Springer 2007
Journal of Business Ethics (2007) 75:285–300
DOI 10.1007/s10551-006-9253-8
Sustainable Development and Corporate
Performance: A Study Based on the
Dow Jones Sustainability Index
ABSTRACT. The goal of this paper is to examine
whether business performance is affected by the adoption
of practices included under the term Corporate Social
Responsibility (CSR). To achieve this goal, we analyse
the relation between CSR and certain accounting indicators and examine whether there exist significant differences in performance indicators between European
firms that have adopted CSR and others that have not.
The effects of compliance with the requirements of CSR
were determined on the basis of firms included in the
Dow Jones Sustainability Index (DJSI), and specific
accounting indicators were applied to measure performance. For the purposes of this study, we selected one
group of firms belonging to the DJSI and another comprised of firms quoted on the Dow Jones Global Index
López Pérez, M. Victoria received PhD in Economics and
Business and working as Assistant Professor, University of
Granada (Spain). Victoria has recently published in
Corporate Ownership & Control, Gestión. Revista de
economı́a, and Revista Española de Financiación y
Contabilidad. Victoria’s research interests are Corporate
Social Responsibility, Corporate Governance and Innovation.
Garcı́a Santana, Arminda is a Lecturer, University of Las
Palmas de Gran Canaria (Spain). Arminda has recently
published in Corporate Ownership & Control, Gestión.
Revista de economı́a, and Workshop on International
Strategy and Cross Cultural Management (EIASM),
Vienna (Austria). Arminda’s research interests are Corporate
Social Responsibility, Corporate Governance and Diversification.
Rodrı́guez Ariza, Lázaro received PhD in Economics and
Business. Lázaro is a Chair Professor and Chairman of the
Business School of Andalusia Foundation, Granada (Spain).
Lázaro has recently published in Corporate Ownership &
Control, Lectures Notes in Artificial Inteligence,
Gestión. Revista de economı́a and Revista de Contabilidad. Lázaro’s research interests are Corporate Social
Responsibility, Entrepreneurship and Innovation.
M. Victoria López
Arminda Garcia
Lazaro Rodriguez
(DJGI) but not on the DJSI. The sample was made up of
two groups of 55 firms, studied for the period 1998–2004.
Empirical analysis supports the conclusion that differences
in performance exist between firms that belong to the
DJSI and to the DJGI and that these differences are related
to CSR practices. We find that a short-term negative
impact on performance is produced.
KEY WORDS: competitive advantage, value creating,
sustainable development, performance, Dow Jones
Sustainability Index
Introduction
The search for competitive advantage is a priority for
firms that operate in a complex global environment,
to ensure the capacity to create value in the longterm. Currently, it is thought that advantages are
often linked to the adoption of socially responsible
behaviour. Interest in these issues has led to the
emergence of sustainability indexes linked to the
financial markets. Our research, therefore, is focused
on the Dow Jones Sustainability Index (DJSI).
In this study, we seek to determine whether there
are significant differences in performance between
two groups of 55 firms; those in the first group have
adopted sustainability practices, ratified by their
belonging to the DJSI, while those in the second are
not included in the DJSI because they have not
fulfilled its requirements. We used a total sample of
110 firms for the period 1998–2004 and analysed the
relevant accounting indicators. Empirical analysis
reveals differences in performance between the DJSI
firms and those firms not included in this index.
This paper is organized as follows: First, it presents
the study’s objectives. Second, it describes some
antecedents and the theoretical framework. Third,
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M. Victoria López et al.
it describes the empirical procedures used and the
research hypotheses and reports the results. Finally,
conclusions are given.
Study objectives
Organizations constantly seek elements to differentiate
them from their competitors, since such elements could
become resources that generate long-term sustainable
competitive advantages (Collin and Porras, 1994;
Gladwin et al., 1995; Makower, 1994; Scott and
Rothman, 1994). These advantages would enable
organizations to survive as well as to obtain an
acceptable profitability rate and economic equilibrium.
It is often argued that firms’ adoption of sustainability strategies should grant them competitive
advantages over firms that do not adopt them
(Adams and Zutshi, 2004, p. 34; King, 2002).
Currently, successful businesses are beginning to be
defined by their integration of concepts such as
management quality, environmental management,
brand reputation, customer loyalty, corporate ethics
and talent retention. These concepts constitute
common CSR practices. It can be said the CSR
strategies are related to sustainable development.1
Specifically, the measures derived from adopting
ethical codes, better environmental practices or human capital development – measures included in the
term CSR – are usually considered a good strategy
that should lead to better corporate management and
thus performance (Orlitzky et al., 2003, p. 405). The
information on sustainability practices that the firm
develops and discloses should facilitate the development of better systems of internal control, decision making, and cost saving (Adams, 2002). Thus,
efficient management of resources would facilitate
the development of capabilities that enable longterm sustainable competitive advantages. The perspective of sustainability provides a framework from
which we can study the practices adopted to create
value. Value creation refers both to achieving sufficient profit and to satisfying the requests of a diverse
group of stakeholders.2
Firms and investors recognise that investing in
accordance with sustainability principles has the
capacity to create long-term value (Bebbington,
2001; Sage, 1999). These principles constitute a
differentiating element in establishing investment
portfolios, as stakeholders believe accredited practices in CSR lead to good economic–financial performance for a specific firm. Currently, expectations
in the capital market are apparent as a positive differential in stock market indexes developed with
sustainability criteria in mind. Although these ideas
have taken root in the U.S., they are still quite new
in Europe.
Based on the foregoing, we sought to obtain
empirical evidence that the adoption of sustainability
practices does in fact influence accounting indicators
and not only advances this argument from a theoretical perspective. We determine the link between
performance indicators and CSR practices, in order
to analyse how these practices affect corporate performance. It is most likely that a potential correlation
can be shown in the long-term, when the policies
have been integrated into corporate management
and are capable of creating competitive advantages.
