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Journal of Business Ethics (2007) 75:285–300  Springer 2007

DOI 10.1007/s10551-006-9253-8

Sustainable Development and Corporate

M. Victoria López
Performance: A Study Based on the Arminda Garcia
Dow Jones Sustainability Index Lazaro Rodriguez

ABSTRACT. The goal of this paper is to examine (DJGI) but not on the DJSI. The sample was made up of
whether business performance is affected by the adoption two groups of 55 firms, studied for the period 1998–2004.
of practices included under the term Corporate Social Empirical analysis supports the conclusion that differences
Responsibility (CSR). To achieve this goal, we analyse in performance exist between firms that belong to the
the relation between CSR and certain accounting indi- DJSI and to the DJGI and that these differences are related
cators and examine whether there exist significant dif- to CSR practices. We find that a short-term negative
ferences in performance indicators between European impact on performance is produced.
firms that have adopted CSR and others that have not.
The effects of compliance with the requirements of CSR KEY WORDS: competitive advantage, value creating,
were determined on the basis of firms included in the sustainable development, performance, Dow Jones
Dow Jones Sustainability Index (DJSI), and specific Sustainability Index
accounting indicators were applied to measure perfor-
mance. For the purposes of this study, we selected one
group of firms belonging to the DJSI and another com- Introduction
prised of firms quoted on the Dow Jones Global Index
The search for competitive advantage is a priority for
firms that operate in a complex global environment,
López Pérez, M. Victoria received PhD in Economics and to ensure the capacity to create value in the long-
Business and working as Assistant Professor, University of term. Currently, it is thought that advantages are
Granada (Spain). Victoria has recently published in often linked to the adoption of socially responsible
Corporate Ownership & Control, Gestión. Revista de
behaviour. Interest in these issues has led to the
economı́a, and Revista Española de Financiación y
emergence of sustainability indexes linked to the
Contabilidad. Victoria’s research interests are Corporate
Social Responsibility, Corporate Governance and Innovation. financial markets. Our research, therefore, is focused
Garcı́a Santana, Arminda is a Lecturer, University of Las on the Dow Jones Sustainability Index (DJSI).
Palmas de Gran Canaria (Spain). Arminda has recently In this study, we seek to determine whether there
published in Corporate Ownership & Control, Gestión. are significant differences in performance between
Revista de economı́a, and Workshop on International two groups of 55 firms; those in the first group have
Strategy and Cross Cultural Management (EIASM), adopted sustainability practices, ratified by their
Vienna (Austria). Arminda’s research interests are Corporate belonging to the DJSI, while those in the second are
Social Responsibility, Corporate Governance and Diversifi- not included in the DJSI because they have not
cation. fulfilled its requirements. We used a total sample of
Rodrı́guez Ariza, Lázaro received PhD in Economics and 110 firms for the period 1998–2004 and analysed the
Business. Lázaro is a Chair Professor and Chairman of the
relevant accounting indicators. Empirical analysis
Business School of Andalusia Foundation, Granada (Spain).
reveals differences in performance between the DJSI
Lázaro has recently published in Corporate Ownership &
Control, Lectures Notes in Artificial Inteligence, firms and those firms not included in this index.
Gestión. Revista de economı́a and Revista de Con- This paper is organized as follows: First, it presents
tabilidad. Lázaro’s research interests are Corporate Social the study’s objectives. Second, it describes some
Responsibility, Entrepreneurship and Innovation. antecedents and the theoretical framework. Third,
286 M. Victoria López et al.

it describes the empirical procedures used and the portfolios, as stakeholders believe accredited prac-
research hypotheses and reports the results. Finally, tices in CSR lead to good economic–financial per-
conclusions are given. formance for a specific firm. Currently, expectations
in the capital market are apparent as a positive dif-
ferential in stock market indexes developed with
Study objectives sustainability criteria in mind. Although these ideas
have taken root in the U.S., they are still quite new
Organizations constantly seek elements to differentiate in Europe.
them from their competitors, since such elements could Based on the foregoing, we sought to obtain
become resources that generate long-term sustainable empirical evidence that the adoption of sustainability
competitive advantages (Collin and Porras, 1994; practices does in fact influence accounting indicators
Gladwin et al., 1995; Makower, 1994; Scott and and not only advances this argument from a theo-
Rothman, 1994). These advantages would enable retical perspective. We determine the link between
organizations to survive as well as to obtain an performance indicators and CSR practices, in order
acceptable profitability rate and economic equilibrium. to analyse how these practices affect corporate per-
It is often argued that firms’ adoption of sustain- formance. It is most likely that a potential correlation
ability strategies should grant them competitive can be shown in the long-term, when the policies
advantages over firms that do not adopt them have been integrated into corporate management
(Adams and Zutshi, 2004, p. 34; King, 2002). and are capable of creating competitive advantages.
Currently, successful businesses are beginning to be Should such a correlation not appear in the short-
defined by their integration of concepts such as term, we could deduce that the effects of sustain-
management quality, environmental management, ability practices do not translate into significant
brand reputation, customer loyalty, corporate ethics variations in the indicators of performance, at least in
and talent retention. These concepts constitute the short-term. If this correlation appears, we will
common CSR practices. It can be said the CSR observe which sign it takes and whether it endures
strategies are related to sustainable development.1 over time.
Specifically, the measures derived from adopting If there is such a relation, we shall determine
ethical codes, better environmental practices or hu- whether there are significant differences in the
man capital development – measures included in the evolution of accounting indicators between firms
term CSR – are usually considered a good strategy that adopt sustainability criteria and those that do
that should lead to better corporate management and not, and whether these differences are preserved
thus performance (Orlitzky et al., 2003, p. 405). The over time. We test whether the adoption of sus-
information on sustainability practices that the firm tainability practices affects the evolution of such
develops and discloses should facilitate the devel- indicators and thus will be able to understand the
opment of better systems of internal control, deci- repercussions they have on corporate performance.
sion making, and cost saving (Adams, 2002). Thus, Measuring by means of variations in accounting
efficient management of resources would facilitate indicators enables us to determine whether the
the development of capabilities that enable long- adoption of sustainability practices causes significant
term sustainable competitive advantages. The per- differences in the firms analysed. The factors from
spective of sustainability provides a framework from which sustainability strategies are articulated could
which we can study the practices adopted to create subsequently become a source of competitive
value. Value creation refers both to achieving suffi- advantages. It would be difficult to justify an asser-
cient profit and to satisfying the requests of a diverse tion that CSR influences performance if differences
group of stakeholders.2 were not observed in significant performance
Firms and investors recognise that investing in indicators.
accordance with sustainability principles has the In the short-term, adopting sustainability practices
capacity to create long-term value (Bebbington, can lead to changes in the criteria applied for the use
2001; Sage, 1999). These principles constitute a of existing resources. The time frame considered in
differentiating element in establishing investment this study leads us to contrast this effect – that is,
Sustainable Development and Corporate Performance 287

