Higher corporate sustainability improves the market and risk-adjusted performance of companies

Master's Thesis, 2013

54 Pages, Grade: GPA 3.7


Table of Contents



Table of Content

List of Figur

List of Tables

List of Abbreviation

List of Appendices


Chapter 1: Overview
1.1. Definitions
1.2. Problem Statement
1.3. Purpose
1.4. Significance of the Study
1.5. Nature of the Study
1.6. Research Questions and Hypotheses
1.6.1. Research question 1
1.6.2. Hypothesis 1 (1H): return
1.6.3. Research question 2
1.6.4. Hypothesis 2 (2H): return
1.6.6. Research question 3
1.6.7. Hypothesis 3 (3H): risk
1.6.8. Research question 4
1.6.9. Hypothesis 4 (4H): risk
1.7. Variables
1.8. Theoretical Framework
1.9. Scope and Limitations.

Chapter 2: Foundations of Project Design
2.1. Literature Review
2.2. Research Design
2.3. Sampling Methods and Procedures
2.3.1. Population
2.3.2. Data collection methodology
2.4. Validity
2.4.1. External validity
2.4.2. Instrument reliability
2.5. Methodology Appropriateness
2.6. Collection of Data
2.7. Analysis of Data

Chapter 3: Action Plan
3.1. Hypothesis 1
3.1.1. Descriptive and graphical analysis
3.2. Hypothesis 2
3.3. Hypothesis 3
3.3.1. Descriptive and graphical analysis
3.4. Hypothesis 4

Chapter 4: Discussions and Conclusion
4.1. Conclusions about the Research Questions
4.2. Conclusions from Data Analysis
4.3. Hypotheses & Null Hypothesis
4.4. Research Benefits
4.5. Recommendations and Conclusions
4.6. Future Research Suggestions




This project complements previous empirical research on the study of sustainability, market and risk-adjusted performance by employing to date unused data.

Sustainability provides opportunities for producers to lower costs, for entrepreneurs and investors to increase profit; and therefore should have an impact on the market performance. Whether sustainability has an impact on market and risk-adjusted performance is examined using three indexes - the Dow Jones Sustainability World Index, the Dow Jones Global Index and the Dow Jones Global Total Stock Market Index. As the most sustainable companies from the Dow Jones Global Stock Market Index are included in the Dow Jones Sustainability World Index, it is expected that the index with more sustainable companies would show a better market and risk-adjusted performance.

The study's results provide no evidence that there is a generic business case for sustainability. The insignificant, slightly higher performance of DJSIW seems to come with additional volatility and risk, as this index shows the lowest Sharpe Ratio of the three indexes. The study indicates that companies with remarkable sustainable development strategies are not more likely to be rewarded by investors with a higher valuation in the financial markets and do not show a better risk-adjusted performance.


This project was made possible due to the support from numerous individuals who encouraged and helped me in many ways to complete this work.

First and foremost, my sincere appreciation goes to my project advisor, Dr. Geoffrey Vanderpal for his guidance and support. I have been privileged to have him in my graduate program, as he is a role model as a researcher and educator. He defines what a researcher and educator should be and has led me to the joy of study and research in the area of sustainability. His warm encouragement gave me strong motivation to complete my MBA, whenever I doubted whether I could finish due to barriers and challenges that I had encountered.

I am also grateful to the other committee members: They provided me helpful comments, and invaluable resources throughout the learning process.

I would like to express my deep appreciation to all of my family. I have been blessed to have my wonderful wife, Manuela Reber, who has stood by me with support, understanding, and love.