Should such a correlation not appear in the shortterm, we could deduce that the effects of sustainability practices do not translate into significant
variations in the indicators of performance, at least in
the short-term. If this correlation appears, we will
observe which sign it takes and whether it endures
over time.
If there is such a relation, we shall determine
whether there are significant differences in the
evolution of accounting indicators between firms
that adopt sustainability criteria and those that do
not, and whether these differences are preserved
over time. We test whether the adoption of sustainability practices affects the evolution of such
indicators and thus will be able to understand the
repercussions they have on corporate performance.
Measuring by means of variations in accounting
indicators enables us to determine whether the
adoption of sustainability practices causes significant
differences in the firms analysed. The factors from
which sustainability strategies are articulated could
subsequently become a source of competitive
advantages. It would be difficult to justify an assertion that CSR influences performance if differences
were not observed in significant performance
indicators.
In the short-term, adopting sustainability practices
can lead to changes in the criteria applied for the use
of existing resources. The time frame considered in
this study leads us to contrast this effect – that is,
Sustainable Development and Corporate Performance
whether changes are produced – measured by means
of their effects on indicators of performance. In the
short-term, the firm will only be able to apply
existing resources to sustainability practices, since the
time frame is insufficient for obtaining additional
financing. In long-term planning, the resources
needed to carry out CSR strategies can be predicted
and financing obtained to achieve them. If the
changes endure over time, they may create differentiating elements that become long-term competitive advantages. In the longer-term, performance is
affected by differentiation and use of new technologies, for which the firm will need to make
investments, and also gradually by changes in the
corporate culture (Gladwin et al., 1995, p. 897).
Our study focuses on European firms, where the
degree of development of sustainability strategies is
similar, i.e. it follows the same philosophy. In
Europe, sustainable development focuses on proactive policies related to the environment and human
resources. However, in the U.S., sustainability
policies focus on the control of issues like tobacco,
alcohol, gambling, environmental impact, and human rights (Social Investment Forum, 2003, p. 39).
In the U.S. there is also a tendency to direct social
activity toward investments in the local communities in which the firms develop their activity. We
wish to study this issue in European firms, where
the tradition of disclosure of information on sustainability practices is much more recent.3 There is
at present no empirical support in European
countries for determining the effect of decisionmaking in firms using sustainability criteria on
corporate performance. This means that there are
no studies in the European area that use a multidimensional construct and take into account different sectors of activity. We seek to examine the
way in which these practices affect firms in the
European area and whether they have an effect
similar to that found in the U.S. In general, the
studies performed taking sustainability as a multidimensional construct have used data from American firms (McWilliams and Siegel, 2000; Preston
and O’Bannon, 1997; Waddock and Graves, 1997).
Furthermore, until recently, there was no multidimensional measurement in Europe with widespread
support from business. We seek to study the
repercussions of a phenomenon for which there
were no commonly used indicators until the early
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2000s and also to analyse the impact of a phenomenon for the first years in which these indicators have been used.
We have chosen a series of variables to analyse the
possible variations in wealth that could occur as a
result of the adoption of sustainability practices. We
have also chosen some indicators that are frequently
used to measure performance, such as profitability
and revenue.
Antecedents
The conceptual and cultural evolution from classical
theory to the incorporation of sustainability criteria as
an element of value creation can be studied through
the different theories developed, responding to and
explaining the reality of sustainable development.
From the empirical perspective, there are antecedents
for analysing the effects of the social and environmental policies on economic–financial indicators.
From classical economic theory to sustainable development
In the last decade, society has begun to demand that
firms carry out policies that move toward sustainable
development. Sustainability philosophy assumes that
we abandon a narrow version of classical economic
theory4 and develop corporate strategies that include
goals that go beyond just maximizing shareholders’
interests. Attention is directed to the demands of a
wider group of stakeholders, since the firm’s success
depends on stakeholders’ satisfaction (Buchholz and
Rosenthal, 2005; Freeman, 1984; Hardjano and
Klein, 2004; Michael and Gross, 2004).
Companies are becoming aware that they can
contribute to sustainable development by reorienting their operations and processes. This position
assumes that the firm obtains economic results that
are sufficient to enable the business’s viability, since
the company’s first concern must be its survival.
Current opinion holds that long-term profits for
shareholders are ensured by means of corporate
management applying both economic and sustainability criteria (Michael and Gross, 2004, p. 34).
The growing complexity of economic activity,
the impact of the activity performed and market
globalisation have created certain expectations and
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M. Victoria López et al.
reactions in society, stimulating the development of
information and the incorporation of these social
factors in management (Adams and Zutshi, 2004;
Agle et al., 1999; Frooman, 1999). What at first
seemed a passing fashion is becoming a cultural
dimension of business. Changes in values and an
expanding normative framework are modifying
companies’ risk profiles, as they are being asked to
become more involved in solving environmental
and social problems. According to legitimation
theory, it is necessary to achieve society’s approval in
order for the company to survive (Campbell et al.,
2002; Deegan, 2000; Deegan and Gordon, 1996;
Deephouse, 1996; Guthrie and Parker, 1989; Patten,
1992).
Legitimacy is a status that comes from the harmony between a corporation’s value system and that
of society. The absence of such harmony may cause
the firm to disappear (Lindblom, 1994, p. 2). To
avoid this threat, organizations tend to accommodate
themselves to the cultural requirements of the
communities in which they develop their activities
(Bansal, 2002, p. 124).