whether changes are produced – measured by means 2000s and also to analyse the impact of a phe-
of their effects on indicators of performance. In the nomenon for the first years in which these indica-
short-term, the firm will only be able to apply tors have been used.
existing resources to sustainability practices, since the We have chosen a series of variables to analyse the
time frame is insufficient for obtaining additional possible variations in wealth that could occur as a
financing. In long-term planning, the resources result of the adoption of sustainability practices. We
needed to carry out CSR strategies can be predicted have also chosen some indicators that are frequently
and financing obtained to achieve them. If the used to measure performance, such as profitability
changes endure over time, they may create differ- and revenue.
entiating elements that become long-term compet-
itive advantages. In the longer-term, performance is
affected by differentiation and use of new technol- Antecedents
ogies, for which the firm will need to make
investments, and also gradually by changes in the The conceptual and cultural evolution from classical
corporate culture (Gladwin et al., 1995, p. 897). theory to the incorporation of sustainability criteria as
Our study focuses on European firms, where the an element of value creation can be studied through
degree of development of sustainability strategies is the different theories developed, responding to and
similar, i.e. it follows the same philosophy. In explaining the reality of sustainable development.
Europe, sustainable development focuses on proac- From the empirical perspective, there are antecedents
tive policies related to the environment and human for analysing the effects of the social and environ-
resources. However, in the U.S., sustainability mental policies on economic–financial indicators.
policies focus on the control of issues like tobacco,
alcohol, gambling, environmental impact, and hu-
man rights (Social Investment Forum, 2003, p. 39). From classical economic theory to sustainable development
In the U.S. there is also a tendency to direct social
activity toward investments in the local communi- In the last decade, society has begun to demand that
ties in which the firms develop their activity. We firms carry out policies that move toward sustainable
wish to study this issue in European firms, where development. Sustainability philosophy assumes that
the tradition of disclosure of information on sus- we abandon a narrow version of classical economic
tainability practices is much more recent.3 There is theory4 and develop corporate strategies that include
at present no empirical support in European goals that go beyond just maximizing shareholders’
countries for determining the effect of decision- interests. Attention is directed to the demands of a
making in firms using sustainability criteria on wider group of stakeholders, since the firm’s success
corporate performance. This means that there are depends on stakeholders’ satisfaction (Buchholz and
no studies in the European area that use a multi- Rosenthal, 2005; Freeman, 1984; Hardjano and
dimensional construct and take into account dif- Klein, 2004; Michael and Gross, 2004).
ferent sectors of activity. We seek to examine the Companies are becoming aware that they can
way in which these practices affect firms in the contribute to sustainable development by reorient-
European area and whether they have an effect ing their operations and processes. This position
similar to that found in the U.S. In general, the assumes that the firm obtains economic results that
studies performed taking sustainability as a multi- are sufficient to enable the business’s viability, since
dimensional construct have used data from Ameri- the company’s first concern must be its survival.
can firms (McWilliams and Siegel, 2000; Preston Current opinion holds that long-term profits for
and O’Bannon, 1997; Waddock and Graves, 1997). shareholders are ensured by means of corporate
Furthermore, until recently, there was no multidi- management applying both economic and sustain-
mensional measurement in Europe with widespread ability criteria (Michael and Gross, 2004, p. 34).
support from business. We seek to study the The growing complexity of economic activity,
repercussions of a phenomenon for which there the impact of the activity performed and market
were no commonly used indicators until the early globalisation have created certain expectations and
288 M. Victoria López et al.

