title: Essays in Sustainable Finance
Creators: name: Qiu, Wanling
Publisher: name: University of Liverpool Repository
Year: 2022

description: Sustainability has grown to be a fundamental part of the finance landscape. Whether understanding through assets under management in sustainable funds, the breadth of firm sustainability reports, or the ever-increasing volume of academic literature on the topic, the centrality of sustainability is clear. This thesis presents three papers which contribute against this growth. Uniting the chapters is the desire to further our understanding of the economic relevance of companies’ dynamically changing corporate social responsibility (CSR) attributes. Chapter 2 evaluates the importance of the stakeholder dimensions of CSR to maximising corporate financial performance (CFP) across the CFP distribution using unconditional quantile regression. Results show that poor CFP firms should not use CSR as a short-term strategy, but may use external stakeholder dimensions such as community and environment, to improve long-term CFP. Good CFP firms should focus on sharing success with employees. Environment focused CSR is most effective for firms around the median of the CFP distribution. Each of these results emerge here for the first time and contribute important understanding to the CSR-CFP relationship. Managers should be guided by the results to optimise their CSR investment. Policymakers must design incentive structures for CSR improvements accordingly, for example subsidising only lesser profitable firms to increase support to employees. Identifying true sustainability index listing effects has been hindered by challenges of parallel trend assumptions and a lack of robustness to shocks which only impact certain industries. In response, Chapter 3 considers listing to the Dow Jones Sustainability Index North America (DJSI). Formally, a generalised synthetic control approach that addresses both concerns is used. A counterfactual portfolio of industry peers is created for each listing firm such that returns to the portfolio match the control period. Absent of listing, the behaviour of this portfolio is how the listing stock would have been expected to behave. Listing effects are then the difference between observed returns on the listing stock and the counterfactual portfolio. Abnormal returns to listing are found to be more persistent than previously identified. Investors gain from these abnormal returns by identifying firms who will be listed ahead of the formal DJSI announcement. High volumes of sustainable investment inspire an investigation of the possibilities to augment traditional strategies, such as the long-small-short-large firm size strategy, with information on firms’ environment, social and governance (ESG) performance. Chapter 4 shows that abnormal returns to these ESG flavoured strategies are not significantly lower than the corresponding pure traditional strategies. Investors may use ESG flavoured strategies to increase ESG exposure without incurring any alpha cost. New evidence is contributed that having an ESG focus and having a return focus need not be mutually exclusive. Across the three chapters, it is shown how innovative econometric techniques and novel approaches to investors portfolio selection yield critical understanding of the links from CSR to CFP and stock returns. Learning therefrom can help firms and investors to leverage the benefits of CSR and also help policymakers to best incentivise progression to more sustainable practices. Meanwhile the contributions aid the academic community to best model and evaluate the role of sustainability in finance.