Corporate sustainability and asset pricing models: empirical evidence for the Brazilian stock market

Azevedo, Vitor Gonçalves de; Santos, André Alves Portela; Campos, Lucila Maria de Souza

doi:10.1590/0103-6513.201115

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Articles • Prod 26 (3) • Jul-Sep 2016 • https://doi.org/10.1590/0103-6513.201115 copy

Corporate sustainability and asset pricing models: empirical evidence for the Brazilian stock market

Authorship SCIMAGO INSTITUTIONS RANKINGS

Abstract

The paper investigates the impact of corporate sustainability on asset prices. For that purpose, we develop a novel corporate sustainability factor and test the extent to which this factor is priced in an augmented four-factor version of the traditional Fama & French (1993)Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3-56. http://dx.doi.org/10.1016/0304-405X(93)90023-5.
http://dx.doi.org/10.1016/0304-405X(93)9... asset pricing model. The corporate sustainability factor is based on a zero-investment portfolio which is long in stocks with high sustainability and short in stocks with low sustainability. We use data on the Brazilian stock market to estimate alternative model specifications with different combinations of four explanatory variables: the corporate sustainability premium, the market risk factor premium, the size factor premium and the book-to-market factor premium. Our results indicate that corporate sustainability is priced and helps to explain the variability in the cross-section of expected stock returns.

Keywords:
Corporate sustainability; ISE; Fama-French Three-factor model; CAPM; Anomalies

Indicator	Country	Stock Exchange	Spheres	Goal
Dow Jones Sustainability Index (DJSI)	U.S.	Yes	Economic Social Environmental	Provide investors further insight into the performance of corporate sustainability through a number of sustainability indices related to financial market (Searcy & Elkhawas, 2012Searcy, C., & Elkhawas, D. (2012). Corporate sustainability ratings: an investigation into how corporations use the Dow Jones Sustainability Index. Journal of Cleaner Production, 35, 79-92. http://dx.doi.org/10.1016/j.jclepro.2012.05.022. http://dx.doi.org/10.1016/j.jclepro.2012... )
FTSE Good Index	U.K.	Yes	Economic Social Environmental	Evaluate the performance of companies that meet the standards of corporate responsibility and also facilitate investment in those companies (Singh et al., 2009Singh, R. K., Murty, H. R., Gupta, S. K., & Dikshit, A. K. (2009). An overview of sustainability assessment methodologies. Ecological Indicators, 9(2), 189-212. http://dx.doi.org/10.1016/j.ecolind.2008.05.011. http://dx.doi.org/10.1016/j.ecolind.2008... )
Corporate Sustainability Index (ISE)	Brazil	Yes	Economic Social Environmental	Track the performance of leading companies in corporate sustainability listed on the BM&FBovespa
Global Reporting Initiative (GRI)	Netherlands	No	Economic Social Environmental	Promoting Sustainable Development in the business world by reconciling profitability and social-environmental responsibility (Curi, 2011Curi, D. (2011). Gestão ambiental. São Paulo: Academia Pearson.)
Ethos Indicators of Social Responsibility	Brazil	No	Social	Measure the effectiveness of corporate sustainability strategies, favoring the continuous monitoring of their progress in different areas (Curi, 2011Curi, D. (2011). Gestão ambiental. São Paulo: Academia Pearson.)