reactions in society, stimulating the development of However, it is necessary to define and measure
information and the incorporation of these social sustainability if we wish it to become a source of
factors in management (Adams and Zutshi, 2004; value creation. Although CSR is a multidimensional
Agle et al., 1999; Frooman, 1999). What at first measure, many authors use only one dimension in
seemed a passing fashion is becoming a cultural their operationalizations (Baucus, 1989; Bromiley
dimension of business. Changes in values and an and Marcus, 1989; Chen and Metcalf, 1980;
expanding normative framework are modifying Davidson and Worell, 1988; Fogler and Nutt, 1975;
companies’ risk profiles, as they are being asked to Hoffer et al., 1988; Reed et al., 1990). This makes it
become more involved in solving environmental difficult to compare the results obtained. Studies that
and social problems. According to legitimation use multidimensional measures take into account
theory, it is necessary to achieve society’s approval in different issues, each of them related to a set of
order for the company to survive (Campbell et al., different dimensions (Griffin and Mahon, 1997;
2002; Deegan, 2000; Deegan and Gordon, 1996; Stanwick and Stanwick, 1998; McWilliams and
Deephouse, 1996; Guthrie and Parker, 1989; Patten, Siegel, 2000; Wenzel and Thiewes, 1999).
1992). Our study uses a multidimensional construct,
Legitimacy is a status that comes from the har- specifically the DJSI, which is based on economic,
mony between a corporation’s value system and that environmental and social indicators. This index uses
of society. The absence of such harmony may cause issues that we consider relevant to measuring CSR
the firm to disappear (Lindblom, 1994, p. 2). To and that enjoy widespread social backing. As to the
avoid this threat, organizations tend to accommodate effect that adopting these practices has on corporate
themselves to the cultural requirements of the performance, it is clear that this influence is difficult
communities in which they develop their activities to measure and quantify in monetary terms (Adams
(Bansal, 2002, p. 124). and Zutshi, 2004; Bernhut, 2002; Carroll, 2000;
It is currently accepted that indefinite, exponen- Evans, 2003; Serageldin, 1994). Nevertheless, many
tial and material growth is not possible but that attempts have been made to analyse the link between
growth can be achieved by means of technology, corporate performance and sustainability indicators.
training and education and advances in society The various studies performed report different and
(Dovers, 1989, p. 33). Sustainable development is even contradictory results. This is explained by the
obtained through the management of environmen- fact that they have different objectives and follow
tal, natural, economic, social, cultural and political different methodologies (Griffin and Mahon, 1997;
factors. These issues are interrelated and therefore Simpson and Kohers, 2002). Some are weak or
should not be considered independently (Sage, 1999, partial measures of sustainability and are based on
p. 196). They are part of the concept of CSR and over-determined parameters (Carroll, 2000, p. 474).
have a voluntary character. They can be grouped From the perspective of corporate management, it
into economic, social and environmental areas (the is crucial to clarify the link between a firm’s strategic
‘‘triple bottom line’’). resources and its future results. Several studies have
The management of these factors takes concrete examined the possible link between indicators of
form in strategies of sustainable development. It is performance and those of sustainability (McWilliams
thought that these strategies constitute a way of and Siegel, 2000; Preston and O’Bannon, 1997;
creating value (Blyth, 2005; Hart and Milstein, Stanwick and Stanwick, 1998). We analyze whether
2003) and of increasing a company’s worth (Frankel the adoption of sustainability practices influences
et al., 1995; Lang and Lundholm, 2000; Marquardt accounting numbers. Sustainability policies must
and Wiedman, 1998). 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
Sustainable development and accounting indicators performance that can be measured by its most
significant accounting numbers. This will enable us
There is no single concept of sustainability; nor is to know whether these practices are profitable
there a commonly accepted way of measuring it. (Gladwin et al., 1995).
Sustainable Development and Corporate Performance 289

Over a longer period of time, it can be deter- cerning sustainability aspects are further reaching
mined whether these practices have managed to than in other sustainability indexes.
produce new strategic resources, improve the quality The DJSI permits us to observe data compiled
of existing ones, construct others or exploit existing over the last 7 years, while the other indexes used in
resources for other uses. Thus, we will be able to Europe were created more recently.5 This index is
decide whether they were really a potential source of constructed from the universe of firms present in the
differentiation (Markides and Williamson, 1994, DJGI.6 The DJSI includes 10% of the firms that
p. 150). For CSR policies to endure, they should be belong to the DJGI, conduct their activity in terms
strategic, be integrated into the policies and key is- of corporate sustainability and are leaders in their
sues of business and be present in every important respective activity sectors. The companies must fulfil
decision that the firm makes. Only thus will they the criteria imposed in three areas: economic,
enable the management and control of inherent risks environmental and social. These criteria are defined
and achieve lasting positive consequences. 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
A study based on the Dow Jones Sustainability Index revised annually to ensure their currency and include
the best practices in corporate sustainability. These
The interest that sustainability practices awaken in criteria have an effect on the economic–financial
investors as a criterion to be considered in the management of the firm that can be seen in its
configuration of their investment portfolios has led accounting indicators.
to the emergence of indexes linked to financial The criteria for index development are identified
markets. Among these are the Dow Jones Sustain- for each dimension and sector of activity of the firm.
ability Group Index, the FTSE4Good and the These criteria are determined by a general procedure
Domini Social Index. These indexes have been applicable to all sectors and by specific criteria for
developed by organizations of recognised prestige each of them.7
and have given credibility to the notion of invest- A priori, we can say that a differentiating ele-
ment in firms that employ corporate sustainability ment exists between the firms that belong to sus-
criteria. The idea underlying these indexes is that tainability indexes and those that do not: the latter
sustainability practices constitute a potential element do not fulfil the requirements for information
for long-term value creation from which share- disclosure on sustainability. To belong to sustain-
holders will benefit. These practices help to develop ability indexes, firms are required to develop and
opportunities and manage economic, environmental disclose information that reflects the criteria
and social risks. Many investors consider this a cru- adopted in matters of sustainability; this informa-
cial value for success (Cheney, 2004, p. 14; Hart and tion usually appears in their sustainability reports.
Milstein, 2003, p. 57). The practices that follow sustainability criteria
The concepts selected to measure CSR in the shape firms’ investment and financing decisions and
DJSI are similar to those proposed by the most provide us with a good perspective for observing
frequently used CSR guides (GRI, Global Com- corporate management. The Sustainable Asset
pact) and are used by a large number of European Management Group (SAM Group) audits and
firms to develop and disclose their sustainability ensures compliance.
reports. The DJSI introduces a number of indica- For the firms that disclose this kind of informa-
tors that allow us to see what the firm is doing, tion, transparency takes precedence over other is-
such as the evaluation of intangible assets, devel- sues. It is assumed that disclosing this information
opment of human capital, organizational issues, will have generalised positive repercussions. Infor-
strategic plans, corporate governance and investor mation disclosure could thus constitute a purposeful
relations. Firms adjust their sustainability reports to action where the goal is to influence the different
the requirements of the entity that evaluates them. participants’ conduct and to create better conditions
One study performed by SustAinability (2004) than those of their competitors (Dye, 1985;
shows that in the DJSI the requirements con- Verrecchia, 1983), while also being advantageous
290 M. Victoria López et al.

