Description
The greenness of real estate industry has much potential to tackle the global warming and climate change, given that it accounts for more than one third of global CO2 emission.
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Towards Sustainable Real Estate Investments: Perspectives from
Asian Emerging Markets
Li Zhiliang Deng Yongheng
National University of Singapore National University of Singapore
[email protected] [email protected]
Abstract
The greenness of real estate industry has much potential to tackle the global warming and
climate change, given that it accounts for more than one third of global CO2 emission. Despite
the reported benefits of investment in green properties at asset market, little has been known
about the financial economic consequence of integrating environmental sustainability into
corporate strategies. This paper, focusing on the firm value effect of going green, seeks to
provide insight about the market perception of environmental sustainability in the real estate
industry. Tobin?s Q is used to measure the intangible asset of firm value, and the use of two
distinct types of environmental performance proxies can shed new light on the appropriateness of
environmental screening for sustainable property investment. We adopt a two-stage least square
approach (2SLS) is employed to partly alleviate the endogenity issue.
Our results document a marginally positive association between environmental
sustainability and firm value within a sample of Asian public property companies over 2010 and
2011. More importantly, sub-market analysis reports that whether or not, and to what extent
markets value environmental sustainability relies on the underlying institutional frameworks and
market structure. This paper is the first cross-country study on the financial outcome of
environmental sustainability in real estate industry in Asia, and its implications can be substantial
to other emerging Asian economies seeking to promote environmental sustainability in the built
environment.
Keywords: Environmental Sustainability, Real Estate Companies, Asian Emerging Markets,
Firm Value
J EL Codes: G3, M14, Q51
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1. Introduction
Environmental sustainability
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has become the central theme of corporate social responsibility
(CSR) nowadays, not only reflecting the public concern about climate change but also the
shifting taste amongst consumers and investors (Stern, 2008). In particular, institutional investors
with real estate exposure, such as pension funds and insurance companies, are facing broad
societal pressure to assess and improve the environmental performance of their real estate
investments (Bauer et al., 2011). Accordingly, the extent that real estate companies? incorporate
environmental sustainability into their business practices now becomes a matter of great interest
to market participants.
To meet the non-financial information needs of investors, several private and public
initiatives have been shaped to evaluate environmental sustainability performance of individual
company or portfolio, e.g., the Carbon Disclosure Project (CDP) and the United Nations Global
Compact (UNGC). Also, public entities are eager to exhibit their environmental awareness and
responsible activities through CSR reporting, engaging third-party CSR rating, or the inclusion
into sustainability indices, and so forth
2
.
More importantly, the global emergence of green building rating systems
3
is gaining
popularity in the real estate industry, being a critical step towards promoting investment in
sustainable real estate and private provision of environmental public goods (Kotchen, 2006).
Properties certified as „green? are not only marketed as having better energy and environmental
performance, but also aligned with higher cash flows and capital values (see Eichholt, Kok and
Quigley, 2010 and 2011a;Fuerst and MacAllister, 2011a and 2011b; Brounen and Kok, 2011;
Kok and Jennen, 2011; and Deng, Li and Quigley, 2012). Moreover, it will also help publicize
property companies? strong commitment to environmental sustainability stewardship (Eichholtz
et al., 2010).
Despite the above mentioned benefits, the progress of mainstreaming investment towards
sustainable property is still stagnant. Some attribute such sluggish progress to the lack of
sufficient information on the financial performance of such investments (Pivo, 2008). Indeed,
there has been so far no publicly available evidence on the financial consequences of committing
to environmental sustainability at firm level, without which investors and property owners are
reluctant to allocate more green property into their investment portfolio. This paper aims to fill
this gap by examining whether or not, and to what extent does corporate environmental
performance (CEP) relate to corporate financial performance (CFP) in the real estate industry.
There is a large volume of literature on corporate social responsibility and corporate
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Since the Brundlandt report in 1987, environmental sustainability has been widely accepted as development that meets the needs
of the present without compromising the ability of future generations to meet their own needs.
2
For example, KLD, SAM and Innovest are independent third-party CSR or sustainability rating agencies; Dow Jones
Sustainability index, Domini 400 Social index, and FTSE KLD 400 Social index.
3
LEED and Energy Star in the U.S., BREEAM in the U.K., Green Mark in Singapore, Green Star in Australia, and HKBEAM in
Hong Kong
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financial performance debating on issues relating to environmental sustainability. One intriguing
question has been the source of this controversy: can firms? environmental performance be
aligned with the added value? On the one hand, skeptics perceive that CSR is too expensive to
comply with the shareholder value-maximization principles (Friedman, 1962; Henderson, 2002);
on the other hand, CSR has been increasingly embraced within the business community due to its
perceived tangible and intangible benefits (e.g., Shrivastava, 1995; Turban and Greening, 1996).
Nonetheless, several decades? research has yielded mixed results, largely attributed to the
measurement problem of environmental screening (Waddock et al., 1997), methodological
inconsistencies (Ulman, 1985; Griffin et al., 1997), or endogenity issues (e.g., Nogareda et al.,
2006).
This paper extends the existing literature and provides evidence that there is a positive
relationship between firms? environmental and financial performance in the real estate industry.
Given the intangible nature of CSR-related benefits (Turban and Greening, 1996), Tobin?s Q, a
forward-looking financial variable capturing market expectation of future profitability, is used to
measure firm valuation. Tobin?s Q measure is adequate to reflect the intangible reputation effect,
investor trust, and investor risk
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(e.g., Guenster et al., 2010; Dowell et al., 2000; Konar and
Cohen, 2001). Our empirical analysis is based upon a very rich data. We employed two types of
environmental sustainability proxies: (1) the environmental dimension of “Asian Sustainability
Rating” score, which is a disclosure-based proxy developed by the “Responsible Research”; (2)
the binary variable indicating concrete green property commitments of real estate firms. The
empirical results of this study can shed light on the appropriateness of the environmental
screening for sustainable real estate investment
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.