It is currently accepted that indefinite, exponential and material growth is not possible but that
growth can be achieved by means of technology,
training and education and advances in society
(Dovers, 1989, p. 33). Sustainable development is
obtained through the management of environmental, natural, economic, social, cultural and political
factors. These issues are interrelated and therefore
should not be considered independently (Sage, 1999,
p. 196). They are part of the concept of CSR and
have a voluntary character. They can be grouped
into economic, social and environmental areas (the
‘‘triple bottom line’’).
The management of these factors takes concrete
form in strategies of sustainable development. It is
thought that these strategies constitute a way of
creating value (Blyth, 2005; Hart and Milstein,
2003) and of increasing a company’s worth (Frankel
et al., 1995; Lang and Lundholm, 2000; Marquardt
and Wiedman, 1998).
Sustainable development and accounting indicators
There is no single concept of sustainability; nor is
there a commonly accepted way of measuring it.
However, it is necessary to define and measure
sustainability if we wish it to become a source of
value creation. Although CSR is a multidimensional
measure, many authors use only one dimension in
their operationalizations (Baucus, 1989; Bromiley
and Marcus, 1989; Chen and Metcalf, 1980;
Davidson and Worell, 1988; Fogler and Nutt, 1975;
Hoffer et al., 1988; Reed et al., 1990). This makes it
difficult to compare the results obtained. Studies that
use multidimensional measures take into account
different issues, each of them related to a set of
different dimensions (Griffin and Mahon, 1997;
Stanwick and Stanwick, 1998; McWilliams and
Siegel, 2000; Wenzel and Thiewes, 1999).
Our study uses a multidimensional construct,
specifically the DJSI, which is based on economic,
environmental and social indicators. This index uses
issues that we consider relevant to measuring CSR
and that enjoy widespread social backing. As to the
effect that adopting these practices has on corporate
performance, it is clear that this influence is difficult
to measure and quantify in monetary terms (Adams
and Zutshi, 2004; Bernhut, 2002; Carroll, 2000;
Evans, 2003; Serageldin, 1994). Nevertheless, many
attempts have been made to analyse the link between
corporate performance and sustainability indicators.
The various studies performed report different and
even contradictory results. This is explained by the
fact that they have different objectives and follow
different methodologies (Griffin and Mahon, 1997;
Simpson and Kohers, 2002). Some are weak or
partial measures of sustainability and are based on
over-determined parameters (Carroll, 2000, p. 474).
From the perspective of corporate management, it
is crucial to clarify the link between a firm’s strategic
resources and its future results. Several studies have
examined the possible link between indicators of
performance and those of sustainability (McWilliams
and Siegel, 2000; Preston and O’Bannon, 1997;
Stanwick and Stanwick, 1998). We analyze whether
the adoption of sustainability practices influences
accounting numbers. Sustainability policies must
influence the accounting indicators if we are to be
able to speak of impact on performance, that is, if
adopting sustainability practices involves changes in
performance that can be measured by its most
significant accounting numbers. This will enable us
to know whether these practices are profitable
(Gladwin et al., 1995).
Sustainable Development and Corporate Performance
Over a longer period of time, it can be determined whether these practices have managed to
produce new strategic resources, improve the quality
of existing ones, construct others or exploit existing
resources for other uses. Thus, we will be able to
decide whether they were really a potential source of
differentiation (Markides and Williamson, 1994,
p. 150). For CSR policies to endure, they should be
strategic, be integrated into the policies and key issues of business and be present in every important
decision that the firm makes. Only thus will they
enable the management and control of inherent risks
and achieve lasting positive consequences.
A study based on the Dow Jones Sustainability Index
The interest that sustainability practices awaken in
investors as a criterion to be considered in the
configuration of their investment portfolios has led
to the emergence of indexes linked to financial
markets. Among these are the Dow Jones Sustainability Group Index, the FTSE4Good and the
Domini Social Index. These indexes have been
developed by organizations of recognised prestige
and have given credibility to the notion of investment in firms that employ corporate sustainability
criteria. The idea underlying these indexes is that
sustainability practices constitute a potential element
for long-term value creation from which shareholders will benefit. These practices help to develop
opportunities and manage economic, environmental
and social risks. Many investors consider this a crucial value for success (Cheney, 2004, p. 14; Hart and
Milstein, 2003, p. 57).
The concepts selected to measure CSR in the
DJSI are similar to those proposed by the most
frequently used CSR guides (GRI, Global Compact) and are used by a large number of European
firms to develop and disclose their sustainability
reports. The DJSI introduces a number of indicators that allow us to see what the firm is doing,
such as the evaluation of intangible assets, development of human capital, organizational issues,
strategic plans, corporate governance and investor
relations. Firms adjust their sustainability reports to
the requirements of the entity that evaluates them.
One study performed by SustAinability (2004)
shows that in the DJSI the requirements con-
289
cerning sustainability aspects are further reaching
than in other sustainability indexes.
The DJSI permits us to observe data compiled
over the last 7 years, while the other indexes used in
Europe were created more recently.5 This index is
constructed from the universe of firms present in the
DJGI.6 The DJSI includes 10% of the firms that
belong to the DJGI, conduct their activity in terms
of corporate sustainability and are leaders in their
respective activity sectors. The companies must fulfil
the criteria imposed in three areas: economic,
environmental and social. These criteria are defined
and weighted. A rating is assigned to each firm to
identify the leading firms in sustainability in each
sector. The index analyses various issues, which are
revised annually to ensure their currency and include
the best practices in corporate sustainability. These
criteria have an effect on the economic–financial
management of the firm that can be seen in its
accounting indicators.
The criteria for index development are identified
for each dimension and sector of activity of the firm.