from the perspective of operations, finance and adoption or otherwise of sustainable practices is,
reputation (Blyth, 2005, p. 29). thus, the difference between the two groups of firms
The disclosure of social and environmental we examined.8 We introduced control variables for
information becomes a significant element in man- size, sector of activity and risk to ensure the
agement, and one that is increasingly present in homogeneity of the two groups analysed.
corporate strategies. Information disclosure may The study covers the period from 1998 to 2004.
enable the firm to structure the available information The economic data were obtained from the data-
so that it can be useful in decision-making. base AMADEUS and the financial statements and
other corporate disclosures are available on the

Sample selection Variables and statistical tools used

We compiled accounting information published by In developing our research, we selected a series of

sample firms (Gray et al., 1995, p. 83). From the variables to measure a firm’s performance,9 focusing
firms belonging to the DJSI, we chose those that on analysing the growth of profit before tax (PBT)
develop their activity in Europe, in order to obtain a and the business evolution, measured by the growth
sample that was homogeneous as to tradition and in revenue (REV). We also considered other vari-
period of disclosure. ables such as assets, capital (cap), profit margin
The total sample is composed of two groups of (marg), return on earnings (roe), return on assets
firms and includes 110 firms of similar size and (roa) and cost of capital (kmpc), that are commonly
capital structure. The first group is composed of 55 used to measure performance (Cochran and Wood,
European firms that have been included in the DJSI 1984; Korac-Kakabadse et al., 2001; Simpson and
from the time this index was constituted. The Kohers, 2002; Wenzel and Thiewes, 1999;
second group is composed of 55 European firms that Wokutch and McKinney, 1991).10
have belonged to the DJGI for the same period but In this paper, we have used accounting ratios
are not and have never been included in the DJSI. rather than market ratios.11 Market indicators
The relative weight of each country is the same in include the perception that the market can have of a
both groups. In order to use firms with similar differentiating factor, such as the adoption of CSR
characteristics in size, economies of scale and mar- practices, but other macroeconomic factors as well,
kets of operation, we chose a sample that is homo- such as speculation, may also have an influence. A
geneous as regards firm size and activity sectors. The firm’s behaviour could be explained using market

Variable definitions for regression equations

Variable name Variable description

Dependent variable
PBT profit/loss before taxes, variation for period t with respect to baseline
Independent variables
REV revenue, variation for period t with respect to baseline
CSR dummy variable, 0 if the firm belongs to DJGI and 1 if it belongs to DJSI
Control variables
SIZE assets, variation for period t with respect to baseline
RISK risk (debt/total assets), variation for period t with respect to baseline
IND activity sector, determined by 4-digit SIC
Sustainable Development and Corporate Performance 291

Variable definitions for non-parametric test

Variable name Variable description

assets assets, variation for period t with respect to baseline

cap capital, variation for period t with respect to baseline
rev revenue, variation for period t with respect to baseline
pbt profit before tax, variation for period t with respect to baseline
marg profit margin (pbt/rev), variation for period t with respect to baseline
roe return on earnings, variation for period t with respect to baseline
roa return on assets, variation for period t with respect to baseline
kpmc13 cost of capital, variation for period t with respect to baseline

