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

The increased scrutiny of investors regarding the non-financial aspects of corporate performance has 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 article 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 article 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 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.     

Islamic legal methodologies and Shariah screening standards: Application in the Indonesian stock market

This article provides a framework for applying the principles of Islamic legal methodology to determine the optimal Shariah screening standards for Islamic equity markets. It is argued that using maslahah mursalah (unrestricted benefit) is an appropriate method for identifying appropriate financial standards and its principles stipulate that the benchmark that yields the best economic returns to investors should be chosen. The methodological framework is applied to the Indonesia equity market where the economic implications of the Islamic stock screening standards of the Indonesian Islamic Shariah Stock Index and four global indices are assessed. Portfolios are constructed by applying Islamic stock screening standards for each of the indices by using data on 377 stocks listed in the Indonesian stock market for 5 years. The performances measured by the Sharpe ratio, Treynor index, and Jensen alpha reveal that the Dow Jones Islamic Index screening criteria performs the best. Based on the method of maslahah mursalah, the article recommends using the screening standard of this index in the Indonesian stock market to maximize benefits to investors. While the approach used in this article is applied to Islamic equity markets, the methodological framework can also be used for other similar cases in Islamic finance.     

How Does the Market Value Corporate Sustainability Performance?

This study provides empirical evidence on how corporate sustainability performance (CSP), as proxied by membership of the Dow Jones sustainability index, is reflected in the market value of equity. Using a theoretical framework combining institutional perspectives, stakeholder theory, and resource-based perspectives, we develop a set of hypotheses that relate the market value of equity to CSP. For a sample of North American firms, our preliminary results show that CSP has significant explanatory power for stock prices over the traditional summary accounting measures such as earnings and book value of equity. However, further analyses suggest that we should not focus on corporate sustainability itself. Our findings suggest that what investors really do is to penalize large profitable firms with low level of CSP. Firms with incentives to develop a high level of CSP not engaging on such strategy are, thus, penalized by the market.     

Are environmental social governance equity indices a better choice for investors? An Asian perspective

This article examines the risk and return profiles of stock indices composed of companies meeting environmental, social and governance (ESG) screening criteria [such as the Dow Jones Sustainability Indices (DJSI)] and conventional composite indices of eight Asian countries from 2002 to 2014. The results indicate that there are no significant differences in the returns or risk‐adjusted returns between the ESG indices and the composite indices within countries. The results do reveal that the market volatility of the ESG indices is higher than the market volatility of the conventional indices. Market betas of DJSI and ESG equity indices are significantly lower than betas of the composite equity indices. The overall results indicate that the performance of ESG equity indices of many Asian countries is similar to the performance of conventional indices, suggesting that investors can pursue socially responsible investing objectives without a material difference in portfolio performance from conventional investing.     

Investigating critical organizational factors toward sustainability index: Insights from the Taiwanese electronics industry

To improve sustainable practices and attract investors, companies in emerging markets have increasingly embraced strategies for inclusion in rapidly expanding sustainability indices. However, most early studies on socially responsible investment or sustainability investment have only focused on exploring the relationship between corporate sustainability and firm value. Moreover, little has been done to explore the practices of emerging market companies for engaging with a sustainability index. To address this research gap, we employed the decision-making trial and evaluation laboratory (DEMATEL) method to identify critical factors that influence the inclusion of emerging market companies in the Dow Jones Sustainability Index (DJSI). Five critical factors and best practices were identified based on the analysis of seven Taiwanese electronics companies that have been listed in the DJSI for several consecutive years. Our results provide insights on the critical factors and best practices that reinforce the sustainable practices of emerging market companies for inclusion in the DJSI. This study also contributes to the literature by investigating the engagement of emerging market companies with the DJSI.     

Business Cases and Corporate Engagement with Sustainability: Differentiating Ethical Motivations

This paper explores links between different ethical motivations and kinds of corporate social responsibility (CSR) activities to distinguish between different types of business cases with regard to sustainability. The design of CSR and corporate sustainability can be based on different ethical foundations and motivations. This paper draws on the framework of Roberts (Organization 10:249–265, 2003) which distinguishes four different ethical management versions of CSR. The first two ethical motivations are driven either by a reactionary concern for the short-term financial interests of the business, or reputational, driven by a narcissistic concern to protect the firm’s image. The third responsible motivation works from the inside-out and seeks to embed social and environmental concerns within the firm’s performance management systems, and the fourth, a collaborative motivation, works to bring the outside in and seeks to go beyond the boundaries of the firm to create a dialogue with those who are vulnerable to the unintended consequences of corporate conduct. Management activities based on these different ethical motivations to CSR and sustainability result in different operational activities for corporations working towards sustainability and thus have very different effects on how the company’s economic performance is influenced. Assuming that corporate managers are concerned about creating business cases for their companies to survive and prosper in the long term, this paper raises the question of how different ethical motivations for designing CSR and corporate sustainability relate to the creation of different business cases. The paper concludes by distinguishing four different kinds of business cases with regard to sustainability: reactionary and reputational business cases of sustainability, and responsible and collaborative business cases for sustainability.     