To address the potential endogenity problem and omitted variable bias, an instrument
variable (IV) approach is employed in our empirical analysis to examine the CEP-CFP link in
several Asian emerging markets from 2010 to 2011. Many Asian economies are at different
stages of economic development and have different levels of environmental awareness.
Furthermore, the uniqueness of institutional and cultural background allows some governments
among these Asian economies to promote sustainable real estate investment via a top-down
approach. Such unique institutional variations allow us to test whether the debated CEP-CFP
relation may vary across markets, depending on the underlying institutional frameworks to
encourage environmental sustainability in the built environment.
Our empirical results document marginal evidence of a positive association between real
estate companies? environmental performance and firm valuation measured by Tobin?s Q. More
importantly, our results suggest that the extent to which individual market values environmental
sustainability of real estate investment is significantly different, subject to both the underlying
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Plausibly, using this variable may avoid the bias of manipulation of some accounting-based variables.
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Pivo (2005) pointed out that one screening process is needed for investors to determine whether director indirect
sustainable property investment products meet their needs. He suggests that in the real estate industry, green
building certification is more appropriate than the conventional social screening. As such, by using the two types of
environmental screening approach this study allows us to identify which type is materially applicable to the context
of sustainable real estate investment.
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environmental policy and market structure. In particular, only in Singapore where underlying
environmental institution is well developed and strictly implemented, a real estate company with
superior environmental performance enjoys higher market value. The results also suggest that
committing to green building practices is seen to be more visible than the disclosure-based
environmental proxy to market participants.
Our empirical results indicate positive CEP-CFP relation will help ease corporate
managers? concern to go green without compromising financial objectives which is consistent
with the existing literature (e.g., King and Lenox, 2002). For those interested in sustainable real
estate investment in Asia, our results suggest investing in markets where a proper combination of
stringent environmental policy and incentive program has been well established and rigorously
implemented. Furthermore, findings of this paper will provide useful information to policy
makers to guide the built environment towards environmental sustainability.
The rest of the paper proceeds as follows: Section 2 conducts a literature review on CSR
and its effect on CFP; Section 3 discusses institutional difference; Data collection and analysis
are presented in Section 4, followed by the empirical analysis in Section 5; Section 6 concludes
and discusses some limitations and further research.
2. Literature Review on CSR
In recent years, CSR and its subsets, e.g., CEP in this study, have become societal focus that
requires the business community to take on responsibility towards environmental, social and
government issues in general (Orlizky, 2001). Among different perspectives of CSR,
McWilliams and Siegel (2001), for example, defines it as actions furthering social good beyond
the interest of the firm and what is required by law. Others (e.g., Heal, 2005) consider CSR as
being able to avoid social distributional conflicts and thus reduce the externality. Notably, there
has been a wide divide in the theoretical argument on the CSR-CFP debate (Griffin and Mahon,
1997).
2.1 Opponents for CSR
Above all, those criticizing CSR rely on the neoclassical microeconomics that the costs
associated with CSR improvement are likely to outweigh the financial benefits, which is
inconsistent with the underlying principle of shareholder wealth maximization (e.g., Friedman,
1962 and 1970; Telle, 2006). Understandably, environmental activities involve much of
corporate financial resources, but the potential benefits of such measures are mostly in the distant
future, if any (e.g., Henderson, 2002; Walley and Whitehead, 1994). Thus, it argues that there is
no role for CSR and that firms should only care about their shareholders? profit (Friedman, 1962).
Further, McWilliams et al., (2006) and McWilliams & Siegel (2001) report that the overall effect
of CSR is neutral in equilibrium.
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The criticisms of CSR may also be rooted in the arguments of stakeholder theory and
corporate governance. According to Freeman (1984), managers need to balance the interests of
all stakeholders, rather than shareholders? interests only, to the extent that the aggregate welfare
is maximized (Renneboog et al. 2008). And yet, it fails to address the problem of how to
aggregate welfare and how to make the tradeoff amongst stakeholders. Also, in a competitive
market, firms pursuing social or environmental objectives by lowering their economic profits
may not survive the competition (e.g., Renneboog et al., 2008; Baumol, 1991). Shleifer (2004)
even argues that competitive pressure from markets, to some extent, encourages unethical
corporate behavior.
In the meantime, from the corporate governance viewpoint, only if internal control
structures and managerial incentive are properly established, would managers choose to
maximize stakeholders? wealth. It appears, however, that the objective function of managers in
the CSR domain is not clearly defined and thus their performances are unaccountable, probably
generating more conflict of interest and agency cost (e.g., Jensen, 2001; Tirole, 2006). Moreover,
the multi-task nature of managers to achieve both financial and social goals greatly weakens their
incentives to pursue high risk-adjusted returns and may be used for entrenching their own utility
(Tirole, 2001), again resulting in additional agency problems.
2.2 Proponents for CSR
Advocates for CSR can also be rooted in the neoclassical microeconomics in that CSR may help
address the agency problems and the external costs. As is assumed in the social welfare theorem,
there is no conflict between a company?s shareholder value and social value maximization in a
competitive and complete market
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, and the resource allocation is Pareto-optimal and the social
value is maximized accordingly (Renneboog et al., 2008). However, in the presence of
externalities
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, shareholder profit-maximizing behavior does not necessarily imply social welfare-
maximizing outcomes (Jensen, 2001). Heal (2005) finds that the government does not fully
resolve all problems with external effects. In this regard, CSR activities can substitute missing
markets and reduce conflicts of interest among stakeholders. Based on Ghatak?s (2006) model
where only those who care about CSR attributes are willing to buy ethical goods, CSR can create
a Pareto improvement for the entire economy and thus maximize wealth. Consequently, the
reduced agency cost enhances corporate profits and financial performance at least in the long
term.