Authors	Goal	Conclusions
Andrade et al. (2013)Andrade, L. P., Bressan, A. A., Iquiapaza, R. A., & Melo Moreira, B. C. (2013). Determinantes de adesão ao índice de sustentabilidade empresarial da BM&FBOVESPA e sua relação com o valor da empresa. Revista Brasileira de Finanças, 11(2), 181-213.	Examine whether the membership of the ISE companies has a relation with the market value of companies.	Evidence of a negative relationship between companies included in ISE and the market value of them in the post-financial crisis period in 2008.
Cavalcante et al. (2009)Cavalcante, L. R. M. T., Bruni, A. L., & Costa, F. J. M. (2009). Sustentabilidade empresarial e valor das ações: uma análise na bolsa de valores de São Paulo. Revista de Gestão Social e Ambiental, 3(1), 70-86.	Compare the performance of a theoretical portfolio consisted of stocks included in the Corporate Sustainability Index (ISE) with the performance of the theoretical portfolios that comprise the Bovespa Index (Ibov) and Brazil Index (IBrX).	There is no evidence of superior performance of the ISE in the period after its creation. However, there are indications that the retroactive effect of the ISE portfolio showed better performance in the period before the creation of the index.
Consolandi et al. (2009)Consolandi, C., Jaiswal-Dale, A., Poggiani, E., & Vercelli, A. (2009). Global standards and ethical stock indexes: the case of the Dow Jones Sustainability Stoxx Index. Journal of Business Ethics, 87(1), 185-197. http://dx.doi.org/10.1007/s10551-008-9793-1. http://dx.doi.org/10.1007/s10551-008-979...	Assess whether practices of corporate social responsibility influence the performance of companies on the stock market.	The assessment of practices of CSR was an important criterion for the activities of asset allocation.
Cunha & Samanez (2013Cunha, F. A. F. S., & Samanez, C. P. (2013). Performance analysis of sustainable investments in the Brazilian stock market: a study about the corporate sustainability index (ISE). Journal of Business Ethics, 117(1), 19-36. http://dx.doi.org/10.1007/s10551-012-1484-2. http://dx.doi.org/10.1007/s10551-012-148... , 2014Cunha, F. A. F. S., & Samanez, C. P. (2014). Análise de desempenho dos investimentos sustentáveis no mercado acionário brasileiro. Production Journal, 24(2), 420-434.)	Analyze the performance of sustainable investments in the Brazilian stock market.	Although sustainable investments have interesting characteristics, such as low diversifiable risk and increasing liquidity, they did not achieve satisfactory financial performance.
Knoepfel (2001)Knoepfel, I. (2001). Dow Jones sustainability group index: a global benchmark for corporate sustainability. Corporate Environmental Strategy, 8(1), 6-15. http://dx.doi.org/10.1016/S1066-7938(00)00089-0. http://dx.doi.org/10.1016/S1066-7938(00)...	Compares the components of the Dow Jones Sustainability Group Index (DJSGI) and those of its benchmark, the Dow Jones Group Index (DJGI).	The index of companies with sustainable practices showed better average returns on equity, on investments and on assets.
López et al. (2007)López, M. V., Garcia, A., & Rodriguez, L. (2007). Sustainable development and corporate performance: a study based on the Dow Jones sustainability index. Journal of Business Ethics, 75(3), 285-300. http://dx.doi.org/10.1007/s10551-006-9253-8. http://dx.doi.org/10.1007/s10551-006-925...	Analyze whether the performance of the business was affected by the adoption of practices included under the Corporate Social Responsibility term.	Adherence to CS practices brought a negative short-term impact on performance.
Machado et al. (2009)Machado, M. R., Machado, M. A. V., & Corrar, L. J. (2009). Desempenho do índice de sustentabilidade empresarial (ISE) da Bolsa de Valores de São Paulo. Revista Universo Contábil, 5(2), 24-38. http://dx.doi.org/10.4270/ruc.2009211. http://dx.doi.org/10.4270/ruc.2009211...	Analyze whether the average profitability of the ISE was statistically different from the profitability of other indices of BM&FBovespa.	The profitability of the ISE in relation to other indices of BM&FBovespa was not statistically different.
Vital et al. (2009)Vital, J. T., Cavalcanti, M. M., Moritz, G. O., & Costa, A. M. (2009). A influência da participação no Índice de Sustentabilidade Empresarial (ISE) no desempenho financeiro das empresas. Ciencias da Administraçao, 11(24), 11-40.	Compares the financial performance of listed companies in the Top 500 of Exame Magazine; those that were part of the ISE and the ones that were not.	Companies that were not part of the ISE had better financial performance.
Xiao et al. (2013)Xiao, Y., Faff, R., Gharghori, P., & Lee, D. (2013). An empirical study of the world price of sustainability. Journal of Business Ethics, 114(2), 297-310. http://dx.doi.org/10.1007/s10551-012-1342-2. http://dx.doi.org/10.1007/s10551-012-134...	Empirically investigate whether the stock market assigns a premium for sustainability factor by including the premium in the three-factor model of Fama and French.	Sustainability does not have a significant impact on the expected return of the shares.