These criteria are determined by a general procedure
applicable to all sectors and by specific criteria for
each of them.7
A priori, we can say that a differentiating element exists between the firms that belong to sustainability indexes and those that do not: the latter
do not fulfil the requirements for information
disclosure on sustainability. To belong to sustainability indexes, firms are required to develop and
disclose information that reflects the criteria
adopted in matters of sustainability; this information usually appears in their sustainability reports.
The practices that follow sustainability criteria
shape firms’ investment and financing decisions and
provide us with a good perspective for observing
corporate management. The Sustainable Asset
Management Group (SAM Group) audits and
ensures compliance.
For the firms that disclose this kind of information, transparency takes precedence over other issues. It is assumed that disclosing this information
will have generalised positive repercussions. Information disclosure could thus constitute a purposeful
action where the goal is to influence the different
participants’ conduct and to create better conditions
than those of their competitors (Dye, 1985;
Verrecchia, 1983), while also being advantageous
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M. Victoria López et al.
from the perspective of operations, finance and
reputation (Blyth, 2005, p. 29).
The disclosure of social and environmental
information becomes a significant element in management, and one that is increasingly present in
corporate strategies. Information disclosure may
enable the firm to structure the available information
so that it can be useful in decision-making.
adoption or otherwise of sustainable practices is,
thus, the difference between the two groups of firms
we examined.8 We introduced control variables for
size, sector of activity and risk to ensure the
homogeneity of the two groups analysed.
The study covers the period from 1998 to 2004.
The economic data were obtained from the database AMADEUS and the financial statements and
other corporate disclosures are available on the
Internet.
Methodology
Sample selection
Variables and statistical tools used
We compiled accounting information published by
sample firms (Gray et al., 1995, p. 83). From the
firms belonging to the DJSI, we chose those that
develop their activity in Europe, in order to obtain a
sample that was homogeneous as to tradition and
period of disclosure.
The total sample is composed of two groups of
firms and includes 110 firms of similar size and
capital structure. The first group is composed of 55
European firms that have been included in the DJSI
from the time this index was constituted. The
second group is composed of 55 European firms that
have belonged to the DJGI for the same period but
are not and have never been included in the DJSI.
The relative weight of each country is the same in
both groups. In order to use firms with similar
characteristics in size, economies of scale and markets of operation, we chose a sample that is homogeneous as regards firm size and activity sectors. The
In developing our research, we selected a series of
variables to measure a firm’s performance,9 focusing
on analysing the growth of profit before tax (PBT)
and the business evolution, measured by the growth
in revenue (REV). We also considered other variables such as assets, capital (cap), profit margin
(marg), return on earnings (roe), return on assets
(roa) and cost of capital (kmpc), that are commonly
used to measure performance (Cochran and Wood,
1984; Korac-Kakabadse et al., 2001; Simpson and
Kohers, 2002; Wenzel and Thiewes, 1999;
Wokutch and McKinney, 1991).10
In this paper, we have used accounting ratios
rather than market ratios.11 Market indicators
include the perception that the market can have of a
differentiating factor, such as the adoption of CSR
practices, but other macroeconomic factors as well,
such as speculation, may also have an influence. A
firm’s behaviour could be explained using market
TABLE I
Variable definitions for regression equations
Variable name
Dependent variable
PBT
Independent variables
REV
CSR
Control variables
SIZE
RISK
IND
Variable description
profit/loss before taxes, variation for period t with respect to baseline
revenue, variation for period t with respect to baseline
dummy variable, 0 if the firm belongs to DJGI and 1 if it belongs to DJSI
assets, variation for period t with respect to baseline
risk (debt/total assets), variation for period t with respect to baseline
activity sector, determined by 4-digit SIC
Sustainable Development and Corporate Performance
291
TABLE II
Variable definitions for non-parametric test
Variable name
assets
cap
rev
pbt
marg
roe
roa
kpmc13
Variable description
assets, variation for period t with respect to baseline
capital, variation for period t with respect to baseline
revenue, variation for period t with respect to baseline
profit before tax, variation for period t with respect to baseline
profit margin (pbt/rev), variation for period t with respect to baseline
return on earnings, variation for period t with respect to baseline
return on assets, variation for period t with respect to baseline
cost of capital, variation for period t with respect to baseline
indicators, but accounting data is considered less
noisy, since it indicates what is actually happening in
the firm. Furthermore, it would be difficult to justify
the conclusion that CSR practices influence corporate performance if there were no differences in the
most significant performance indicators.
To achieve the study’s goals, we use two different
statistical tools. First, we examine the possible link
between CSR practices and corporate performance,
measured by performance indicators, using regression analysis. Second, we consider whether there are
differences in the evolution of these performance
indicators between firms that adopt sustainability
criteria and those that do not and apply a nonparametric test to determine whether these differences endure over time.12
Tables I and II show the variables used in these
analyses.
Analysis of the relation between performance and CSR
We analyse whether there is a direct link between
performance and CSR practice. The growth of
profit before tax (PBT) is used as a measure of
corporate performance.
The model proposed includes PBT as a dependent
variable (Ho, 2005) and revenue (REV) and CSR as
independent variables. Size, risk and industry are also
included as control variables to keep these firm-related factors constant. Thus, total assets are recorded
as a measure of size (SIZE), debt to assets as one of
risk (RISK), and sectors of activity of the firm as a
measure of the industry (IND). The specific
regression model tested was:
PBT ¼ b1 þ b2 REV þ b3 CSR þ b4 SIZE
þ b5 RISK þ b6 IND þ e
The results are expected to show a significant link
for REV, since PBT depends on this variable. In
addition, we seek to analyse whether the other
variables have an explanatory value in the model.