List of Figures

Figure 1. The three pillars of sustainability (Hallman, 2010)

Figure 2. Performance of the indexes

Figure 3. Normalized index values

Figure 4. Rate of return of the indexes

Figure 5. Annualized Sharpe Ratios

List of Tables

Table 1 Description of DJGI, DJSIW and DJGTSM

Table 2 Subjects and statistical analysis methods

Table 3 Descriptive statistics for hypothe

Table 4 Results of ANOVA for index values and rate of return

Table 5 Descriptive statistics for hypothe

Table 6 Results of ANOVA for Sharpe Ratios

List of Abbreviations

ANOVA Analysis of Variance

CFP Corporate financial performance

CS Corporate Sustainability

CSP Corporate sustainability performance

CSR Corporate Social Responsibility

DJGI Dow Jones Global Index

DJGTSM Dow Jones Global Total Stock Market Index

DJSIW Dow Jones Sustainability Index World

DJSSI Dow Jones Sustainability Stoxx Index

e.g. for example

GCX Global Challenges Index

H Hypothesis

N refers to population size

p p-Value, used for significance

SAM Sustainable Asset Management

S&P 500 Standard & Poor's 500

StdDev Standard Deviation

US United States

List of Appendices

Appendix A: Index values, normalized index values and risk-free rates

Appendix B: Monthly rate of returns

Appendix C: Sharpe Ratio calculation


I dedicate my capstone project to my family. A special feeling of gratitude to my loving wife, Manuela Reber, whose words of encouragement and push for tenacity ring in my ears. I also dedicate this dissertation to my friends who have supported me throughout the process. I will always appreciate all they have done, especially Dr. Marcel Sonderegger for helping me develop my technology skills and Daniel Stocker for the many hours of proofreading.

Chapter 1: Overview

Sustainable development has been a topic since the beginning of the 18th century and was reinforced with the increasing consumption and pollution in the 20th century. Sustainable development was initially defined by Brundtland (1987): Sustainable development means development which meets the needs of the current without compromising the capability of future generations to meet their needs. The concept of sustainable development integrates the consideration of economic growth, environmental protection, and social equity, simultaneously and on a macro level (Figge & Hahn 2004), as displayed in

Abbildung in dieser Leseprobe nicht enthalten

Figure 1. The three pillars of sustainability (Hallman, 2010)

Due to the many different aspects that need to be considered, sustainability cannot be measured as easily as financial performance and it is much more complex. Several approaches have been taken to find a measure to assess a firm's sustainability performance, like the value based approach of Figge and Hahn (2004) or burden based like the approach of RobecoSAM (2013c). In all the different measures there was at least one point of convergence common to all: Sustainability is based on a triple bottom line perspective - people, planet, profit (Bader, 2008) - that considers economic, social and environmental developments.

In 2010 Accenture published the study "A New Era of Sustainability" (Lacy, Cooper, Hayward, & Neuberger, 2010) where 766 CEO's from more than 100 countries participated. Of those 93% expected that sustainability will be an important topic in future and 86% of the board of directors expected that sustainability will be a core business within 10 to 15 years. The study also indicated that the understanding and measurability of sustainability are of high importance to be able to communicate accomplishments toward investors and customers.

Today, there seems to be little motivation for companies to make decisions based on sustainable principles. For example, natural resources are consumed faster than they can rebuild due to short term and profit oriented thinking. The motivation to make decisions on sustainable principles could be increased if there are advantages for companies and managers.

This thesis complements previous empirical research on the study of sustainability and market performance (Cheung, 2011, Lo & Sheu 2007, Consolandi, Jaiswahl-Dale, Poggiani & Vercelli 2009, Robinson, Kleffner & Bertels (2011), Lourengo, Branco, Curto & Eugénio 2012, Lopez, Garcia & Rodriguez, 2007) by employing to date unused data. It addresses the problem analyzing the market and risk-adjusted performance of more and less sustainable companies.