Doing right,investing right: Socially responsible investing and shareholder activism in the financial sector

In this article, we present an overview of corporate social responsibility (CSR) in the financial sector. We focus on how socially responsible investment and shareholder activism have been integral parts of corporate social responsibility in the financial sector. We examine how the financial sector and its firms are evaluated and rated via a sustainability index, the Dow Jones Sustainability World Index, and show that even leading financial institutions do not employ proactive practices regarding socially responsible investment and shareholder activism. Finally, we provide examples of two companies, UBS AG and the Co-operative Banking Group, that do utilize proactive practices.     

A Critical Review of Sustainable Business Indices and their Impact

Most studies into the performance of socially responsible investment vehicles have focused on the performance of sustainable or socially responsible mutual funds. This research has been complemented recently by a number of studies that have examined the performance of sustainable investment indices. In both cases, the majority of studies have concluded that the returns of socially responsible investment vehicles have either underperformed, or failed to outperform, comparable market indices. Although the impact of sustainable indices to date has been limited, the recent launch of sustainable indices by Dow Jones and FTSE suggests that more attention is being paid to the subject by financial markets, investors, and companies. This development raises a number of important issues which are reviewed in this article: (a) the performance of indices compared with their benchmark indices; (b) the methodologies employed in compiling the indices; and (c) the impact of the indices on companies and the investment community. The article concludes with a number of suggestions for areas that merit future research.     

A Bi-Directional Examination of the Relationship Between Corporate Social Responsibility Ratings and Company Financial Performance in the European Context

Research focusing on the relationship between measures of Corporate Social Responsibility (CSR) and company financial performance has led to mixed results in the North American context. In addition, the ethical attitudes and approaches toward CSR investments of both companies and rating agencies are not necessarily the same in Europe and the United States. In this study, we use CSR ratings issued by a major European CSR ratings agency (Vigeo) to examine in a bi-directional manner the relationships between CSR ratings and financial performance in the European context. By bi-directional, we mean an examination of the relationship between prior CSR ratings and subsequent accounting and financial performance and reciprocally, the impact of accounting and financial performance of year N ? 1 on CSR ratings of year N. Our principal findings are: (1) the greater the market capitalization of a company, the higher the Vigeo rating, (2) the higher the risk of the company, the lower the Vigeo rating, and (3) the greater the stock market return of a company, the lower the Vigeo rating. Based on these findings, we propose (1) a concept of “political visibility” pursuant to which enterprises of a greater size are exposed to greater pressure to conform to norms of socially acceptable behavior, (2) a concept of “priorities” in which enterprises that have resolved their most urgent financial needs have a greater ability to invest in CSR, (3) a concept of “rating downgrading” which reveals the sanctioning role of the rating agency from an ethical standpoint.     

Changes in the Covalence Ethical Quote,Financial Performance and Financial Reporting Quality

We examine the equity valuation effect of press releases of upgrades or downgrades reflected in the Covalence Ethical Quote (CEQ), an index ranking the ethical performance of multinational firms. The index is updated quarterly and is comprehensive enough to include 45 criteria reflecting working conditions, impact of product, impact of production, and company institutional impact. Thus, it captures many dimensions of firms’ ethical performance that are not accounted for in previous research. Our research encompasses a joint test of the value relevance of the index itself and the impact of ethical reputation on a firm’s value. We find first a significant causal relationship between stock market reactions and changes in the CEQ. Specifically, disclosures of positive (negative) changes in firm ethical performance cause increases (decreases) in firm value. Second, cross-sectional analysis indicates a positive association between changes in firm ethical performance and both its financial performance and its financial reporting quality. Collectively, these results suggest that the CEQ conveys information that is useful to investors. Further, corporate measures taken to increase ethical performance are associated with positive benefits to shareholders. Finally, investors have concluded that good news about their firms’ efforts to be ethical is worth the cost.     