Specifically, we shall examine whether CSR influences corporate performance. The results in the
literature are diverse, differing according to the
theories underlying them (Simpson and Kohers,
2002). In our study, the expected coefficient for
CSR is negative, since insufficient time has passed
for these measures to influence consumers’ attitudes,
and we assume that short-term cost savings are not
made.
As to size, we have taken total assets (SIZE) as the
control variable, although we do not expect this to
influence the model, since the firms constituting our
sample groups are of similar size.
The industry variable might exercise some influence (Schmalensee, 1985). However, even though
the ‘‘sector’’ factor contributes to explaining a significant part of the variability of the results, these are
more strongly affected by the specific characteristics
of the firms (Rumelt, 1991). It will thus be necessary
to analyse the results obtained for each sample.
Results obtained
In the time period in question, the adoption of
sustainability criteria can bring about changes in
governance and in production and management
systems, which may cause a redistribution of available resources (Hart and Milstein, 1999, p. 25) and
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M. Victoria López et al.
TABLE III
Regression coefficients and statistics
Independent and control variables
REV
CSR
SIZE
RISK
IND
Adjusted R Square
F-Statistic
Probability
Dependent variable PBT (99–01)
Dependent variable PBT (02–04)
0.578 (0.000)**
)0.042 (0.603)
)0.070 (0.378)
)0.093 (0.237)
)0.072 (0.369)
0.328
54.267
0.000
0.575 (0.010)**
)0.171 (0.030)**
)0.135 (0.088)*
)0.064 (0.407)
)0.045 (0.564)
0.358
21.286
0.000
** P £ 0.05
* P £ 0.10
could affect performance. In the next section, we
obtain the accounting variables for the differences
arising from the application of sustainability practices. Some of these differences are related to profitability. Let us now analyse the link between CSR
and performance, introducing control variables for
size, risk and industry.
We studied two time intervals of 3 years: 1999–
2001 (in which no differences were found in the
non-parametric test – see below); and 2002–2004
(when there were differences between the two
groups of firms). We establish the relation between
performance and CSR for PBT, the variable in
which the differences were most consistent in time.
Table III shows the results obtained for each time
interval.
For the period 1999–2001, in which no differentiation exists between firms that disclose information on sustainability practices and those that do
not, there is no relation between PBT and CSR.
For this period, the relation between CSR and
performance is negative, though the value is not
significant. As expected, there is a positive and
statistically significant relation between REV and
PBT. The relations between the other variables
considered and PBT are not significant.
For 2002–2004, the period in which there were
significant differences between the two groups in the
sample, we found a direct relation between CSR and
performance. Specifically, for the DJSI sample, there
is a negative relation between CSR and performance.
The introduction of the philosophy of sustainability
involves a cost or reallocation of resources that
negatively affects the firm’s performance. Firms that
engage in socially responsible activities provide more
informative and extensive disclosures than do those,
which are less focused on advancing social goals
(Gelb and Strawser, 2001, p. 11). This involves costs
such as training, product quality and safety (Waddock
and Graves, 1997). In the time frame considered, the
expenses can be greater than the incremental revenue
that these measures generate (Simpson and Kohers,
2002. p. 102). Another factor is that assigning resources to investments that take into account sustainability criteria depends on the availability of
surplus funds (McGuire et al., 1988; Orlitzky et al.,
2003, p. 406), or on the allocation of resources that
were destined a priori to another purpose. This may
affect PBT, since the availability of funds is limited.
Only in the long-term can the firm plan to obtain
new funds to finance practices that require larger
investments. For this period, and for the DJSI sample,
the control variables are not statistically significant;
we were unable to establish any relation between
these variables and PBT, a finding that is consistent
with other studies (Gomez and Rodriguez, 2004;
Rodriguez and Gomez, 2002).
Differences in performance indicators when sustainability
criteria are adopted
To obtain empirical evidence as to whether there are
significant differences in profitability between firms
that apply and disclose CSR practices and those that
do not, we investigated all the firms and activity
Sustainable Development and Corporate Performance
sectors as to whether significant differences occur in
the evolution of the accounting numbers. The
following hypotheses were proposed:
H1:
There are no significant differences related
to revenue trends between DJSI and DJGI
firms.
Changes in management practices should be
reflected in the profit and loss statement, produced
by increased business volume and changes in
resource allocation. The former can be measured by
changes in revenues. If the goods or services offered
by the firm possess elements that differentiate them
from those of competitors, this will produce differences in sales and turnover. Firms that develop sustainability practices usually introduce differentiating
elements into their products, processes and organization as a result of the change in values. However, the
transmission of these values to society occurs slowly.
Traditional consumers need time to change their
consumption patterns and to introduce ethical criteria
into their decisions (Alexander, 2002; Ingram et al.,
2005; Vitell and Muncy, 1992). Thus, sales may not be
affected in the short-term, despite the changes introduced by the firm. The effects of these changes might
become evident only over a period longer than that
considered here (Ogrizek, 2002). However, when the
firm receives a negative impact from its actions, the
influence on sales is usually faster. Most studies have
focused on this negative impact, on the scandals
created by firms’ actions (Zyglidopoulos, 2002), and
specifically on how they deal with the impact of
damage to their reputation and trading results, and
how companies minimise risks and combat consumer
boycotts (Adams, 2002). Some studies claim that sustainability practices favour stakeholders’ legitimation,
offering a positive image of the firm and improves its
reputation (Adams, 2002; Hedstrom et al., 1998; Fombrun and Shanley, 1990; Orlitzky et al., 2003;
Weigelt and Camerer, 1988). This may create a differentiating effect between firms that follow sustainability practices and those that do not.
