Question

Read the “Does Corporate Social Responsibility Influence Our Stock Price?”

1. What is the Dow Jones Sustainability Index (DJSI).? Identify three companies listed on the exchange. Would you be more likely to invest in a company on the DJSI? Why or why not?

Answer 1

A trio of researchers, two from Boston University (Rui Albuquerque and Yrjo Koskinen) and one from the University of Iowa (Art Durnev), had heard anecdotal reports that companies who practice CSR saw more stability with their stock prices. They set out to conduct a scientific study to see whether it was really true.

Durnev said that the results of the study showed that a healthy dose of CSR created greater brand loyalty, so customers kept buying their products and paid a premium for them, despite what the overall economic situation was.

That stability of sales in turn reduces the companies' costs of equity capital, further reducing its overall risk.

Durnev and his team based a lot of their research on beta -- a number describing the correlated volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. If companies have high beta, their cost of capital is higher, but companies with lower beta have a lower cost of capital.

The research team measured CSR's effect on stock prices using a series of six indices, Durnev said.

• Environment: When the company's working area/production facility had an adverse or positive effect on the environment.
• Labor force: What a company's track record is in hiring racial minorities, and sexual minorities (gays, etc.)
• Product quality and safety: Whether the company produces products that are environmentally friendly and using environmental technology.
• Humanity: Whether the company does business with countries that are notoriously poor in human rights (Libya, Syria, etc.)
• Community: How the company makes a significant economic impact in their community, and how charitable they've been. This includes support for housing, support for education, and other community programs.
• Employee Relations: How a company treats its employees and their level of satisfaction in the workplace.
  Durnev said that of the six categories they measured, the index with the strongest and most tangible effect on a company is environment.

The Dow Jones Sustainability World Index, or DJSI World, is a global index consisting of the top 10% of the largest 2,500 stocks in the S&P Global Broad Market Index based on their sustainability and environmental practices.

3 companies listed on the exchange - Salesforce.com, Schlumberger Ltd, Diageo PLC

We should invest into comapnies on djsi because CSR activities have a more and more stabilizing effect on companies'

As investors seek to invest in companies with long-term return potential, their stock selection decisions will likely be increasingly influenced by sustainability considerations.