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Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective

Authors


  • The authors thank the Dow Jones Sustainability Index group who provided the corporate sustainability ratings data and the Dow Jones Index Group for providing index data. They thank James Sefton and Alan Scowcroft for kindly providing the momentum factors for the DJGI large stock, country, and industry formed self-financing momentum portfolios. We also thank the Editor, Arnie Cowan, two anonymous referees for their helpful comments and Professor Phil Gray for technical assistance in a part of this study.

* Corresponding author: UQ Business School, University of Queensland, St Lucia, Queensland 4072, Australia; Phone: +61-7-3365-6743; Fax: +61-7-3365-6988; E-mail: darren.lee@business.uq.edu.au

Abstract

Does investing in sustainability leaders affect portfolio performance? Analyzing two mutually exclusive leading and lagging global corporate sustainability portfolios (Dow Jones) finds that (1) leading sustainability firms do not underperform the market portfolio, and (2) their lagging counterparts outperform the market portfolio and the leading portfolio. Notably, we find leading (lagging) corporate social performance (CSP) firms exhibit significantly lower (higher) idiosyncratic risk and that idiosyncratic risk might be priced by the broader global equity market. We develop an idiosyncratic risk factor and find that its inclusion significantly reduces the apparent difference in performance between leading and lagging CSP portfolios.

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