Additionally, the stakeholder theory is gaining momentum in the modern organizational
structures to overcome the externality (Barnett and Salomon, 2006). Essentially, the stakeholder
theory suggests that management must satisfy the expectations and demands of several groups
(e.g., shareholders, employees, customer, and government) that have some interests in a firm and
can influence its outcome or can be influenced by firms (Freeman, 1984; McWilliams et al.,
6
Social value is defined as the sum of the value generated for all stakeholders.
7
The costs and benefits of an agent?s action are affected by or affect others? actions in the economy.
6
2006). Furthermore, it can be embedded into the resource-based view of firm (e.g., Barney, 1991;
Hart, 1995) that corporate economic success and competitive advantage evolves from internal
resources and capabilities.
Notably, only proactive environmental governance that is valuable, rare, and difficult to
imitate by competitors is a source of financial benefits which is intangible in nature (e.g., King
and Lenox, 2001; Derwall et al., 2011), such as stakeholder relationships and brand images (e.g.,
Davis, 1973; Derwall et al., 2010). Likewise, CSR may be rationalized to mitigate asymmetric
information by signaling firms? reputation or product quality (e.g., Fombrun and Shanley, 1990;
Barnea and Rubin, 2006). In addition, investors may view companies with poor environmental
reputation as risky to invest in and thus demand a higher risk premium (e.g., Hamilton, 1995).
Also, firms with a good reputation of environmental sustainability could attract a qualified
workforce, as an improved corporate environmental reputation makes talent recruitment and
retention easier than poor performers. Beyond the above benefits, in this paper, sustainable real
estate can lead to enhanced employee health and productivity, which ultimately increases CFP
(see Hoffman et al., 1993; Wargocki et al., 2004; Bauer et al., 2009).
Taken as a whole, when these (intangible) benefits are financially relevant, it can be
anticipated that CSR-related activities tend to positively affect companies? financial performance.
2.3 Capital Market Response to CSR
Capital-market participants have increasingly incorporated the Environmental, Social and
Governance (ESG) aspects into their investment decision-makings (e.g., Groysberg et al., 2011).
For example, mutual funds that invested in socially responsible firms by 2007 have assets under
management of more than $2.5 trillion and $2 trillion dollars in the United States and Europe,
respectively (Ioannou and Serafeim, 2011)
Apart from the prior economics and managerial advocates of CSR, financial economists
add important perspectives on its benefits in terms of risk-adjusted return to investors, risk-
sharing opportunities, and the market segment of social (green) investors (see Moskowitz, 1972;
Merton, 1997; Hamilton, Jo and Statman, 1993; Heinkel et al., 2001; Derwall et al., 2011).
Importantly, whether investors gain by holding responsible companies depends on how capital
market values CSR (Guenster et al., 2010).
Despite early studies reporting that the market does not value CSR (e.g., Luther et al.,
1992; Luther and Matatko, 1994; Bauer, Derwall, and Otten, 2007), recent studies tend to
document a learning process that CSR information is gradually incorporated into asset pricing,
e.g., Gompers et al. (2003), Derwall et al. (2005), Bauer et al. (2006), Derwall et al. (2010), and
Ghoul et al. (2010). Meanwhile, others document favorable business cases for the significant
effect of CSR on CFP.
For example, Spicer (1978) and Shane and Spicer (1983) argue that CSR activities reduce
the threat of litigation risk. Karpoff et al. (2005) claim that investors „price-protect? against
lawsuit risks from environmentally irresponsible activities. Also, Hong and Kacperczyk (2007)
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find that litigation risk associated with socially contentious companies has become more relevant
to investors expecting to earn premium from holding those stocks. Moreover, CSR activities
matter to other idiosyncratic risks as well, such as reputation, investor trust, and customer loyalty,
which lay further basis for eschewing environmentally controversial companies (e.g.
Vandermerwe and Oliff, 1990; Russo and Fouts, 1997).
3. Institutional Difference in Asia
Having reviewed and analyzed general arguments on the CSR & CFP relation, it is possible that
the aforementioned association may run in another direction under different underlying policy
regimes (Ziegler et al., 2011). Porter et al (1995) contend that social benefits arising from
environmental policies come at the expense of private cost and the direction of this balance
depends on the underlying policy regimes. Under appropriately designed environmental
standards, innovation can be spurred to lower production cost and enhance resource productivity,
ultimately achieving the mutual interests of environmental improvement and competitiveness. As
such, how CSR, or CEP, affect firms? financial performance depends on the structure of the
market that determines the interplay between social costs and benefits (e.g., Cheung et al., 2010).
According to Ziegler et al. (2011), the stakeholder theory is likely to be reinforced under
stringent institutions where social climate also demand better corporate responses to
environmental issues such that good stakeholder relationships enable companies to be largely
free from regulatory or market risks. Therefore, a good reputation of environmental performance
seems to be a more important intangible resource under such circumstance. In contrast, the
criticisms of CSR (e.g., Friedman, 1970) may be weakened if stringent regulation leads to higher
non-compliance costs when firms do not react. Heinkel et al. (2001) argue that environmental
polluters opt for reforming when the cost of pollution exceeds the reform cost. Overall, both the
strengthening of the stakeholder theory and the weakening of the cost argument can benefit
environmentally sustainable companies in the real estate industry.
Nowadays, Asian markets are at the different stages of economic cycles and urbanization
process, as well as different levels of environmental awareness, naturally leading to distinct
approaches to promote investment towards sustainable property. Keep in mind that the impact of
institutional factors on the CSR-CFP linkage is of major focus in the paper, the following
contributes to discussing and analyzing the institutional frameworks and market structure to
promote sustainable real estate investment in China, Hong Kong and Singapore
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.