The Chief Officer of Corporate Social Responsibility: A Study of Its Presence in Top Management Teams

I present a review of the top management teams (TMTs) of the largest public corporations in the U.S. and Scandinavia (one thousand in total) to identify corporations that have a TMT position with “corporate social responsibility” (CSR) or a “CSR synonym” like sustainability or citizenship explicitly included in the position title. Through this I present three key findings. First, I establish that a number of CSR TMT positions exist and I list all identified corporations and associated position titles. Second, I show that Scandinavian corporations are significantly more likely than U.S. corporations to have such CSR TMT positions. This finding serves as evidence that the U.S. may have been surpassed by a subset of Europe, i.e., Scandinavia, in at least one relevant measure of explicit CSR, whereby this study may serve witness to a noteworthy juncture post Matten and Moon’s (Academy of Management Review, 33(2):404–424, 2008) “Implicit & Explicit CSR” article. And third, I show that corporations with a CSR TMT position are three times more likely to be included in the Dow Jones Sustainability Index (DJSI) than corporations with none. A range of further research opportunities stemming from these findings include exploring whether explicit attention to CSR by the corporation is indicative of a longer term trend that has to do with attention to responsible business and whether a move away from the expression ‘CSR’ toward the expression ‘sustainability’ is underway and what this may entail.     

Does socially responsible investment equity indexes in emerging markets pay off? Evidence from Brazil

This paper explores the financial performance of a mainstream socially responsible investment equity index in emerging markets: the Brazilian Corporate Sustainability Index. The results indicate that investors in emerging markets could accommodate their ethical values while at the same time not scarifying their overall portfolio performance in bullish market periods. However, the financial crisis led ethical investors to take a riskier and less profitable portfolio. These results seem to be due to socially responsible investment in Brazil that, as with other emerging markets, is highly influenced by social and institutional factors.     

Business ethics: a sustainable approach

The author proposes sustainability as the criterion for business ethics. The argument here is that in today's world, business success depends on sustainability. This in turn depends on respect for the environment, employees, customers and stakeholders at large. Thinking about ethics in terms of sustainability involves thinking about ethics in strategic terms. Indeed sustainability could and should be raised to the status of a global ethic. There is evidence to show that corporate social responsibility pays; e.g. the Dow Jones sustainability group index outperformed the Dow Jones index by 36% over the past three-year period. This suggests that taking ethics seriously goes hand in hand with successful business.     

Business and Government Ethics in the “New” and “Old” EU: An Empirical Account of Public–Private Value Congruence in Slovenia and the Netherlands

This article studies how financial investors respond to firms’ corporate social responsibility (CSR) performance in terms of their investing behaviors, and how such behaviors change contingent on an event that provokes their attention and concerns to CSR. Using the melamine contamination incident in China as a natural experiment, it is found that neither the individual investors’ nor the institutional investors’ behaviors are influenced by firms’ CSR performance before the incident. Nevertheless, in the post-event period, institutional investors’ behaviors are significantly influenced by firms’ CSR performance that exceeds a certain threshold. Furthermore, such an effect diminishes for a better CSR performance. In comparison, the authors do not find any effects of CSR performance on individual investors, either before the event or after the event. Finally, firms’ performance and investors’ behaviors jointly affect firms’ stock returns after the event but not before the event. This article reconciles the mixed findings in the literature on the effect of firms’ CSR performance on their financial performance by showing that such an effect exists in a contingent manner. Furthermore, the authors show that a too low or a too high CSR performance could lead to undesirable responses from investors. Therefore, managers should pay attention to optimizing firms’ CSR activities.     

Are Sharia stocks,gold and U.S. Treasury hedges and/or safe havens for the oil-based GCC markets?

This study examines whether the Sharia-compliant stocks measured by Dow Jones Islamic World Emerging Market index (DJIWEM), gold and the U.S. Treasury bills (T-bills) can serve as a hedge and/or a safe-haven asset in the six GCC stock markets, by using a vine copula approach. The results show that GCC and global investors can realize both risk diversification benefits and downside risk reductions during tranquil and downturn periods by including gold or DJIWEM in their portfolios but not the T-bills.     

