Market Reaction to Sustainability Index Updates

Abstract

The discussion about sustainable development is affecting today’s business environment. Companies and investors are both integrating sustainability factors in their decision making and acting according to environmental, social and governmental (ESG) criteria has become rather a necessity than a choice. Sustainable investing is an investment approach which combines financial goals with certain sustainability criteria. Previous studies on sustainable investing concentrate on the financial benefits of sustainable performance.

Being part of a “best-in-class” sustainability index is a sign of top sustainable performance and can have a positive effect on company value. This study examines how the annual sustainability index updates affect the stock returns of added and deleted companies. The purpose is to find out the informational value of sustainability index announcements and if the updates create any abnormal returns.

This study examines the additions to and deletions from the Dow Jones Sustainability Index (DJSI) Europe in the period of 2011–2017. Event study method is used to calculate the abnormal returns around the index updates. The study did not capture any statistically significant abnormal returns for additions or deletions.