Whether sustainability has an impact on market performance is examined using three indexes: the Dow Jones Sustainability World Index (DJSIW), the Dow Jones Global Index (DJGI) and Dow Jones Global Total Stock Market Index (DJGTSM). The analysis will be based on the market performance, the normalized market performance and the rate of return of each of the three indexes. The analysis will contain three primary components - descriptive, graphical analysis as well as analysis of variance. The DJSIW tracks the performance of the top 10% of the 2500 largest companies in the DJGTSM that lead the field in terms of sustainability (RobecoSAM, 2013b). The DJGI is a broad measure of the global stock market. It targets 95% coverage of markets open to foreign investment and tracks 47 countries (Dow Jones Global Indices, 2013). The DJGTSM represents 77 countries and covers more than 98% of the world's market capitalization (Dow Jones Total Stock Market Indices, 2013). It is expected, that the high sustainability companies - represented by the DJSIW - show a higher market performance compared to the other two indexes, because these companies better satisfy environmental, social and economic requirements.

Whether sustainability has an impact on the risk-adjusted performance is examined using the Sharpe Ratio, a ratio developed to measure risk-adjusted performance (Simai He & Zhang, 2009). With the Sharpe Ratio, it is evaluated whether a portfolio's returns are due to smart investment decisions or a result of excess risk. It is expected that the sustainable companies show a better risk-adjusted performance and, therefore, show a higher Sharpe Ratio. The Sharpe Ratio is calculated by subtracting the risk-free rate from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns (Simai He & Zhang, 2009). The Sharpe Ratio will be calculated annually for each index and will be compared against the other indexes.

1.1. Definitions

The various terms used in the study are as follows:

1. Corporate sustainability is a multi-faceted concept covering areas of environmental protection, social equity, community friendship and sustainable development in corporate governance (Lo & Sheu, 2007). It is a business approach that creates long­term shareholder value by embracing opportunities and managing risk from economic, environmental and social dimensions (Dow Jones Sustainability Indices, 2013).
2. Corporate social responsibility (CSR) was according to Lo (2007) viewed as the social responsibility of a business to increase its profits and value for its owner. In today's definition of CSR the term includes voluntary business activities, including social and environmental concerns so as to interact with stakeholders (Lo, 2007).
3. Corporate sustainability performance (CSP) measures the extent to which a firm embraces economic, environmental, social and governance factors into its operations, and ultimately the impact they exert on the firm and society (Lourengo, et al., 2012).
4. The Corporate Sustainability Assessment is a tool, based on a Total Sustainability Score, for identifying companies that are better equipped to identify and respond to emerging opportunities and risks resulting from global sustainability trends. The Total Sustainability Score at the highest aggregated level is the sum of all question scores for one company. Economic, environmental and social dimensions are considered. Once the total scores have been calculated, companies within the same industry are ranked against their peers in order to determine which companies are eligible for inclusion in the DJSI (Dow Jones Sustainability World Index Guide, 2013).
5. Sharpe Ratio (Simai He & Zhang, 2009) is a measure of efficiency, developed by Nobel laureate William F. Sharpe which measures the risk-adjusted performance. It tells whether a portfolio's returns are due to smart investment decisions or a result of excess risk. Investments are favorable, if return can be increased without increasing risk (Ross, Westerfield and Jaffe, 2002). The greater a portfolio's Sharpe Ratio, the better its risk-adjusted performance has been. The formula to calculate the Sharpe Ratio (Simai He & Zhang, 2009) is:

Abbildung in dieser Leseprobe nicht enthalten

Where X is the return and R a benchmark index (e.g. the risk-free rate) and E[X-R] the expected excess return over the benchmark.

6. Risk-free rate or risk-free rate of return (Ross, et al., 2002) is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time (Ross, et al., 2002).

1.2. Problem Statement

Although global competition is rising, technology is changing fast and the world just faced a serious economic downturn (OECD, 2013: nominal percentage change from previous year of the gross domestic product within the OECD countries between 1988 and 1998 was 8%, between 1999 and 2009 it turned down to 4.5% and between 2010 and 2013 there is 3.5%), there seems to be little reason for business leaders to deal in a sustainable way (Lacy, et al., 2010). According to Lacy, et al. (2010) the main problems that drive sustainability are lack of education, climate change, scarcity and health issues and they point out that one of the reasons for this situation is the difficulty to calculate the contribution in companies towards sustainability. As long as it is difficult to associate the market performance or investment risk in a direct relationship to sustainability, investors are supposed not to value sustainable behavior (Pava & Krausz, 1996) and unsustainable behavior like destructive pollution and wasting will continue.

