Global Standards and Ethical Stock Indexes: The Case of the Dow Jones Sustainability Stoxx Index

Abstract

The increased scrutiny of investors regarding the non-financial aspects of corporate performance have placed portfolio managers in the position of having to weigh the benefits of "holding the market" against the cost of having positions in companies that are subsequently found to have questionable business practices. The availability of stock indexes based on sustainability screening makes increasingly viable for institutional investors the transition to a portfolio based on a Socially Responsible Investment (SRI) benchmark at relatively low cost. The increasing share of socially responsible investments may play a role in providing incentives towards a continuous upgrading of sustainability standards to the extent that their performance is not systematically inferior to that of the other funds. This paper examines whether these incentives have been so far detectable with particular reference to the Dow Jones Sustainability Stoxx Index (DJSSI) that focuses on the European corporations with the highest CSR scores among those included in the Dow Jones Stoxx 600 Index. The aim of the paper is twofold. First, we analyse the performance of the DJSSI over the period 2001-2006 compared to that of the Surrogate Complementary Index (SCI), a new benchmark that includes only the components of the DJ Stoxx 600 that do not belong to the ethical index in order to evaluate more correctly the size of possible divergent performances.Second, we perform an event study on the same data set to analyse whether the stock market evaluation reacts to the inclusion (deletion) in the DJSSI. In both cases the results suggest that the evaluation of the CSR performance of a firm is a significant criterion for asset allocation activities.

Signaling Sustainability Leadership: Empirical Evidence of the Value of DJSI Membership

“…To determine whether there is a short-term impact of losing a DJSI listing, as has previously been documented, we examine the pattern of daily mean CARs between the announcement date and 10 trading days after a firm's removal from the index. We find a statistically insignificant negative value for the mean CAR of -0.388% over this interval which is larger in magnitude than the -0.082% reported by Consolandi et al (2008), and smaller than the -1.2% reported by Doh et al (2010) (they examined the announcement period only). We also find that this negative effect is eliminated by 20 trading days after the effective change, suggesting that it is a temporary as opposed to a sustained effect.…”

“…A study by Consolandi et al (2008) considers whether inclusion in, or deletion from, the Dow Jones Sustainability Stoxx Index (DJSSI), an index for European corporations, results in a short-term stock market reaction. They find that companies experience a positive excess return of 0.03% after it is announced that they are being added to the DJSSI, but no significant effect during the 10 days after its addition becomes effective.…”

“…Using inclusion on the DJSI as a signal of a company's reputation for sustainability leadership, we investigate whether being added to, or removed from, the DJSI results in a significant change to the value of North American companies both in the short-term and over an intermediate time frame. In so doing, we build on prior work that examines the impact of additions or deletions to a sustainability index on companies (Consolandi et al, 2008;Doh et al, 2010;Fowler and Hope, 2007), by differentiating between a sustainability effect and a listing effect, and by moving beyond the immediate announcement period to also study the intermediate term effects of these changes. Our results provide evidence that there is a sustained positive stock market reaction when firms are added to the DJSI, but that there is a temporary but not sustained loss in value to firms that are removed from the DJSI.…”

Market Reactions to Increased Reliability of Sustainability Information

“…Publishers of sustainability indexes require companies to meet a set of sustainability performance criteria to be listed in the index. Inclusion in a sustainability index is often seen as evidence of high sustainability performance (comparable to a CSR ''certification''; Consolandi et al 2009). Consequently, inclusion in (or deletion from) such an index is a strong signal for an increase (or decline) in a company's sustainability performance relative to its competitors.…”

Discutindo sustentabilidade no contexto de negócios e em relatórios de desempenho: análise de estudos de caso brasileiros

“…As businesses are what they can measure (Hauser & Katz, 1998), a performance measurement system that incorporates environmental and social issues into economic objectives is key to a company engaged in sustainable development. The literature on sustainability performance is broad, addressing various issues such as environmental accounting (Schaltegger et al, 2013), sustainability reporting (Hahn & Kühnen, 2013); indicators associated with stock exchange (Consolandi et al, 2009;Orsato et al, 2015), among others. However, the literature on sustainability performance measurement is still fragmented and dispersed, pointing out the need for research on the challenges of implementation of corporate sustainability into companies' practices (Morioka & Carvalho, 2016).…”