Influence of the corporate social responsibility factors and financial factors on REIT performance in Australia

Abstract

PurposeCorporate social responsibility (CSR) has taken on increased stature and importance in recent years, as property investors have given an increased priority to environmental, social and corporate governance issues in their property investment decision‐making. The purpose of this paper is to empirically examine the impact of CSR factors and financial factors on the performance of Real Estate Investment Trusts (REITs) in Australia (A‐REITs) and assess whether these three CSR factors are separately priced by A‐REIT investors in uniquely adding value to A‐REIT investment performance.Design/methodology/approachUsing CSR rating factors and financial factors for the 16 A‐REITs in the ASX200, cross‐sectional multi‐factor models are employed to identify the separate pricing of these CSR factors in A‐REIT performance over 2005‐2010.FindingsThe empirical results show that the environmental, social and corporate governance dimensions of CSR are not currently separately priced by A‐REIT investors, with most of the A‐REIT performance accounted for by the financial factors. Amongst the three CSR dimensions, corporate governance is seen to be the most influential CSR factor on A‐REIT performance.Practical implicationsThis paper empirically determines that the CSR dimensions of environment, social and corporate governance are currently less influential than the financial factors of size, book‐to‐market value, gearing and beta in influencing A‐REIT performance. Given the increased role of CSR amongst A‐REITs, corporate governance is seen to have a more influential role in A‐REIT pricing than either environmental or social factors. This finding also has practical implications for CSR practices in other REIT markets internationally.Originality/valueThis paper is the first published property research analysis on the separate role of CSR factors, compared to the traditional financial factors, in the performance of A‐REITs. Given the increased focus on CSR by property investors, this research enables empirically‐validated and practical property investment decisions by A‐REIT investors regarding the separate pricing of these CSR factors in A‐REIT performance.

A Review of Corporate Social Responsibility and Real Estate Investment Trust Studies: An Australian Perspective

“…() found that CSR A‐REITs did not significantly underperform non‐CSR A‐REITs, and also provide additional portfolio diversification benefits. Furthermore, evidence for Canada (Hebb et al ., ), Australia (Newell & Lee, ), and multi‐country (Kerscher & Schäfers, ) demonstrate that REITs with a high CSR/ESG rating outperform their conventional counterparts. Overall, the empirical evidence on balance suggests that REITs can benefit from employing various CSR strategies to mitigate risks and enhance their financial performance.…”

“…Orlitzky et al ., ), there has been limited empirical research conducted on the relationship between CSR and risk‐adjusted returns of REITs, particularly in Australia. There are – to the best of our knowledge – only two empirical studies (Newell et al ., ; Newell & Lee, ) with a focus on the risk‐adjusted return performance of A‐REITs. Both studies analysed risk‐adjusted returns of 16 CSR A‐REITs for similar periods: August 2005 – July 2010 and July 2005 – June 2010, respectively.…”

“…As proposed by Derwall et al (2009), any study analysing the linkage between CSR and riskadjusted returns in A-REITs, using the Carhart four-factor model, could increase the suitability of the model by including an A-REIT-specific momentum factor. Similar to Newell and Lee (2012), further studies are also encouraged to include leverage in the Carhart model to analyse the impact of debt levels on A-REIT risk-adjusted return performance. Following the approach of Costa et al (2014), rolling risk-adjusted returns could also be computed to provide a deeper understanding of A-REIT risk-adjusted return performance over time.…”

“…and/or based on individual CSR components (e.g. environment, employees, community and corporate governance) (Newell and Lee (), with the latter allowing the researcher/s to identify the key CSR drivers of A‐REIT risk‐adjusted return performance.…”

The role of green investment and corporate social responsibility investment on sustainable performance

“…Furthermore, Uadiale and Fagbemi (2012) explained that CSR investment may improve reputation, profitability, and sustainable performance (Jain & Winner, 2016), so that further, it will enhance the company's image. On the other hand, Menzel et al (2010); Newell and Lee (2012) argued that CSR does not affect a company's financial performance and its sustainable performance (Perez-Batres et al, 2010), because of the high additional costs of social responsibility. Lee et al (2017) found that there is no significant difference in the financial performance between companies that apply sustainability principles and companies that do not.…”