3.1 Green Certification System
Established by Akerlof (1970) and Jensen and Meckling (1976), the asymmetric information
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Only these three markets that take up over 80% of sample data have green certified properties, while other markets are of minor
interest in this respect.
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regarding the quality standards may make property market participants either stick to producing
conventional buildings, or misuse the concept of green property as a (deceptive) marketing tool
(Zheng et al., 2011). As such, to address the information asymmetry, scholars argue that a rating
system providing credible and transparent energy and environmental performance of buildings is
required to serve as a direct push to promote investment towards and activate the market of
sustainable real estate (e.g., Qian and Chan, 2008; Lee and Yik, 2004)
The Singapore Green Mark (GM) rating scheme was launched in 2005 by the Building
and Construction Authority (BCA), which essentially assess buildings? environmental and energy
performance. Since its inception, the number of green certified projects has significantly
increased from 17 in 2005 to over 1,000 in 2011.
In contrast, Hong Kong rely more on the private sector to voluntarily promote green
properties. In particular, the HK-BEAM
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rating system was launched in 2002 by private
developers, such as Swire properties. As of October 2009, up to 37% of commercial space and
nearly 28% of dwellings have been certified green. So far, China has yet to adopt a well-
functioning green rating standard for its real estate sector. Since 2007, the Ministry of Housing
and Urban-Rural Development (MOHURD) has been seeking to create a nationwide program
called the “China Green Building Evaluation Label”. Nonetheless, green buildings in China are
still rare. The very low market penetration of green certification may be attributed to the lack of
public recognition of the program, and insufficient institutional and financial mechanism to
reward those who achieved higher scores for energy efficiency (Zheng et al., 2011)
3.2 Regulatory Instrument
Government intervention is said to be one of the most effective ways to promote sustainable
properties (e.g., Varone and Aebischer, 2000). Still, it is debatable how governments can
supplement the market for green building adoption, for each government has its own concerns
and policy instruments. While some favor economic tools to correct externalities due to the
subsidized private cost (e.g., Chan, 2000; Jaffe et al., 2002), others argue that legislation and
regulations remain superior (e.g., Rivers and Jaccard, 2006). Eyre (1997) holds that a mix of
economic and regulatory instruments could be more appropriate for internalizing environmental
externalities. Notably, regulatory instruments may deter opportunistic behaviors in an imperfect
market and create a level playing field for all competitors in the green property market (Chan et
al., 2009).
As mandated by the 2
nd
green building Master-plan
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, all new government buildings in
Singapore with over 5,000 m
2
must achieve top green ratings and existing ones with over 10,000
m
2
will be at least green mark gold-plus level
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. Also, 80% of building must be green by 2030
10
.
Remarkably, thanks to the revised building control act in 2008, Singapore becomes one of the
9
It refers to Hong Kong Building Environmental Assessment Method Society
10
http://www.bca.gov.sg/GreenMark/others/gbmp2.pdf
11
There are four levels of the Green Mark certification, i.e., Platinum, Gold-plus, Gold, and Certified, based on total score gained
for each building project.
9
few countries in the world to set minimum environmental sustainability performance for
buildings, namely, all eligible new building projects must fulfill a level that is on par with the
Green Mark Certified standard. That way it explicitly creates a product market for green real
estate.
In contrast, regulations on green property are still in the infancy in Hong Kong and China.
Compulsory mandates on buildings? energy efficiency are still pending in Hong Kong. Yet, it
affirms that the environmental performance of all newly built government buildings with a floor
area of over 10,000 m
2
must be certified as green by either LEED or HK-BEAM. In anticipation
that aggregate energy demand will rise sharply in China, the 11th “Five Year Plan Guidelines”
contains a target of 20% reduction in China?s energy intensity, 40% of which should come from
energy conservation in buildings. New buildings will be more affected by new design standards
mandating 50% energy savings compared to the1980s standards by the end of the 2010s.
3.3 Economic Instruments
Sustainable properties involving an array of innovative construction techniques is perceived to
have higher upfront costs than conventional ones (OECD, 2003), lifting the green property
market entry barrier. Thus, either cost savings or increased valued, or both, is necessary to make
sustainable real estate attractive to stakeholders. Some argue that monetary or fiscal incentives
may leverage the higher capital expenses, as they are both efficient and effective means to
economize buildings? energy consumption (e.g., Jaffe et al., 2002; Dennis, 2006). Others hold
that the greater availability of green technologies and human capital, the lower the threshold of
green property investment (e.g., Prakash, 2002). Also, market economic force, e.g., energy price,
matters to sustainable real estate, since increased life-cycle cost will make green properties
favorable (e.g., Lee and Yik, 2004).
To ease the financial burdens of going green, a wide range of monetary incentive schemes
are released, e.g., the US$20 million cash subsidy for new buildings (GMIS-NB), a US$100
million for existing buildings (GMIS-EB), and the gross floor area scheme (GM-GFA), coupled
with the “Building Retrofit Energy Efficiency Finance” (BREEF) scheme entitling building
owners bank loans to retrofit their buildings to a greener standard. Also, Singapore strengthens
R&D input to build up expertise in green building design and technologies as well as to develop
industry capability to ensure sufficient supply of green building professionals. Moreover, recent
evidence of sale price premium associated with Singapore green housing projects (Deng, Li and
Quigley, 2012) corroborates a societal attitude towards environmental concern that can be
translated into demand for green buildings and further affect supply-side behavior. Lastly,
electricity price are adjustable periodically to incentivize energy conservation.
