise that there exists a trade-off between the higher costs associated with CSR initiatives and the economic benefits derived from increased support from important stakeholder groups (Brown 1998; Yoon et al 2018)
As described in the methodology section, we investigated the impact of environmental performance at the firm level, proxied for by ESG Environmental Pillar scores on a firm’s excess stock returns, as described by Carhart’s four-factor model
Summary
The field of socially responsible investing (SRI) has been a locus of active study in the academic world since the 1990s. Much of this enduring interest has been informed by the rapid development of the subject area and the evolution of what investors, as a group, value. The extant literature highlights the difficulty of assessing how investors will integrate sustainability data as a metric of a firm’s market performance. Given the large disparities in the empirical findings, some authors posit that there is insufficient evidence to conclude that there exists a definitive association between SRI and a firm’s financial performance (Ioannou and Serafeim 2011).
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