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Finance and accounting corporate social responsibility and financial performance

Abstract

Purpose – This paper aims to investigate the interaction between sustainability and financialperformance. Can socially responsible investors, integrating environmental, social and ethical issues intheir investment policy, expect the same return as traditional investors?

Design/methodology/approach – Based on the sustainability ratings of a specialized rating agency,Vigeo, a Fama and French approach is performed to adapt for style biases in the performances.

Findings – The results indicate that, on a style-adjusted basis, high sustainability-rated portfolios haveperformed better than low-rated portfolios, but, probably due to the short horizon, not to a significantextent. The same results are found for four out of the five sub-ratings of which the sustainability rating is composed, suggesting that sustainability is a broad and multidimensional concept that cannot be attributed to one specific theme or topic. The results also indicate that investors are ready to pay a premium for companies with good management of their relations with shareholders, clients and suppliers.

Research limitations/implications – Owing to the rather new concept of socially responsible investing and in order to avoid survivorship bias, only a relative time horizon is considered.

Practical implications – There is no cost involved in integrating sustainable dimensions in theinvestment policy.

Originality/value – The paper shows the relevance of socially responsible investing when one adjusts
for style differences within the portfolio.

Keywords Social responsibility, Economic sustainability, Ethical investment

Paper type Research paper

Data
In order to measure the sustainability of a company, we used the Vigeo corporate socialresponsibility scores. Vigeo is an independent corporate social responsibility agency thatscreens European quoted companies on CSR.

The scores of Vigeo contain information on five dimensions of corporate social responsibility:
1. Human resources.
2. Environment.
3. Customers and suppliers.
4. Community and society.
5. Corporate governance[2].

For each dimension, Vigeo assesses the corporate social performance with a sustainabilityscore. For the purpose of this paper, we constructed a total sustainability score as a summation of the ratings on the five individual dimensions. The Jarque-Bera test indicatesthe normality of the total and individual sustainability scores.
The Vigeo scores have been available since 2000 for a representative sample of euro zone companies. The period of investigation ranges from 1 January 2000 to the end of November 2003. Companies that disappeared because of merger or acquisition events were excludedfrom the investment universe for the year the event took place. Table I gives an overview of the number of companies for which data were available. The table shows that over the years,
the number of screened companies has increased.
The data for share prices, market capitalization and book values were obtained from DataStream.

Notes
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