In Hong Kong, government launched a US$57 million funding program as of April 2009
to encourage private sector to make their facilities more energy efficient, which is relatively
smaller in scale than Singapore. Traditionally, local government injects little investment into
R&D. The institutional environment in Hong Kong, i.e., the lack of markets for innovations in
the building sector led to a low entry barrier to the conventional building market. Accordingly,
10
key market players have little incentives to venture into new business of sustainable real estate
(Chiang et al., 2001; Chan et al., 2009); As for China, to attain energy efficiency in building
sector, subsidies of 20% of the total investment costs are proposed for projects saving between
15% and 25% on energy, while projects with a rate above 25% can apply for up to 30%
investment subsidy. However, the progress towards maturing green building technology and
cultivating green professionals is in the early stage. Besides, China government keeps electricity
price low, which could have been another direct incentive to conserve energy (Zheng et al., 2011)
3.4 Stock Exchange Engagement
Given that CSR reporting is an integral part of efforts to increase the availability of non-financial
information (e.g., Ioannou and Serafeim, 2011), stock exchanges have complemented to educate
investors and prompt listed firms to disclose non-financial performance, respectively. Yet, few
have made it mandatory so far, especially in Asia where ESG issues have gain momentum just
recently. As such, CSR reporting is set out as voluntary guidelines at most stock exchanges.
The Singapore Stock Exchange (SGX) issued a “Policy Statement on Sustainability
Reporting” and proposed a guide for its listed companies to use for their sustainability
reporting
12
, stating that “Sustainability reporting is not a mandatory requirement for listed
companies under the listing manual…Conceivably, there will be progress towards mandatory
reporting through regulations and rules in the future”; Similarly, Hong Kong Exchanges and
Clearing (HKEx) and China have launched a consultation paper that calls for voluntary
disclosure on ESG issues, which could evolve into a “comply or explain” regime in the future if
the market participants are ready.
Importantly, to generate greater awareness, some exchanges launched / will launch
sustainability index where leaders in addressing ESG issues are included. By 2011, SGX has
reiterated the plan to launch sustainability indices, whereas HKEx has for now decided not to
launch an index of its own given the launch of the Hang Seng Corporate Sustainability index in
July 2010. In contrast, China outperform its counterparts in that three sustainability indices in
Shanghai Stock Exchange (SSE) has been launched since 2008, i.e., SSE 180 Corporate
Governance Index, SSE Corporate Governance Index, and SSE Social Responsibility Index.
4. Data Collection &Analysis
4.1 Environmental Data
Prior studies have advised a number of measures of CSR/CEP: forced-choice survey instruments
(Aupperle, 1991), self-reported toxic release inventory (TRI) (e.g., Konar and Cohen, 2001), or
CSR rating score (e.g., KLD, Innovest). And yet, little contextual and geographic considerations
12
http://www.sgx.com/wps/wcm/connect/cp_en/site/regulation/public_consul-
tation/pc_28Aug2010?presentationtemplate=design_lib/PT_Printer_Friendly
11
are given to Asia. One exception could be the CLSA (Credit Lyonnais Securities Asia) used by
Cheung et al. (2010), Klapper and Love (2004) and Durnev and Kim (2005). However, this
indicator is constructed with subjective responses to 57 questions and merely reflects corporate
governance dimension of CSR.
Given the data richness, two types of environmental performance proxies at real estate
industry are used in this paper. Firstly, we use the disclosure-based CSR rating score – the “Asian
Sustainability Rating” (ASR)
13
by “Responsible Research”, a leading provider of independent
ESG research in Asia
14
. One advantage of the ASR dataset is its comprehensiveness in capturing
the full picture of ESG factors through a set of 100 proprietary sustainability indicators
representing nearly all of the most realistic assessment of achievable best sustainability practices
specifically for companies in MSCI AC (All Country) Asia ex Japan
15.
Importantly, the ASR score can
be disaggregated into four sub-groups, of which its environmental dimension is used to measure
CEP in this paper:
- General: Assessment of the presence and comprehensiveness of overall sustainability
reporting.
- Environment: Assessment of environmental policy and reporting on resource usage and
carbon emission. Importantly, this dimension assesses both transparency on resource
consumption information and the extent of environmental responsiveness (See Appendix
1 for details)
- Social: Assessment of engagement with community, supplier, employees and customers.
- Governance: Assess governance policy, reporting, systems, financial control, board
quality and independence, audit quality and so forth.
- Insert Appendix 1 Here -
Another advantage of the ASR is its in-depth understanding of local markets by having
analysts with local market expertise and language skills (e.g., Mandarin, Cantonese, Korean,
Hindi and English). Further, the ASR aims at accurately reflecting the strategic sustainability of
Asian companies by giving a half point score if the data is only in the local language without
English version
16
.To explicitly control for the lack of transparency and high family ownership in
Asian capital markets (Cheung et al., 2010), listed subsidiaries are treated as separated investable
entities from holding companies in the sense that information declared by the holding company
is not considered sufficient for developing an understanding of the subsidiary?s sustainability
practices.
13
It has been so far the first comprehensive CSR rating exclusively for Asian listed companies.
14
In 29 June 2012, It was acquired by the “Sustainalytics BV”, a Amsterdam-based responsible investment research firm aiming
to add talent and expertise in the Asian responsible investment market into its global environmental, social and governance
research and analysis
15
To make sure that the resulting findings are as unbiased as possible, there is neither engagement and questionnaire nor the
highly subjective elements in the methodology. Thus, All ASR assessments are done in-house and based on publicly available
information such as annual reports, sustainability or CSR reports, press releases and website information
16
Scoring for each criterion is binary and a full point can only be achieved if submissions are in English reflecting the fact that
this is the language companies must use if they are to successfully and responsibly communicate with the global investment
community.
12
Moreover, all data point used are collected from public source without direct engagement
with companies, e.g., stock exchanges filings, annual financial and/or CSR reports, company or
NGO websites. That way ASR is not immune to the assumption that reporting is a proxy of
performance
17
, which plagues most studies using disclosure as the proxy for CSR performance.