Premium	Monthly Mean returns	Standard Deviation	Correlation Matrix
Premium	Monthly Mean returns	Standard Deviation	SUS	(RM-RF)	SMB	HML
SUS	0.47	4.72	1.00	0.07	–0.11	–0.09
RM-RF	0.08	6.01		1.00	–0.20	–0.07
SMB	0.19	4.24			1.00	0.10
HML	–0.42	4.33				1

Model	Coef.	SL	SM	SH	ML	MM	MH	BL	BM	BH
Model 1	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
Model 1	b (t)	(8.88)^* * indicate two-tailed significance at the 5% level.	(8.93)^* * indicate two-tailed significance at the 5% level.	(8.41)^* * indicate two-tailed significance at the 5% level.	(8.22)^* * indicate two-tailed significance at the 5% level.	(11.06)^* * indicate two-tailed significance at the 5% level.	(8.69)^* * indicate two-tailed significance at the 5% level.	(14.47)^* * indicate two-tailed significance at the 5% level.	(22.85)^* * indicate two-tailed significance at the 5% level.	(8.72)^* * indicate two-tailed significance at the 5% level.
Model 2	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	b (t)	(9)^* * indicate two-tailed significance at the 5% level.	(9.1)^* * indicate two-tailed significance at the 5% level.	(8.7)^* * indicate two-tailed significance at the 5% level.	(8.38)^* * indicate two-tailed significance at the 5% level.	(11.64)^* * indicate two-tailed significance at the 5% level.	(8.64)^* * indicate two-tailed significance at the 5% level.	(14.8)^* * indicate two-tailed significance at the 5% level.	(28.34)^* * indicate two-tailed significance at the 5% level.	(9.24)^* * indicate two-tailed significance at the 5% level.
	c	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	c (t)	(–1.39)	(–1.59)	(–2.12)^* * indicate two-tailed significance at the 5% level.	(–1.55)	(–2.77)^* * indicate two-tailed significance at the 5% level.	(–0.23)	(–1.97)	(7.3)^* * indicate two-tailed significance at the 5% level.	(–2.85)^* * indicate two-tailed significance at the 5% level.
Model 3	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	b (t)	(12.09)^* * indicate two-tailed significance at the 5% level.	(15.55)^* * indicate two-tailed significance at the 5% level.	(16.22)^* * indicate two-tailed significance at the 5% level.	(13.97)^* * indicate two-tailed significance at the 5% level.	(13.44)^* * indicate two-tailed significance at the 5% level.	(12.93)^* * indicate two-tailed significance at the 5% level.	(22.31)^* * indicate two-tailed significance at the 5% level.	(23)^* * indicate two-tailed significance at the 5% level.	(11.52)^* * indicate two-tailed significance at the 5% level.
	s	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	s (t)	(6.94)^* * indicate two-tailed significance at the 5% level.	(10.8)^* * indicate two-tailed significance at the 5% level.	(12.22)^* * indicate two-tailed significance at the 5% level.	(10.34)^* * indicate two-tailed significance at the 5% level.	(5.42)^* * indicate two-tailed significance at the 5% level.	(6.01)^* * indicate two-tailed significance at the 5% level.	(1.85)	(–3.41)^* * indicate two-tailed significance at the 5% level.	(–0.85)
	h	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	h (t)	(–1.83)	(0.15)	(1.14)	(–1.43)	(–1.11)	(5.26)^* * indicate two-tailed significance at the 5% level.	(–11.82)^* * indicate two-tailed significance at the 5% level.	(1.14)	(7.97)^* * indicate two-tailed significance at the 5% level.
Model 4	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	b (t)	(12.09)^* * indicate two-tailed significance at the 5% level.	(15.79)^* * indicate two-tailed significance at the 5% level.	(16.66)^* * indicate two-tailed significance at the 5% level.	(14.09)^* * indicate two-tailed significance at the 5% level.	(14.08)^* * indicate two-tailed significance at the 5% level.	(10.99)^* * indicate two-tailed significance at the 5% level.	(14.5)^* * indicate two-tailed significance at the 5% level.	(28.85)^* * indicate two-tailed significance at the 5% level.	(8.94)^* * indicate two-tailed significance at the 5% level.
	s	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	s (t)	(6.59)^* * indicate two-tailed significance at the 5% level.	(10.79)^* * indicate two-tailed significance at the 5% level.	(12.39)^* * indicate two-tailed significance at the 5% level.	(10.07)^* * indicate two-tailed significance at the 5% level.	(5.24)^* * indicate two-tailed significance at the 5% level.	(5.65)^* * indicate two-tailed significance at the 5% level.	(0.33)	(–3.51)^* * indicate two-tailed significance at the 5% level.	(–0.39)