Market Reactions to Increased Reliability of Sustainability Information

This article investigates whether investors consider the reliability of companies’ sustainability information when determining the companies’ market value. Specifically, we examine market reactions (in terms of abnormal returns) to events that increase the reliability of companies’ sustainability information but do not provide markets with additional sustainability information. Controlling for competing effects, we regard companies’ additions to an internationally important sustainability index as such events and consider possible determinants for market reactions. Our results suggest that first, investors take into account the reliability of sustainability information when determining the market value of a company and second, the benefits of increased reliability of sustainability information vary cross-sectionally. More specifically, companies that carry higher risks for investors (e.g., higher systematic investment risk, higher financial leverage, and higher levels of opportunistic management behavior) react more strongly to an increase in the reliability of sustainability information. Finally, we show that the benefits of an increase in the reliability of sustainability information are higher in times of economic uncertainty (e.g., during economic downturns and generally high stock price volatilities).     

Investor Reactions to Concurrent Positive and Negative Stakeholder News

This paper examines the impact on firm value created by investor reaction to same day news of corporate social responsibility (CSR) and corporate social irresponsibility (CSiR) activities. First, using trading volume, the authors establish that the perceived value of moral capital generated by news involving institutional (e.g., environmental and community) stakeholders is less clear to investors than that of the news involving technical (e.g., customers and employees) stakeholders. Subsequently, the authors analyze abnormal returns from 565 unique firm events—each comprising at least one positive and one negative stakeholder news item. Using signaling theory, the authors demonstrate that news of the number of CSR activities involving institutional groups counteracts the effects of same day CSiR news in an inverted U-shaped fashion. In contrast, they find that news of the number of CSR activities involving technical groups mitigates the effects of same day CSiR news in a U-shaped fashion.     

Rebuilding Trust: Ireland’s CSR Plan in the Light of <Emphasis Type="Italic">Caritas in Veritate</Emphasis>

This paper seeks to contribute to the discussion on national corporate social responsibility (CSR) plans from the perspectives of the three logics as articulated in Caritas in Veritate, by using the Irish national CSR plan as an example. Good for Business, Good for the Community: Ireland’s National Plan on Corporate Social Responsibility 2014–2016 maintains that CSR activities can enable organisations to build relationships and trust with communities. One of the consequences of the 2008 financial crisis was the decrease in trust in banking systems and in business more broadly. It is well recognised that relationships of trust are essential to the life of the market, the state and civil society. Pope Emeritus Benedict XVI’s Caritas in Veritate contends that corresponding to the life of the market, the state and civil society are three logics: the logic of exchange (i.e. giving to acquire), the logic of public obligation (i.e. giving through duty) and the logic of gift (i.e. giving due to solidarity). This paper proposes that the normative framework of the three logics of Caritas in Veritate can be read into the Irish national CSR plan. This paper argues that the examples of CSR initiatives proffered by the plan could point organisations in the direction of the logic of gift and therefore enable the rebuilding of relationships of trust with citizens and communities.     

Corporate Social Responsibility and Its Impact on Firms’ Investment Policy, Organizational Structure, and Performance

This study examines the determinants of corporate social responsibility (CSR) and its implications on firms’ investment policy, organizational strategy, and performance. First, we find that firms with better performance, higher R&D intensity, better financial health, and firms in new economy industries are more likely to engage in CSR activities, while riskier firms are less likely to do so. We also find U-shaped relation between firm size and CSR, indicating that either very small or very large firms exhibit high levels of CSR strengths and concerns. Next, we find that firms’ CSR strengths relate favorably with their investments, organizational strategy, and performance, whereas CSR concerns and firm attributes are by and large negatively related. Using a 2SLS procedure, we verify that the CSR–performance relation is robust to corrections for endogeneity through reverse causation and/or biases introduced by time varying omitted variables. Finally, we find that the CSR–firm attributes relation is strengthened when the CEO’s incentives are below the sample median, suggesting that CSR participation is especially important when monetary incentives are lower than benchmark levels.     

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

We explore the relationship between corporate sustainability, reputation, and firm value by asking whether signaling sustainability leadership through membership on a recognized sustainability index is value generating. Increasingly, stakeholders are demanding that firms demonstrate their commitment to sustainability. One signal that companies can send to stakeholders to indicate that they are sustainability leaders is membership on a recognized “best in class” sustainability index. This article explores both the short-term and the intermediary impact on North American firms of being included or removed from the Dow Jones Sustainability World Index (DJSI). Our results provide evidence that being added to the DJSI results in a sustained increase in a firm’s share price, suggesting that the benefits of being included on the DJSI outweigh the costs associated with applying. This article also notes a temporary decrease in the value of firms for the first 10 days after their removal from the DJSI; however, this effect is eliminated within the next ten trading days.