Similar with the Kinder, Lyndenberg and Domini (KLD) dataset, each data point is
equally-weighted to reckon the aggregated and disaggregated ASR scores. Up to date, literature
has not drawn a theoretically derived ranking of importance for the various stakeholder groups a
guide for empirical work (Cheng et al., 2011), whilst some use differential weights based on
either subject academic opinion (Graves and Waddock, 1994) or analytic hierarchy process to
derive weights (Ruf et al., 1993). Mitchell et al (1997) even hold that finding a universally
accepted ranking is impossible theoretically. Therefore, this paper follows prior studies (e.g.,
Waddockand Graves, 1997; Hillman and Keim, 2001; Waldman et al., 2006) by assigning equal
weights to each of data point of ASR. Presumably, the distinct materiality of sub-dimension of
ASR can be partly measured by the different number of data points within each category.
To ensure that the largest and most influential companies domiciled and listed in Asian
countries are covered in the ASR
18
, several approaches and criteria are applied to form the ASR
company universe (See Appendix 2 for details). In total, a universe of 542 and 750 publicly listed
companies are included for the ASR 2010 and the ASR 2011, respectively
19
, of which 40 real
estate entities (4 REITs and 36 REOCs) are for ASR 2010 and 62 (11 REITs and 51 REOCs) are
for ASR 2011. There are 37 companies rated twice over the sample period.
- Insert Appendix 2Here -
Secondly, to mitigate concerns about the symbolic nature of disclosure-based CSR rating
(see Patten, 1991; Gray and Bebbington, 2007; Cormier et al., 2011), another variable –“Green
Building” measuring a concrete and substantive environmental sustainability practice in real
estate industry is considered. This binary variable has the value of 1 if a listed real estate
company develops, operates or owns green properties certified by the Green Mark, HKBEAM or
LEED labeling program; and value of 0 otherwise. Its validity is backed by the notion that green
real estate is not only marketed for its ability to reduce resource usage, but also helps identify
property companies with strong commitment to environmental sustainability (Eichholtz et al.,
2010; Deng, Li and Quigley, 2011).
Given the inherent distinction between the two types of environmental proxies, different
capital market responses are possible and different empirical results are thus anticipated.
17
Though the ASR team acknowledges that it is challenging to report on all activities being undertaken, it is vital that companies
prioritize the communication of their internal practices in order to better inform investment decisions.
18
Banking, Real Estate, Telecoms and Utilities are considered the high impact sectors for which several sector specific indicators
are developed.
19
ASR analysts compile information and benchmark companies at the beginning of each year and the ASR report will usually be
released to the public every September. Noticeably, the ASR review companies? sustainability performance of the past fiscal year.
Thus, the ASR 2010 and ASR 2011 proxy for the corporate sustainability performances for the FY 2009 and FY 2010,
respectively.
13
4.2 Dependent Variable
Previous literatures imply CSR benefits are mostly intangible in nature, if any (e.g., Turban and
Greening, 1996; Waddock and Graves, 1997; Gardberg and Fomburn, 2006). Hence, Tobin?s Q is
used in this paper, as it is widely understood as an indicator of intangible value (e.g., Dowell et al.,
2000; Konar and Cohen, 2001). Also, Guenster et al (2010) argue that the use of Tobin?s Q is
sufficient particularly when analyzing CSR, as it reflects reputation effects and investor trust. Also,
in contrast with accounting-based measures, i.e., ROA and ROE, using this variable can avoid
backward-looking bias and data manipulation.
Typically, a firm?s market value is based on the present value of future profitability
discounted at financial market risk perception of the firm (Fama, 1970). Following prior studies (e.g.,
Lindenberg and Ross, 1981; Jaffe, 1986; Konar and Cohen, 2001), Tobin?s Q increases with the
intangible asset value of firms (for details, please refer to Appendix 3)
- Insert Appendix 3 Here -
In this paper, due to the missing data on the replacement cost of corporate tangible assets
for most firms, we follow the way Kaplan and Zingales (1997) and Guenster et al. (2010)
compute Tobin?s Q. In essence, it is the ratio of the market value of assets to the book value of
assets
20
.Though there are other more sophisticated methods e.g., Perfect and Wiles (1994), this
type of calculation appears the most efficient and applicable approximation to ensure data
richness for our sample.
4.3 Independent Variables
We match the ASR data to the “Compustat” and“Bloomberg” database by ticker, company name
and GVKEY number
21
. Since the ASR is released in each September, all financial information is
matched to appropriate year-end to mitigate the look-ahead bias (Baquero et al., 2005; Jaffe et al.,
1989). To account for firms? heterogeneities, several control variables, such as firm size, leverage,
sale growth, profitability, and firm age, are considered.
Following the seminal work of Waddock and Graves (1997), firm size and leverage are
included: size is measured by the natural logarithm of book value of total asset, and leverage is
proxied by the ratio of long-term debt to asset. Also, to condition on any difference in corporate
characteristics relevant to firm value, we include past 1-year sale growth (e.g., Schmalensee,
1989; Hirsch, 1991). Besides, firm age, i.e., the difference between the first trading day on the
“Factset” dataset and the respective ending date of analysis is calculated. Presumably, the age of
20
The market value of assets is defined as the sum of the book value of assets and the market value of common stock outstanding
minus the sum of the book value of common stock and balance sheet deferred taxes
21
It is the identifier of individual stock in the COMPUSTAT database.
14
a firm?s assets may negatively relate to intangible-asset value because a firm with older
technology and equipment may be less efficient and thus not as profitable as one with new
technology (Konar& Cohen, 2001). Further, profitability measured by return on asset (ROA) is
also included as suggested by Derwall et al. (2010)
In addition, time fixed effects control for macro-economic climate common to all. Also,
market fixed effects in which real estate companies are listed rather than originated are included
to manifest the fact that public real estate companies are eager to establish environmental
reputation by complying with local regulations market participants are more familiar with.