indicators, but accounting data is considered less PBT ¼ b1 þ b2 REV þ b3 CSR þ b4 SIZE
noisy, since it indicates what is actually happening in
þ b5 RISK þ b6 IND þ e
the firm. Furthermore, it would be difficult to justify
the conclusion that CSR practices influence corpo- The results are expected to show a significant link
rate performance if there were no differences in the for REV, since PBT depends on this variable. In
most significant performance indicators. addition, we seek to analyse whether the other
To achieve the study’s goals, we use two different variables have an explanatory value in the model.
statistical tools. First, we examine the possible link Specifically, we shall examine whether CSR influ-
between CSR practices and corporate performance, ences corporate performance. The results in the
measured by performance indicators, using regres- literature are diverse, differing according to the
sion analysis. Second, we consider whether there are theories underlying them (Simpson and Kohers,
differences in the evolution of these performance 2002). In our study, the expected coefficient for
indicators between firms that adopt sustainability CSR is negative, since insufficient time has passed
criteria and those that do not and apply a non- for these measures to influence consumers’ attitudes,
parametric test to determine whether these differ- and we assume that short-term cost savings are not
ences endure over time.12 made.
Tables I and II show the variables used in these As to size, we have taken total assets (SIZE) as the
analyses. control variable, although we do not expect this to
influence the model, since the firms constituting our
sample groups are of similar size.
Analysis of the relation between performance and CSR
The industry variable might exercise some influ-
ence (Schmalensee, 1985). However, even though
We analyse whether there is a direct link between
the ‘‘sector’’ factor contributes to explaining a sig-
performance and CSR practice. The growth of
nificant part of the variability of the results, these are
profit before tax (PBT) is used as a measure of
more strongly affected by the specific characteristics
corporate performance.
of the firms (Rumelt, 1991). It will thus be necessary
The model proposed includes PBT as a dependent
to analyse the results obtained for each sample.
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-re- Results obtained
lated factors constant. Thus, total assets are recorded In the time period in question, the adoption of
as a measure of size (SIZE), debt to assets as one of sustainability criteria can bring about changes in
risk (RISK), and sectors of activity of the firm as a governance and in production and management
measure of the industry (IND). The specific systems, which may cause a redistribution of avail-
regression model tested was: able resources (Hart and Milstein, 1999, p. 25) and
292 M. Victoria López et al.

Regression coefficients and statistics

Independent and control variables Dependent variable PBT (99–01) Dependent variable PBT (02–04)

REV 0.578 (0.000)** 0.575 (0.010)**

CSR )0.042 (0.603) )0.171 (0.030)**
SIZE )0.070 (0.378) )0.135 (0.088)*
RISK )0.093 (0.237) )0.064 (0.407)
IND )0.072 (0.369) )0.045 (0.564)
Adjusted R Square 0.328 0.358
F-Statistic 54.267 21.286
Probability 0.000 0.000

** P £ 0.05
* P £ 0.10

could affect performance. In the next section, we negatively affects the firm’s performance. Firms that
obtain the accounting variables for the differences engage in socially responsible activities provide more
arising from the application of sustainability prac- informative and extensive disclosures than do those,
tices. Some of these differences are related to prof- which are less focused on advancing social goals
itability. Let us now analyse the link between CSR (Gelb and Strawser, 2001, p. 11). This involves costs
and performance, introducing control variables for such as training, product quality and safety (Waddock
size, risk and industry. and Graves, 1997). In the time frame considered, the
We studied two time intervals of 3 years: 1999– expenses can be greater than the incremental revenue
2001 (in which no differences were found in the that these measures generate (Simpson and Kohers,
non-parametric test – see below); and 2002–2004 2002. p. 102). Another factor is that assigning re-
(when there were differences between the two sources to investments that take into account sus-
groups of firms). We establish the relation between tainability criteria depends on the availability of
performance and CSR for PBT, the variable in surplus funds (McGuire et al., 1988; Orlitzky et al.,
which the differences were most consistent in time. 2003, p. 406), or on the allocation of resources that
Table III shows the results obtained for each time were destined a priori to another purpose. This may
interval. affect PBT, since the availability of funds is limited.
For the period 1999–2001, in which no differ- Only in the long-term can the firm plan to obtain
entiation exists between firms that disclose infor- new funds to finance practices that require larger
mation on sustainability practices and those that do investments. For this period, and for the DJSI sample,
not, there is no relation between PBT and CSR. the control variables are not statistically significant;
For this period, the relation between CSR and we were unable to establish any relation between
performance is negative, though the value is not these variables and PBT, a finding that is consistent
significant. As expected, there is a positive and with other studies (Gomez and Rodriguez, 2004;
statistically significant relation between REV and Rodriguez and Gomez, 2002).
PBT. The relations between the other variables
considered and PBT are not significant.
For 2002–2004, the period in which there were Differences in performance indicators when sustainability
significant differences between the two groups in the criteria are adopted
sample, we found a direct relation between CSR and
performance. Specifically, for the DJSI sample, there To obtain empirical evidence as to whether there are
is a negative relation between CSR and performance. significant differences in profitability between firms
The introduction of the philosophy of sustainability that apply and disclose CSR practices and those that
involves a cost or reallocation of resources that do not, we investigated all the firms and activity
Sustainable Development and Corporate Performance 293