	c	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	c (t)	(–1.07)	(–1.4)	(–2.34)^* * indicate two-tailed significance at the 5% level.	(–1.32)	(–2.66)^* * indicate two-tailed significance at the 5% level.	(0.27)	(–1.92)	(7.4)^* * indicate two-tailed significance at the 5% level.	(–2.86)^* * indicate two-tailed significance at the 5% level.
Model 5	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	b (t)	(8.92)^* * indicate two-tailed significance at the 5% level.	(9.08)^* * indicate two-tailed significance at the 5% level.	(8.78)^* * indicate two-tailed significance at the 5% level.	(8.29)^* * indicate two-tailed significance at the 5% level.	(11.54)^* * indicate two-tailed significance at the 5% level.	(10)^* * indicate two-tailed significance at the 5% level.	(24.67)^* * indicate two-tailed significance at the 5% level.	(28.68)^* * indicate two-tailed significance at the 5% level.	(12.68)^* * indicate two-tailed significance at the 5% level.
	h	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	h (t)	(–1.12)	(0.59)	(1.19)	(–0.49)	(–0.81)	(4.86)^* * indicate two-tailed significance at the 5% level.	(–13.11)^* * indicate two-tailed significance at the 5% level.	(1.66)	(8.03)^* * indicate two-tailed significance at the 5% level.
	c	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	c (t)	(–1.48)	(–1.52)	(–2.02)^* * indicate two-tailed significance at the 5% level.	(–1.58)	(–2.83)^* * indicate two-tailed significance at the 5% level.	(0.16)	(–4.51)^* * indicate two-tailed significance at the 5% level.	(7.49)^* * indicate two-tailed significance at the 5% level.	(–3.06)^* * indicate two-tailed significance at the 5% level.
Model 6	b	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	b (t)	(12.17)^* * indicate two-tailed significance at the 5% level.	(15.68)^* * indicate two-tailed significance at the 5% level.	(16.69)^* * indicate two-tailed significance at the 5% level.	(14.11)^* * indicate two-tailed significance at the 5% level.	(14.07)^* * indicate two-tailed significance at the 5% level.	(12.85)^* * indicate two-tailed significance at the 5% level.	(24.77)^* * indicate two-tailed significance at the 5% level.	(29.47)^* * indicate two-tailed significance at the 5% level.	(12.24)^* * indicate two-tailed significance at the 5% level.
	s	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	s (t)	(6.83)^* * indicate two-tailed significance at the 5% level.	(10.69)^* * indicate two-tailed significance at the 5% level.	(12.27)^* * indicate two-tailed significance at the 5% level.	(10.24)^* * indicate two-tailed significance at the 5% level.	(5.36)^* * indicate two-tailed significance at the 5% level.	(6.04)^* * indicate two-tailed significance at the 5% level.	(1.65)	(–3.73)^* * indicate two-tailed significance at the 5% level.	(–1.16)
	h	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	h (t)	(–1.93)	(0.04)	(0.99)	(–1.55)	(–1.37)	(5.28)^* * indicate two-tailed significance at the 5% level.	(–13.34)^* * indicate two-tailed significance at the 5% level.	(2.07)^* * indicate two-tailed significance at the 5% level.	(8.11)^* * indicate two-tailed significance at the 5% level.
	c	1.00	0.96	0.85	0.65	0.81	0.73	0.93	1.11	0.77
	c (t)	(–1.24)	(–1.38)	(–2.26)^* * indicate two-tailed significance at the 5% level.	(–1.44)	(–2.77)^* * indicate two-tailed significance at the 5% level.	(0.71)	(–4.4)^* * indicate two-tailed significance at the 5% level.	(7.68)^* * indicate two-tailed significance at the 5% level.	(–3.16)^* * indicate two-tailed significance at the 5% level.

Size Tertiles	Book-to-market equity (BE/ME) tertiles
Size Tertiles	Low	2	High	Low	2	High
	R² Model 1			R² Model1 2
Small	0.48	0.48	0.45	0.49	0.49	0.48
2	0.44	0.58	0.46	0.45	0.62	0.46
Big	0.71	0.86	0.47	0.72	0.91	0.51
	R² Model 3			R² Model 4
Small	0.67	0.78	0.80	0.66	0.79	0.81
2	0.75	0.69	0.71	0.75	0.71	0.61
Big	0.89	0.88	0.69	0.72	0.92	0.51
	R² Model 5			R² Model 6
Small	0.49	0.50	0.48	0.67	0.79	0.82
2	0.45	0.62	0.58	0.76	0.72	0.71
Big	0.91	0.91	0.72	0.91	0.93	0.73

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[1] * vitor.azevedo@tum.de