Although R&D expenses tend to positively relate to intangible firm value (e.g., Konar and Cohen,
2001; King and Lenox, 2002), we fail to collect such information given the notorious data
scarcity in Asia.
To empirically examine the potential impact of different national regulatory or
institutional frameworks on the CSR-CFP relationship, several interacting variables between
market fixed effects and the two environmental sustainability proxies are constructed accordingly.
4.4 Descriptive Statistics
As shown in Table 1, there are 40 and 62 real estate companies included in the ASR 2010 and
ASR 2011, respectively. Over 80% of firms are listed in China, Hong Kong and Singapore.
Specifically, Hong Kong-listed firms have the largest representation with 47 firm-year
observations, while firms from Indonesia and Malaysia only appear once. As a whole, the
environment dimension of ASR remains consistent at 14%. Specifically speaking, improvements
in the environmental performance can be seen in China and Hong Kong, while dramatic drop
takes place in India, Philippine and Singapore, of which results of the latter two may be
attributed to the addition of poor performers to the data sample.
- Insert Table 1Here -
Furthermore, around 30% of firms commit to green buildings, of which firms listed in
Singapore and Hong Kong, are regional leaders.
Table 2 presents summary statistics of major financial variables. Compared to other
variables, there seems a wide variation in firms? sale growth opportunities. Importantly,
correlations among control variables are acceptably low, leading multi-co-linearity not to be an
issue in regression.
- Insert Table 2Here -
5. Empirical Analysis
5.1 Prior Empirical Studies on CSR-CFP Debate
15
Empirical literatures relating CSR to CFP fall into three subsets: event studies; portfolio studies;
multivariate regression analysis. Until now, most studies have been too fragmented to draw any
generalized conclusions (Orlitzky et al., 2003). Ulman (1985) and Griffin et al. (1997), for
example, posit that methodological inconsistencies make most evidences incomparable and
inconclusive. Other flaws include stakeholder mismatching (Wood, 1991), measurement errors
(Waddock and Graves, 1997), omitted variable bias (e.g., Aupperle et al., 1985), and endogenity
issues (e.g., Nogareda et al., 2006), etc.
Firstly, event studies examine the immediate effect of new information content of an
environmental issue on the announcement return (MacKinlay, 1997).Literatures have reported a
negative market reaction to the release of bad environmental news(e.g., Joshiet.al., 2005; Kona
and Cohen, 1997), as well as the asymmetric effect (e.g., Hamilton, 1995; Klassen et al., 1996)
22
.
And yet, the validity of the linkage is challenged by the so-called “cash-flow effect” that
investors may react to cash-flow projections instead of environmental news; Secondly, portfolio
analysis typically involves a comparison of risk-adjusted returns between mutually exclusive
portfolios with differing environmental performance. Scholars (e.g., Guenster et al., 2010 and
Derwall et al., 2005) find a positive and dynamic relation between environmental performance
and stock returns, while Cohen et al. (1997) find that investors receive neither a premium nor a
penalty for investing in environmental leaders. Notably, portfolio analyses exclusively examine
the investor perspective and do not examine causal effects.
Thirdly, multivariate regressions are used to explore relatively long-run CSR and CFP
relation. In particular, some find CSR to be positively related to financial performance and
negatively linked with financial risks (Spicer, 1978; Konar and Cohen, 2001), whereas others fail
to report a significant CSR-CFP relation (e.g., Chen and Metcalf, 1980;Mahapatra, 1984;
Elsayed and Paton, 2005). Nonetheless, those results should be interpreted with the caution that
correlation does not necessarily imply causation.
An important caveat is the issue of the endogenity between CSR and CFP : on the one
hand, based on the “good management theory” (e.g., Waddock and Graves, 1997; Sharma and
Vredenburg, 1998), good management of relationships with stakeholders, such as government,
employees or investors, can improve legitimacy, staff productivity and market visibility and
reputation, which ultimately lead to competitive advantages; on the other hand, the “slack
resource theory” (e.g., Waddock and Graves, 1997; Margolis and Walsh, 2003) hold that firms
with superior financial performance are more likely to commit to socially responsible practices
because they have more resources to afford CSR activities than less profitable companies.
Among few studies addressing the endogenity issues are Wagner et al. (2002), Aerts et al. (2008),
and Galdeano-Gomez (2008), and Cheng et al. (2011), in which either the simultaneous equation
model or instrumental variables (IV) approach is employed.
Emerging literatures on CSR in Asia provide some evidence that environmental
22
That is, stock price increase following positive environmental information about the firm is less strong than a price decline in
response to negative news
16
information is valued by market participants but at a gradual pattern (e.g., Pargal and Wheeler,
1996; Powers et al., 2010). For example, Gupta and Golder (2005) using Indian data find the
market penalized environmental unfriendly behavior with negative abnormal returns of up to
30%. By contrary, Wang and Yuan (2004) find that the effect of environmental certification, such
as ISO 9000 and ISO 14000, on equity pricing is statistically insignificant in China. Also, the
Japanese stock market seems to respond to environmental information significantly after the
underlying environmental policy got more stringent (Takeda and Tomozawa, 2008). Nonetheless,
most of the results offer a short-term perspective, leading to weak economic and statistical
significance in the CSR-CFP relation.
5.2 Model Specification
As compared to the event study examining the short-term market reaction to CSR and the
portfolio approach using asset pricing model, the multivariate regression approach is appropriate
to this paper?s data sample.
