Research shows investors don’t lose by choosing socially responsible companies

University of Queensland Business School lecturer Darren Lee has found no evidence that investing in a portfolio of socially responsible firms means lower returns for investors.

Mr Lee said corporate sustainability was synonymous with socially responsible investing (SRI) in that both strategies formally integrated economic, social, and environmental concerns into the investment decision.

His research compared firms with strong corporate social performance scores against firms that were lagging behind on this dimension.

“I analysed a best of sector (BOS) corporate sustainability strategy from 1998 to 2002 using data from the Dow Jones Sustainability World Index,” Mr Lee said.

“The index is one of the worlds best corporate sustainability indexes and is consistent with modern portfolio theory and the principles of shareholder wealth maximisation.

“Many investors believe adopting an SRI approach will mean lower returns.

“I found that returns on a portfolio of leading sustainability firms are the same as that of a portfolio of lagging sustainability firms.

“Portfolio returns are the same whether investors favoured socially responsible firms or not.

“Perhaps the most unexpected finding is that leading CSP firms are bigger in relation to the firms that haven’t embraced strong corporate sustainability principles.

“Leading CSP firms seem able to attract equity capital more easily than other firms, thereby resulting in a lower cost of capital.”

Mr Lee said his research helped to overcome the common criticisms directed at existing work in this area.

“What this research means is that investors can hold a portfolio consisting of socially responsible firms without incurring a financial cost,” he said.

“On the other hand, socially responsible firms are able to more effectively compete with their lagging counterparts by obtaining a lower cost of equity capital.”

Prior to joining UQ Business School, he worked in the areas of treasury, financial planning, and funds management.

For more information contact Cathy Stacey on (07) 3365 6179 or 0434 074 372.