H2:
There are no significant differences between
DJSI and DJGI firms concerning profitability trends
293
The adoption of sustainability criteria by DJSI firms
is thought to produce improved performance. This
increased profitability could be observed as better
exploitation of available resources, which may be
reflected as greater profit growth than that enjoyed
by firms that do not belong to the DJSI. If this occurs, it would be due to cost savings, since we believe the time frame is insufficient to produce
competitive advantages that affect sales. This could
mean that firms are able to create more value from
fewer resources (Hedstrom et al., 1998; Majumdar
and Marcus, 2001).
However, the differences between the two groups
of firms in the sample may be negative. Sustainability
practices can mean additional expenses are incurred
in research, training and risk prevention. Engaging
in sustainability-related activities may require time,
effort and investment and cause a short-term decrease in profitability.
Subsequent variations in performance ratios
would be significant in DJSI firms, reflecting a difference in the degree of exploitation of available
resources and a strengthening of their competitive
position (Kettinger et al., 1994; Preston and
O’Bannon, 1997; Waddock and Graves, 1997;
Wenzel and Thiewes, 1999). Many studies have
discussed the relation between sustainability and
profitability (e.g. Griffin and Mahon, 1997).
Analysis of the significant differences observed between the
two groups of firms
The following temporal sequence was used to study
the above hypotheses. Firstly, we checked that no
significant differences related to performance
indicators existed between the two groups of firms
before sustainability standards were applied
(1998–1999). Secondly, we tried to determine the
moment in time when the differences began.
In this phase of the study, we confirmed that the
two groups of firms analysed were similar, in terms of
the above-described performance indicators, at the
time CSR practices began to be applied in one of the
groups. Panel A in Table IV shows that there were no
statistically significant differences (at P £ 0.05) between DJGI and DJSI during the period 1998–1999
for any of the accounting variables used in this study.
By accepting the null hypothesis, it follows that
we began with two similar sets of firms, which
presented comparable accounting characteristics
M. Victoria López et al.
294
TABLE IV
Panel A: Variations produced in the period considered (probability and statistics)
Variables
var_asset
Mann–Whitney
Z
Probability
var_cap
Mann–Whitney
Z
Probability
var_rev
Mann–Whitney
Z
Probability
var_pbt
Mann–Whitney
Z
Probability
var_marg
Mann–Whitney
Z
Probability
var_roa
Mann–Whitney
Z
Probability
var_roe
Mann–Whitney
Z
Probability
var_kmpc
Mann–Whitney
Z
Probability
1998–1999
1998–2000
1998–2001
1998–2002
1998–2003
U
1281.00
)1.384
(0.166)
275.00
)1.153
(0.249)
1445.00
)0.404
(0.687)
1445.00
)0.404
(0.687)
1302.00
)1.25
(0.208)
1263.00
)1.492
0.136)
U
1397.50
)0.692
(0.489)
300.00
)0.700
(0.484)
1351.50
)0.963
(0.336)
1241.00
)1.623
(0.105)
1497.00
)0.093
(0.926)
1453.00
)0.356
(0.722)
U
1392.00
)0.720
(0.471)
328.00
)0.183
(0.855)
1250.00
)1.569
(0.117)
1347.00
)0.989
(0.322)
1386.00
)0.756
(0.450)
1372.00
)0.840
(0.401)
U
1497.00
)0.093
(0.926)
317.00
)0.384
(0.701)
1192.00
)1.916
(0.055)*
1170.00
)2.048
(0.041) **
1122.00
)2.334
(0.020)**
1127.00
)2.305
(0.021)**
U
1460.00
)0.314
(0.754)
320.00
)0.329
(0.742)
1242.00
)1.617
(0.106)
1192.00
)1.916
(0.027)**
1198.00
)1.880
(0.060)*
1199.00
)1.874
(0.061)*
U
1414.00
)0.589
(0.556)
322.00
)0.293
(0.770)
1263.00
)1.492
(0.136)
1242.00
-1.617
(0.013)**
1132.00
)2.275
(0.023)**
1212.00
)1.796
(0.072)*
U
1357.00
)0.930
(0.353)
313.00
)0.458
(0.647)
1213.00
-1.790
(0.073)*
1156.00
)2.131
(0.033)**
1158.00
)2.119
(0.034)**
1191.00
)1.922
(0.055)*
U
1475.00
)0.224
(0.823)
1108.00
)2.418
(0.016)**
1481.00
)0.188
(0.851)
1503.00
)0.057
(0.955)
1213.00
)1.790
(0.073)*
1281.00
)1.384
(0.166)
Panel B: Summary of the results obtained in non-parametric testing
Periods analysed
1998–1999
1998–2000
1998–2001
1998–2002
1998–2003
1998–2004
Significant differences (at P £ 0.05)
pbt; marg; roa; roe
pbt; roa; roe
pbt
Associate variable: sustain_dp
** P £ 0.05
* P £ 0.10
No significant differences
All variables analysed
All variables analysed
All variables analysed
asset; cap; rev; kmpc
asset; cap; rev; marg; kmpc
asset; cap; rev; marg; roa; roe; kmpc
1998–2004
Sustainable Development and Corporate Performance
with respect to the variables considered. This leads
us to inquire whether the application of sustainability
practices by the DJSI firms leads to long-term differentiation, which could provide them with competitive advantages vis à vis the DJGI firms.
We repeated the analysis for the periods 1998–
2000, 1998–2001, 1998–2002, 1998–2003 and
1998–2004. A summary of the results obtained is
given in Panel B of Table IV. We performed the
analysis both for the group as a whole and after
grouping the firms by sectors, and we arrived at the
same conclusions. The firms formed part of the same
universe until 2002 (at P £ 0.05), which is when
differences began to appear. These differences,
measured by means of performance indicators,
continue for the periods 1998–2003 and 1998–2004.
The principal differences occur in the profit
and in the profitability indicators. As there are no
differences in revenues, the differences must be
produced by the costs; thus, resources are being
exploited in different ways.
