Category Management Insights
11 May 2012

Is reliable sustainability disclosure really worth the fuss?

“By providing sustainability disclosure, companies can increase their market value. However, this effect depends on the reliability of this disclosure, in particular when companies face a high information or investment risk or difficult economic conditions.”


With one exception all companies on the German DAX30 index voluntarily disclose structured information about their sustainability performance. Besides long-term economic issues, this information explains their social and environmental orientation. Recently, smaller firms have also started to disclose such information. However, can investors really understand and interpret this type of data?


Companies provide information about their sustainability performance in standalone sustainability reports and Corporate Social Responsibility (CSR) reports, in annual reports and on websites. The upcoming implementation of an EU directive will even require the disclosure of some sustainability information for listed and large non-listed companies. Investors can only assess sustainability information with great difficulty. Most of the available data is non-financial or qualitative in nature and thus difficult to link to future financial performance. Moreover, this information is often cherry-picked for self-serving reasons.


In an empirical study, Prof. Ernstberger and two of his doctoral students investigate whether investors question the reliability of sustainability information when determining the market value of a company. The authors examine how the stock market reacts when a firm is added to the Dow Jones Sustainability Index (DJSI) STOXX, an internationally important sustainability index. The index is composed of the leading 20% of companies in terms of sustainability criteria on the Dow Jones STOXX 600 Index, which consists of the 600 largest European companies. Inclusions in this index do not provide additional sustainability information to market participants but increase the reliability of existing information because they are scrutinized by the provider of the index.

The empirical study provides three major findings: First, investors consider the reliability of the sustainability information when determining the market value of a company. The authors find that the stock market positively reacts when a company is added to the DJSI STOXX.


Second, the magnitude of the positive market reaction appears to be higher for companies characterized by a higher investment or information risk. Third, the benefits of an increase in the reliability of sustainability information are higher in times of economic uncertainty, i.e. in times of economic downturns or higher stock return volatility.


The authors conclude that investors are able to evaluate the reliability of sustainability information. Thus, companies must safeguard the reliability of these disclosures, e.g. by a listing in a sustainability index. Alternatively, companies can present both the advantages and the challenges it is facing in different areas of sustainability or request a (voluntary) audit by an external assurance provider. The study shows that higher reliability is associated with an increase in the market value of a company.




Prof. Dr. Jürgen Ernstberger
Financial Accounting


Chair: Financial Accounting