sectors as to whether significant differences occur in The adoption of sustainability criteria by DJSI firms
the evolution of the accounting numbers. The is thought to produce improved performance. This
following hypotheses were proposed: increased profitability could be observed as better
exploitation of available resources, which may be
reflected as greater profit growth than that enjoyed
H1: There are no significant differences related by firms that do not belong to the DJSI. If this oc-
to revenue trends between DJSI and DJGI curs, it would be due to cost savings, since we be-
firms. lieve the time frame is insufficient to produce
competitive advantages that affect sales. This could
Changes in management practices should be mean that firms are able to create more value from
reflected in the profit and loss statement, produced fewer resources (Hedstrom et al., 1998; Majumdar
by increased business volume and changes in and Marcus, 2001).
resource allocation. The former can be measured by However, the differences between the two groups
changes in revenues. If the goods or services offered of firms in the sample may be negative. Sustainability
by the firm possess elements that differentiate them practices can mean additional expenses are incurred
from those of competitors, this will produce differ- in research, training and risk prevention. Engaging
ences in sales and turnover. Firms that develop sus- in sustainability-related activities may require time,
tainability practices usually introduce differentiating effort and investment and cause a short-term de-
elements into their products, processes and organiza- crease in profitability.
tion as a result of the change in values. However, the Subsequent variations in performance ratios
transmission of these values to society occurs slowly. would be significant in DJSI firms, reflecting a dif-
Traditional consumers need time to change their ference in the degree of exploitation of available
consumption patterns and to introduce ethical criteria resources and a strengthening of their competitive
into their decisions (Alexander, 2002; Ingram et al., position (Kettinger et al., 1994; Preston and
2005; Vitell and Muncy, 1992). Thus, sales may not be O’Bannon, 1997; Waddock and Graves, 1997;
affected in the short-term, despite the changes intro- Wenzel and Thiewes, 1999). Many studies have
duced by the firm. The effects of these changes might discussed the relation between sustainability and
become evident only over a period longer than that profitability (e.g. Griffin and Mahon, 1997).
considered here (Ogrizek, 2002). However, when the
firm receives a negative impact from its actions, the Analysis of the significant differences observed between the
influence on sales is usually faster. Most studies have two groups of firms
focused on this negative impact, on the scandals The following temporal sequence was used to study
created by firms’ actions (Zyglidopoulos, 2002), and the above hypotheses. Firstly, we checked that no
specifically on how they deal with the impact of significant differences related to performance
damage to their reputation and trading results, and indicators existed between the two groups of firms
how companies minimise risks and combat consumer before sustainability standards were applied
boycotts (Adams, 2002). Some studies claim that sus- (1998–1999). Secondly, we tried to determine the
tainability practices favour stakeholders’ legitimation, moment in time when the differences began.
offering a positive image of the firm and improves its In this phase of the study, we confirmed that the
reputation (Adams, 2002; Hedstrom et al., 1998; Fo- two groups of firms analysed were similar, in terms of
mbrun and Shanley, 1990; Orlitzky et al., 2003; the above-described performance indicators, at the
Weigelt and Camerer, 1988). This may create a dif- time CSR practices began to be applied in one of the
ferentiating effect between firms that follow sustain- groups. Panel A in Table IV shows that there were no
ability practices and those that do not. statistically significant differences (at P £ 0.05) be-
tween DJGI and DJSI during the period 1998–1999
for any of the accounting variables used in this study.
H2: There are no significant differences between By accepting the null hypothesis, it follows that
DJSI and DJGI firms concerning profit- we began with two similar sets of firms, which
ability trends presented comparable accounting characteristics
294 M. Victoria López et al.

Panel A: Variations produced in the period considered (probability and statistics)

Variables 1998–1999 1998–2000 1998–2001 1998–2002 1998–2003 1998–2004

Mann–Whitney U 1281.00 275.00 1445.00 1445.00 1302.00 1263.00
Z )1.384 )1.153 )0.404 )0.404 )1.25 )1.492
Probability (0.166) (0.249) (0.687) (0.687) (0.208) 0.136)
Mann–Whitney U 1397.50 300.00 1351.50 1241.00 1497.00 1453.00
Z )0.692 )0.700 )0.963 )1.623 )0.093 )0.356
Probability (0.489) (0.484) (0.336) (0.105) (0.926) (0.722)
Mann–Whitney U 1392.00 328.00 1250.00 1347.00 1386.00 1372.00
Z )0.720 )0.183 )1.569 )0.989 )0.756 )0.840
Probability (0.471) (0.855) (0.117) (0.322) (0.450) (0.401)
Mann–Whitney U 1497.00 317.00 1192.00 1170.00 1122.00 1127.00
Z )0.093 )0.384 )1.916 )2.048 )2.334 )2.305
Probability (0.926) (0.701) (0.055)* (0.041) ** (0.020)** (0.021)**
Mann–Whitney U 1460.00 320.00 1242.00 1192.00 1198.00 1199.00
Z )0.314 )0.329 )1.617 )1.916 )1.880 )1.874
Probability (0.754) (0.742) (0.106) (0.027)** (0.060)* (0.061)*
Mann–Whitney U 1414.00 322.00 1263.00 1242.00 1132.00 1212.00
Z )0.589 )0.293 )1.492 -1.617 )2.275 )1.796
Probability (0.556) (0.770) (0.136) (0.013)** (0.023)** (0.072)*
Mann–Whitney U 1357.00 313.00 1213.00 1156.00 1158.00 1191.00
Z )0.930 )0.458 -1.790 )2.131 )2.119 )1.922
Probability (0.353) (0.647) (0.073)* (0.033)** (0.034)** (0.055)*
Mann–Whitney U 1475.00 1108.00 1481.00 1503.00 1213.00 1281.00
Z )0.224 )2.418 )0.188 )0.057 )1.790 )1.384
Probability (0.823) (0.016)** (0.851) (0.955) (0.073)* (0.166)

Panel B: Summary of the results obtained in non-parametric testing

Periods analysed Significant differences (at P £ 0.05) No significant differences

1998–1999 - All variables analysed
1998–2000 - All variables analysed
1998–2001 - All variables analysed
1998–2002 pbt; marg; roa; roe asset; cap; rev; kmpc
1998–2003 pbt; roa; roe asset; cap; rev; marg; kmpc
1998–2004 pbt asset; cap; rev; marg; roa; roe; kmpc