It is apparent that the 110 firms analysed were
similar, in terms of the performance indicators
examined, until the year 2002, when we begin to
see significant differences between the variables
related to profitability, margins, return on assets
and return on equity. After 2001, the policy of
creating long-term value through the development
of sustainable strategies began to have positive
effects in Europe.
During the 7 years covered by the present study,
the only significant changes observed were in profitability and in profit indicators such as margins and
return on assets and equity. Since there are no significant differences in the variation of revenues, we
conclude that the differences in performance are due
to changes in costs. Over a longer period of time,
other, more structural factors (such as volume of
assets and capital) could influence value creation, as
might other factors that require more time to develop, such as the creation of a characteristic firm
culture or the development of new organizational
processes. Furthermore, there might be other
changes, such as the development of new products,
the differentiation of current ones, the development
of technology and the diversification of activities.
Sustainability strategies take specific forms in these
factors, such that each choice could produce an
effect on other economic–financial indicators.
295
By 2004, the differences corresponding to the
magnitudes related to income and profitability had
become less significant. This could be attributed to
the fact that the standards applied by DJSI firms have
now been incorporated by those in the DJGI, which
reduces the advantages obtained by the former
(Adams and Zutshi, 2004; Bansal, 2002, p. 126;
Bond, 2005; Burgess, 2003; Ogrizek, 2002),
although regression analysis shows that the effect of
CSR practices was negative in the short-term. It
seems that the differentiation is not consistent and
does not increase over time. The reduced differences
could also derive from the fact that when these
practices were first applied, the effect on performance
was negative. The firms in question would have acted
to reverse these negative effects.
Even if the effects of these differences were
positive, they could have been weakened, due to the
fact that CSR strategies are easily imitable or perhaps
because the customer focus is transient.14 Greater
normative pressure drives companies to adopt these
practices, which could cause a reduction in the differences between the two groups analysed. Although
the firms were differentiated initially, this differentiation did not persist in the last period analysed,
probably because the competitors imitated the
competitive advantage. This study shows that the
differences mentioned only occur during a specific
period in time and later become less significant.
We found no differences between the DJSI and
the DJGI firms as to variations in total assets, capital
or revenues. Decisions concerning investment and
financing are not linked to the sustainability practices
required by the DJSI, at least for the period considered. We also calculated the cost of capital in
order to determine whether greater transparency
translates into a reduction in the cost of capital.
Previous studies have shown that disclosure can have
effects on the cost of capital (Fishman and Hagerty,
1989; Dye, 1985; Gelb and Strawser, 2001;
Sengupta, 1998; Simpson and Kohers, 2002, p. 103;
Verrecchia, 1983). However, we only found differences in the cost of capital between the two
groups of firms studied in one year (at P £ 0.05).
There was no apparent regularity in this result and
we believe the difference to have been coincidental.
In our opinion, although investment policies may
differ in their objectives and strategies, their effects
are not significantly different in relation to total
296
M. Victoria López et al.
capital and assets in the period considered. A longer
time period would mean the creation of a new firm
culture and the development of technologies that
might lead the firm to search for new resources.
Conclusions
Both firms and investors believe that strategies that
take sustainability criteria into account have the
capacity to create long-term value. Such actions
have awakened investors’ interest and have led to the
appearance of sustainability-related indexes linked to
financial markets. These indexes enable us to analyse whether there exist significant differences in
performance between DJSI and DJGI firms.
We selected a group of DJSI and DJGI firms
whose performance-indicator results were similar
prior to the creation of the DJSI index. Three years
after one group of firms had applied the sustainability
strategies required by the DJSI, we confirm that
differences exist in various profitability measures
obtained by DJSI firms with respect to DJGI ones.
The elements immediately affected by the adoption of these strategies are related to operating
activity and are included in the magnitudes that
compose or are derived from the firm’s profit.
The income results reflect the different degrees of
exploitation of resources by the two groups of firms.
Decisions on investments and financing are not
linked to the sustainability policies reflected in the
DJSI, at least for the time period and sample
considered. Nor did we find significant differences
between the two groups with respect to the cost of
capital.
We analyzed the link between the performance
indicators and CSR, and found that the link between these variables is negative, which leads us to
affirm that the effect of sustainability practices on
performance indicators is negative during the first
years in which they are applied. In the context of the
time frame considered in this study, we confirm that
differentiation in the exploitation of resources exists
and that it is negative. At first, the firms did not
make budget provisions for new assets for sustainability practices. A longer-term view is necessary for
new policies, i.e. sustainability criteria, to be reflected in the budgets. Firms must use their current
resources, which may involve a different allocation
of resources or increased expenses such as those for
training, safety, pollution prevention, non-polluting
technologies and recycling. The management may
need to look past these short-term effects in order to
lead the corporation forward.
In this paper, we see that the above-mentioned
differences only occur during a specific period and
are not robust over time. In the time frame
considered, we did not find grounds for claiming
that the adoption of sustainability practices will
have positive repercussions on performance
indicators.
The expenses that firms incur as a result of their
socially responsible actions can place them at an
economic disadvantage with respect to other, less
responsible firms, at least in the short-term. However, it seems that the negative impact on performance, as measured by the variation in performance
indicators, is self-correcting, since the differences
diminish over time, as shown in the results of the
non-parametric test. It will be necessary to examine
a longer time frame to see whether these practices
acquire continuity and begin to influence corporate
performance positively. The above-mentioned
negative short-term effects may inhibit others from
adopting CSR practices. We believe the government could play a very important role in promoting
sustainability practices, by legislation or by financial
incentives.
