A study of the market's reaction to superior sustainability reporting as demonstrated by the financial performance of publicly traded companies
Recent ethical lapses by business organizations and their management suggest that traditional governance requirements have had less than the desired effect. Legislated disclosure alone is insufficient as it provides reactionary guidance that fails to address performance issues since rules can be circumvented and financial data can be tweaked to reflect its most favorable presentation. The research evaluated sustainability reporting as an additional resource for reporting on ethical performance and addressed the question of whether companies that demonstrate ethical leadership through best in class sustainability reporting performed better than their peers in terms of value creation.
The study evaluated a group of top companies recognized in the SustainAbility Global Reporters Listing for 2006 against the market performance of securities traded on the S&P 500 Index during the period of January 1, 2002 to December 31, 2006. The selected datasets were compared relative to the dependent variables of risk and return to identify any potential differences in the datasets. The research does not imply causality, as sustainability reporting itself does not create value. This is also why the study did not conclude that companies that fail to report on sustainability issues were bad performers; rather organizations could potentially increase their value by doing more to communicate their performance. Strong financial performance may encourage enhanced disclosure; in that case sustainability reporting provides a manner by which organizations can demonstrate sound financial decision-making. Sustainability reporting may be viewed as a best in class business process that ethical and operationally efficient organizations use to communicate their activities.