Associate variable: sustain_dp

** P £ 0.05
* P £ 0.10
Sustainable Development and Corporate Performance 295

with respect to the variables considered. This leads By 2004, the differences corresponding to the
us to inquire whether the application of sustainability magnitudes related to income and profitability had
practices by the DJSI firms leads to long-term dif- become less significant. This could be attributed to
ferentiation, which could provide them with com- the fact that the standards applied by DJSI firms have
petitive advantages vis à vis the DJGI firms. now been incorporated by those in the DJGI, which
We repeated the analysis for the periods 1998– reduces the advantages obtained by the former
2000, 1998–2001, 1998–2002, 1998–2003 and (Adams and Zutshi, 2004; Bansal, 2002, p. 126;
1998–2004. A summary of the results obtained is Bond, 2005; Burgess, 2003; Ogrizek, 2002),
given in Panel B of Table IV. We performed the although regression analysis shows that the effect of
analysis both for the group as a whole and after CSR practices was negative in the short-term. It
grouping the firms by sectors, and we arrived at the seems that the differentiation is not consistent and
same conclusions. The firms formed part of the same does not increase over time. The reduced differences
universe until 2002 (at P £ 0.05), which is when could also derive from the fact that when these
differences began to appear. These differences, practices were first applied, the effect on performance
measured by means of performance indicators, was negative. The firms in question would have acted
continue for the periods 1998–2003 and 1998–2004. to reverse these negative effects.
The principal differences occur in the profit Even if the effects of these differences were
and in the profitability indicators. As there are no positive, they could have been weakened, due to the
differences in revenues, the differences must be fact that CSR strategies are easily imitable or perhaps
produced by the costs; thus, resources are being because the customer focus is transient.14 Greater
exploited in different ways. normative pressure drives companies to adopt these
It is apparent that the 110 firms analysed were practices, which could cause a reduction in the dif-
similar, in terms of the performance indicators ferences between the two groups analysed. Although
examined, until the year 2002, when we begin to the firms were differentiated initially, this differen-
see significant differences between the variables tiation did not persist in the last period analysed,
related to profitability, margins, return on assets probably because the competitors imitated the
and return on equity. After 2001, the policy of competitive advantage. This study shows that the
creating long-term value through the development differences mentioned only occur during a specific
of sustainable strategies began to have positive period in time and later become less significant.
effects in Europe. We found no differences between the DJSI and
During the 7 years covered by the present study, the DJGI firms as to variations in total assets, capital
the only significant changes observed were in prof- or revenues. Decisions concerning investment and
itability and in profit indicators such as margins and financing are not linked to the sustainability practices
return on assets and equity. Since there are no sig- required by the DJSI, at least for the period con-
nificant differences in the variation of revenues, we sidered. We also calculated the cost of capital in
conclude that the differences in performance are due order to determine whether greater transparency
to changes in costs. Over a longer period of time, translates into a reduction in the cost of capital.
other, more structural factors (such as volume of Previous studies have shown that disclosure can have
assets and capital) could influence value creation, as effects on the cost of capital (Fishman and Hagerty,
might other factors that require more time to de- 1989; Dye, 1985; Gelb and Strawser, 2001;
velop, such as the creation of a characteristic firm Sengupta, 1998; Simpson and Kohers, 2002, p. 103;
culture or the development of new organizational Verrecchia, 1983). However, we only found dif-
processes. Furthermore, there might be other ferences in the cost of capital between the two
changes, such as the development of new products, groups of firms studied in one year (at P £ 0.05).
the differentiation of current ones, the development There was no apparent regularity in this result and
of technology and the diversification of activities. we believe the difference to have been coincidental.
Sustainability strategies take specific forms in these In our opinion, although investment policies may
factors, such that each choice could produce an differ in their objectives and strategies, their effects
effect on other economic–financial indicators. are not significantly different in relation to total
296 M. Victoria López et al.

capital and assets in the period considered. A longer of resources or increased expenses such as those for
time period would mean the creation of a new firm training, safety, pollution prevention, non-polluting
culture and the development of technologies that technologies and recycling. The management may
might lead the firm to search for new resources. need to look past these short-term effects in order to
lead the corporation forward.
In this paper, we see that the above-mentioned
Conclusions differences only occur during a specific period and
are not robust over time. In the time frame
Both firms and investors believe that strategies that considered, we did not find grounds for claiming
take sustainability criteria into account have the that the adoption of sustainability practices will
capacity to create long-term value. Such actions have positive repercussions on performance
have awakened investors’ interest and have led to the indicators.
appearance of sustainability-related indexes linked to The expenses that firms incur as a result of their
financial markets. These indexes enable us to ana- socially responsible actions can place them at an
lyse whether there exist significant differences in economic disadvantage with respect to other, less
performance between DJSI and DJGI firms. responsible firms, at least in the short-term. How-
We selected a group of DJSI and DJGI firms ever, it seems that the negative impact on perfor-
whose performance-indicator results were similar mance, as measured by the variation in performance
prior to the creation of the DJSI index. Three years indicators, is self-correcting, since the differences
after one group of firms had applied the sustainability diminish over time, as shown in the results of the
strategies required by the DJSI, we confirm that non-parametric test. It will be necessary to examine
differences exist in various profitability measures a longer time frame to see whether these practices
obtained by DJSI firms with respect to DJGI ones. acquire continuity and begin to influence corporate
The elements immediately affected by the adop- performance positively. The above-mentioned
tion of these strategies are related to operating negative short-term effects may inhibit others from
activity and are included in the magnitudes that adopting CSR practices. We believe the govern-
compose or are derived from the firm’s profit. ment could play a very important role in promoting
The income results reflect the different degrees of sustainability practices, by legislation or by financial
exploitation of resources by the two groups of firms. incentives.
Decisions on investments and financing are not Finally, we must take into account social demands
linked to the sustainability policies reflected in the on firms with respect to their actions and practices in
DJSI, at least for the time period and sample matters of sustainability. The cultural changes that
considered. Nor did we find significant differences are taking place in this respect do not seem to be
between the two groups with respect to the cost of going away. In society, changes in values are
capital. increasing the normative demands related to CSR.
We analyzed the link between the performance This means another way must be sought of under-
indicators and CSR, and found that the link be- standing the goals of business and that the objectives
tween these variables is negative, which leads us to they pursue must be reformulated. Only if CSR
affirm that the effect of sustainability practices on practices are integrated into the strategic decisions
performance indicators is negative during the first taken in business will positive consequences be
years in which they are applied. In the context of the achieved. This kind of change in corporate philos-
time frame considered in this study, we confirm that ophy will have fundamentally qualitative repercus-
differentiation in the exploitation of resources exists sions, for example in reducing environmental
and that it is negative. At first, the firms did not impact, increasing employee satisfaction, retaining
make budget provisions for new assets for sustain- talent, enhancing the company’s reputation and
ability practices. A longer-term view is necessary for playing a full, positive role in the local community.
new policies, i.e. sustainability criteria, to be re- Such social and corporate changes, however, will
flected in the budgets. Firms must use their current not always have a quantitative effect on economic–
resources, which may involve a different allocation financial indicators.
Sustainable Development and Corporate Performance 297