Finally, we must take into account social demands
on firms with respect to their actions and practices in
matters of sustainability. The cultural changes that
are taking place in this respect do not seem to be
going away. In society, changes in values are
increasing the normative demands related to CSR.
This means another way must be sought of understanding the goals of business and that the objectives
they pursue must be reformulated. Only if CSR
practices are integrated into the strategic decisions
taken in business will positive consequences be
achieved. This kind of change in corporate philosophy will have fundamentally qualitative repercussions, for example in reducing environmental
impact, increasing employee satisfaction, retaining
talent, enhancing the company’s reputation and
playing a full, positive role in the local community.
Such social and corporate changes, however, will
not always have a quantitative effect on economic–
financial indicators.
Sustainable Development and Corporate Performance
The present paper only provides a start, and further research into the issue is required. Showing that
CSR is associated with performance should subsequently lead us to search for a way to measure its
effect on corporate performance and on stakeholders’
satisfaction.
Notes
1
Sustainability development can be defined as
‘development that meets the needs of the present without compromising the ability of future generations to
meet their own needs’ (WCED, 1987, p. 8).
2
Under value creation, we consider issues such as pollution control, transparency, business responsibility, the
incorporation of new technologies, and employee and
customer satisfaction (Hart and Milstein, 2003, p. 59).
3
The financial tradition in the U.S. is different from
Europe. Generally, the European tradition can be defined as a bank-based financial system and that of the
U.S. as a market-based financial system. Furthermore,
the legal systems are defined as civil law and common
law, respectively (Nobes, 1994, p. 3). European firms
do not usually adopt a practice until they are legally
required to do so, and the influence of the Stock
Exchange is not strong. American firms, in contrast, are
encouraged to adopt sustainable standards as a demand
of the market-based financial system. The American
indexes were created in the early 90s and began to
influence management then. In contrast, the European
indexes began in the late 90s. Most European firms
begin to disclose sustainability information in the early
2000s. On the other hand, the DJSI follows different
selection criteria for American and European firms. It
distinguishes between American firms, European firms
and those in emergent countries.
4
This theory indicates that companies should only
respond to shareholders’ interests, their only social
responsibility being the maximization of company
value. From this perspective, any positive social act
undertaken by the firm is associated with costs that
would reduce profit and prejudice shareholders. It
would not, therefore, be opportune (Friedman, 1970).
5
Although the firms making up DJSI Stoxx are
European, this index began to be developed in 2001
and thus would not be useful for the purposes of this
study. The FTSE4GOOD database was established in
2002. The Domini Social Index was created in 1990
and is a benchmark for sustainability investment in
American firms. We used the DJSI, which is an index
297
composed of firms in the global arena, since its starting
date is earlier than that of the other indexes developed
in the European area (1999). We chose the European
firms where we wished to focus our study from the
total number of firms belonging to the DJSI.
6
DJGI covers 95% of free-float market cap at the
country level and includes large-cap, mid-cap and
small-cap sub-indexes for American firms. For developed European and emerging markets, the selection
methodology creates indexes that represent 95% of freefloat market cap at the aggregate level. The DJSI is
made up of firms that are leaders in sustainability practices and are the top 10% of the firms in the DJGI.
Firms in the DJSI are required to fulfil sustainability
requirements. The firms that belong to the DJSI are
audited by the Sustainable Asset Management Group,
which monitors DJSI firms to ensure they observe
economic, environmental and social criteria (the ‘‘triple
bottom line’’).
7
The criteria considered in each of the dimensions
can be consulted in the guidelines corresponding to
the indexes considered at www.sustainability-indexes.
com.
8
Although the possible differences cannot be associated exclusively with sustainability practices, if there
were no differences between the two samples, we could
affirm that the adoption of these practices would not
have a differentiating effect, at least on the variables
analysed during the period studied.
9
We use variations in the indicators because we
wish to contrast whether the adoption of sustainability
practices affects performance. Furthermore, by studying
the variations in the indicators considered, we can show
the possible significantly different changes in strategy
that might occur, i.e. the possible changes in strategy
that might be apparent through the existence of significant variations in performance indicators. The sample is
made up of firms that follow different accounting rules,
since the application of the Fourth Directive related to
Annual Accounts of Companies with Limited Liabilities
has led to very different accounting criteria in different
European countries. This prevents us from comparing
the data in absolute terms. By studying the variations in
the indicators we can identify the relative changes in
the variables and compare them, thus avoiding problems
that could arise if we took the variables in absolute
terms.
10
Griffin and Mahon (1997) provide a review of
financial indicators used in previous studies.
11
By this, we refer to ratios often used by analysts,
such as market to book, payout and price to earnings
ratio (PER).
298
M. Victoria López et al.
12
Since we cannot assume that the distribution of
economic–financial data will fit a normal distribution,
we use a non-parametric procedure, specifically the
Mann–Whitney U-test for two independent samples, as
an analytical tool. This can be used when we have
two independent samples and enables us to determine
whether the distributions have the same form and
dispersion, that is, whether they belong to the same
universe.
13
kmpc = rd*D/V + rsse*E/V, where rd is the
Financial expenses/Liabilities; D, the Liabilities; V, the
Total Assets; re, the return on shareholders’s funds; E,
Shareholdrres’ funds.
14
States of opinion are generated (Bendell and
Kearins, 2004, p. C3) that drive other firms to adopt
this type of strategy, whether by imitation or from the
firm’s own demands on other parts of the chain of suppliers and customers (Adams and Zutshi, 2004; Bond,
2005; Burgess, 2003; Ogrizek, 2002).
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M. Victoria López, Arminda Garcia
and Lazaro Rodriguez
Department of Financial Economy and Accounting,
University of Granada,
Campus de la Cartuja s/n.,
Granada, 18071, Spain
E-mail: [email protected]
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.