The financial performance and risk profile of sustainable firms

Matthijs van Geffen

Student thesis: Master thesis

Abstract

Through investigating the financial performance and risk profile of socially performing firms, this thesis attempts to shed light on the prime question why companies and investors commit resources to sustainability efforts. One of the most commonly argued drivers behind the increasing force of socially responsible investing is that the benefits outweigh the costs. In other words, “doing well while doing good”. To arrive at a complete view, not only de facto financial performance is researched, also the risk profile of ethical companies is investigated. The latter is done as academics theorize that the risk exposure of socially responsible investors is different from conventional investors. Simultaneously it is commonly said that the altruistic firm is able to mitigate certain risks, however little light on this matter is shed. Investigating a sample of 85 socially performing firms over a 10-year time period, ranging from January 2001 to December 2010, the overall conclusion of this thesis is that no robust argument can be made with respect to the financial performance of socially performing companies. In other words, no solid evidence is found for either consistent under- or superior performance for this type of firm. On the other hand, the results presented in this thesis show that ethical firms are able to mitigate risk. When decomposing financial performance by accounting- and market performance, the results are mixed. Whereas it appears that socially responsible firms perform significantly better than conventional firms based on accounting measures, no such thing can be said with respect to market measures. Although theoretically a high correlation between the two is expected, the results show otherwise. A plausible explanation for this is that the increased demand for sustainable firms—with enhanced bottom lines and reduced performance volatility—cause their prices to increase and marginal returns to decrease accordingly. Furthermore, when risk is broken down in overall performance variability, proneness to market risk and firm-specific risk, the results presented in this thesis suggest that sustainable firms are able to mitigate the first and the latter type. This implies that socially performing firms are able to mitigate risks by taking good care of their labour force, the local communities in which they operate, considering the environment and working pro-actively with regulatory institutions. The findings in this thesis imply that corporate social responsibility is beneficial from a risk management perspective. The more stable financial returns of altruistic firms allow companies and investors alike enhanced financial planning and forecasting. This in turn could lead to more efficient allocation of capital from which additional benefits are be achieved.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2012
Number of pages97