The present paper only provides a start, and fur- composed of firms in the global arena, since its starting
ther research into the issue is required. Showing that date is earlier than that of the other indexes developed
CSR is associated with performance should subse- in the European area (1999). We chose the European
quently lead us to search for a way to measure its firms where we wished to focus our study from the
effect on corporate performance and on stakeholders’ total number of firms belonging to the DJSI.
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 devel-
oped European and emerging markets, the selection
Notes methodology creates indexes that represent 95% of free-
float market cap at the aggregate level. The DJSI is
Sustainability development can be defined as made up of firms that are leaders in sustainability prac-
‘development that meets the needs of the present with- tices and are the top 10% of the firms in the DJGI.
out compromising the ability of future generations to Firms in the DJSI are required to fulfil sustainability
meet their own needs’ (WCED, 1987, p. 8). requirements. The firms that belong to the DJSI are
Under value creation, we consider issues such as pol- audited by the Sustainable Asset Management Group,
lution control, transparency, business responsibility, the which monitors DJSI firms to ensure they observe
incorporation of new technologies, and employee and economic, environmental and social criteria (the ‘‘triple
customer satisfaction (Hart and Milstein, 2003, p. 59). bottom line’’).
The financial tradition in the U.S. is different from The criteria considered in each of the dimensions
Europe. Generally, the European tradition can be de- can be consulted in the guidelines corresponding to
fined as a bank-based financial system and that of the the indexes considered at www.sustainability-indexes.
U.S. as a market-based financial system. Furthermore, com.
the legal systems are defined as civil law and common Although the possible differences cannot be associ-
law, respectively (Nobes, 1994, p. 3). European firms ated exclusively with sustainability practices, if there
do not usually adopt a practice until they are legally were no differences between the two samples, we could
required to do so, and the influence of the Stock affirm that the adoption of these practices would not
Exchange is not strong. American firms, in contrast, are have a differentiating effect, at least on the variables
encouraged to adopt sustainable standards as a demand analysed during the period studied.
of the market-based financial system. The American We use variations in the indicators because we
indexes were created in the early 90s and began to wish to contrast whether the adoption of sustainability
influence management then. In contrast, the European practices affects performance. Furthermore, by studying
indexes began in the late 90s. Most European firms the variations in the indicators considered, we can show
begin to disclose sustainability information in the early the possible significantly different changes in strategy
2000s. On the other hand, the DJSI follows different that might occur, i.e. the possible changes in strategy
selection criteria for American and European firms. It that might be apparent through the existence of signifi-
distinguishes between American firms, European firms cant variations in performance indicators. The sample is
and those in emergent countries. made up of firms that follow different accounting rules,
This theory indicates that companies should only since the application of the Fourth Directive related to
respond to shareholders’ interests, their only social Annual Accounts of Companies with Limited Liabilities
responsibility being the maximization of company has led to very different accounting criteria in different
value. From this perspective, any positive social act European countries. This prevents us from comparing
undertaken by the firm is associated with costs that the data in absolute terms. By studying the variations in
would reduce profit and prejudice shareholders. It the indicators we can identify the relative changes in
would not, therefore, be opportune (Friedman, 1970). the variables and compare them, thus avoiding problems
Although the firms making up DJSI Stoxx are that could arise if we took the variables in absolute
European, this index began to be developed in 2001 terms.
and thus would not be useful for the purposes of this Griffin and Mahon (1997) provide a review of
study. The FTSE4GOOD database was established in financial indicators used in previous studies.
2002. The Domini Social Index was created in 1990 By this, we refer to ratios often used by analysts,
and is a benchmark for sustainability investment in such as market to book, payout and price to earnings
American firms. We used the DJSI, which is an index ratio (PER).
298 M. Victoria López et al.
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economic–financial data will fit a normal distribution, of Management Best Conference Paper 2004, C1–C6.
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