1.3. Purpose

As investigated in other studies (e.g. Oekom Research AG, 2011), there are indications that the market performance of high sustainable companies may be better compared to less sustainable. Oekom Research AG (Oekom Research, 2011), a rating agency, states that "In the last three years, the Global Challenges Index (GCX) has recorded a higher overall increase in value than both the DAX and the EuroStoxx indexes" (Oekom Research, 2011, para 1). This implies the assumption that it is generally true, that more sustainable companies have a better market performance than less sustainable. If this could be confirmed on a scientific basis, it would be a strong argument for sustainability. The GCX (Global Challenges Index, 2013) focuses on companies which are actively facing up to seven global challenges for this millennium which politics, society and the economy must face up to like climate change, provision of drinking water, deforestation, biodiversity, population development, poverty, and responsible governance structures; and have made substantial, forward-looking contributions to surmounting the global challenges. The index contains 50 securities from globally active, large companies as well as small and medium-sized companies.

The purpose of this thesis is to investigate the assumption that the market performance and the risk-adjusted performance of high sustainable companies -ranked by RobecoSAM and included in the DJSIW - is higher compared to companies included in broader based indexes with more and less sustainable companies (included in DJGI or DJGTSM).

1.4. Significance of the Study

At this point a study of the relation between sustainability and market, or risk-adjusted performance, is important for three reasons:

1. According to Lacy, et al. (2010) today most corporations agree that they have to integrate the concept into their strategies and activities, regardless of whether they see it as an opportunity or a burden. They are pushed to operate in a sustainable way and contribute to the idea "while striving for economic prosperity corporate decision makers should take into account the environmental and social consequences of their business." (Figge, 2009, para 1).
2. To be able to create sustainability today and in the future, environmental, social and economic capital is needed (Figge, 2009) and should be considered within the decision making processes. The motivation for thinking and acting sustainable may be significantly increased if it can be proved that sustainability correlates with market or risk-adjusted performance. Therefore, the significance of the study is its potential to increase the knowledge and acceptance of sustainability for decision makers, due to a better understanding of the link between sustainability and financial performance.
3. Researchers have often studied the impact of sustainability to financial performance (like Margolis & Walsh, 2003), but only in very few cases (Cheung, 2011, Pava & Krausz, 1996 Margolis & Walsh, 2003, Orlitzky, 2008, Lo & Sheu, 2007, Consolandi, et al., 2009, Orlitzky, 2008, Lopez, et al., 2007, Wagner & Blom, 2011) put sustainability in relation to the market performance.

1.5. Nature of the Study

The methodology used in this study was quantitative and technical. According to Bodie and Merton (2004) markets can be analyzed by technical (focus on stock price patterns and proxies for buy or sell pressure in the market) or fundamental analysis (focus on determinants of the underlying value of the firm, such as current profitability and growth prospects).

In order to establish a wide range of basic areas of knowledge for the market performance, a descriptive quantitative analysis examined a sample of companies that have a high sustainability score and therefore were included in the DJSIW.

A quantitative research design based on literature review was chosen for two reasons:

1. A desire for a specific outcome of the research, and familiarity with other similar studies which also used the quantitative methods approach, helped to apply the quantitative method.


Excerpt out of 54 pages


Higher corporate sustainability improves the market and risk-adjusted performance of companies
Swiss Management Center University
GPA 3.7
Catalog Number
ISBN (eBook)
ISBN (Book)
GPA 3.7 =1.3 (according to the German grading system)
Nachhaltigkeit, Organisationsleistung, Sustainability, market and risk-adjusted performance
Quote paper
Peter Reber (Author), 2013, Higher corporate sustainability improves the market and risk-adjusted performance of companies, Munich, GRIN Verlag, https://www.grin.com/document/943757


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