Importantly, it is noted that CSR and firm value may be associated through other
variables, i.e., correlated with error terms. For example, high-value firms are more likely to
attract investors, and greater international investor holdings may lead to better performance in
CSR (Cheung et al., 2010). Thus, to address the endogenity issues that result in biased and
inconsistent estimates, this study follows Cheng et al (2011) using instrumental variables (IV)
approach
23
to partly mitigate the endogenity issues and omitted variable bias. The instrument is
the lagged environmental sustainability performance measured by the two proxies, aiming to
capture the persistence of environmental performance measures.
24
3 1
1 1
it n n n n it
n n
it it
Q c X ENV M Y | ¸ o o c
= =
+ = + + + +
¿ ¿
(1)
In model (1), Q
i
denotes the natural logarithm of Tobin?s Q. c is a constant and is an
independently identical distribution (iid) error term. includes a set of value-relevant control
variables, such as firm size, leverage, sale growth, profitability, and firm age. M
n
aims to capture
market fixed effects
25
.The year dummy, Y
n,
is intended to control for macro-economic attributes
common to all
26
. , , are estimated coefficients. Importantly, ENV
it
represents both
23
The advantage of the instrumental variables approach is that the estimated coefficients are more likely to be consistent,
whereas the estimates from an instrumental variables approach are less efficient because the standard errors are large (Wooldridge,
2002)
24
The lagged disclosure-based CSR rating score and green dummy appear good instruments in that their correlation with
environmental measures are significantly high and that with Tobin?s Q is insignificantly low. Correlation test are available upon
request
25
There are 7 markets in the raw data. To gain economic significance, we group India, Indonesia, Philippine and Malaysia
markets as one category–“others”. The validity of doing so is backed up by the small portion of firm-year observations in the data
sample. Besides, China, Hong Kong and Singapore markets are measured separately.
26
The year of 2010 is the base group.
17
measures of environmental performance, i.e., the disclosure-based environmental rating score
and the binary variable indicating green building practices. Thus, o measures the possible
association between environmental performance and firm valuation in real estate industry.
1
2 3
1 1 1
it it n n n n n it it
n n n
n
M Y M ENV Q c X | ¸ o | c
= = =
= + + + + +
¿ ¿ ¿
(2)
Model (2) is developed to investigate if the CSR-CFP association varies across markets
with differing regulatory and institutional frameworks. To accomplish it, several interacting
variables between market dummies and environmental measures are created, and ?
n,
captures
this potential effect accordingly.
The IV regressions are estimated using the two-step least square method (2SLS), as
follows:
1 3
1 1
ENV
it n n n n it
n n
it it
ENV a Z X M w Y o | ¸ o
= =
= + + + + +
¿ ¿
(3)
1 2 3
*
1 1 1
it it n n n n n it it
n n n
n
Q M Y M ENV c X | ¸ o | c
= = =
+ = + + + +
¿ ¿ ¿
(4)
where
ENV
it
Z denotes instruments and others denote exogenous variables in model (3).
*
it
ENV is the
fitted value of
it
ENV from model (3), which is subsequently used as an independent variable in
model (4). In the following tables, only the second-stage regressions are reported, while the first-
stage is available upon request.
5.3 Empirical Results
Table 3 reports the 2SLS estimate results of model (1), of which environmental performance are
measured by disclosure-based rating score in column (1) and by green building dummy variable
in column (2), respectively. Using the lagged environmental performance measures as instrument
reduces the sample size to 74 firm-year observations that appear twice over the sample period.
- Insert Table 3 Here -
Overall, most control variables have expected sign, except for the sale growth and
riskiness. Only firm age is statistically significant across all model specifications. Notably,
column (1) and (2) both yield positive results, though marginally significant at 10% level. The
economic significance is substantial: 1% increase in the environmental dimension of ASR rating
score is associated with about 30% increase in firm value proxied by Tobin?s Q, while a 15%
firm value premium is commanded by real estate companies committing to green property,
ceteris paribus.
Table 4 provides estimate results for model (2).Interestingly, column (1) using the
18
disclosure-based rating environmental proxy reports no significant results, whilst column (2)
with the substantive green building proxy finds significant results at 1% level. Economically, it
suggests that compared to other markets, only in Singapore are real estate companies committing
to green buildings valued higher by capital market by roughly 20%, ceteris paribus. Plausibly, it
can be attributed to the well combination of stringent regulatory and institutional frameworks
and market structure that draw societal interest in corporate efforts to address environmental
issues.
- Insert Table 4 Here -
Furthermore, given the inherent difference between real estate investment trusts (REITs)
and real estate operating companies (REOCs)
27
, robustness test are conducted to perform the
above IV regression estimation only within REOCs sample with a smaller of 66 firm-year
observations. Results from column (3)-(4) in Table 3 again provide the marginal evidence of the
positive relation between environmental performance and firm value, which is significant at 10%
level. Also, results in column (3)-(4) of Table 4 remain consistent in that only in Singapore are
real estate companies committing to green buildings valued higher than its non-green
counterparts.
In addition, for any specification of Table 4, EnvScore are by no means significant, which
may lend support to the criticisms of the symbolic nature of disclosure-based CSR rating (e.g.,
Patten, 1991; Gray and Bebbington, 2007; Cormier et al., 2011)
6. Conclusion and Future Research
The past decade has witnessed the growing popularity of CSR among business community and
policy makers. Given the fact that real estate sector accounts for over one third of global energy
consumption (RICS, 2008), it provides a tremendous potential to address global CO2 emission
and achieve energy efficiency (Eichholtz et al., 2010). Institutional investors are eager to assess
and improve the environmental performance of their direct and indirect property holdings, and in
turn real estate companies tend to improve their environmental performance to draw investor
interest via either CSR reporting or committing to green building practices.
Despite the growing literatures reporting economic returns to direct investment in energy
efficiency and sustainability in buildings at asset markets (e.g., Eichholtz et al., 2010; Deng et al.,
2012), little has been known about the financial consequence of incorporating environmental
sustainability into corporate strategy. This paper fills gap by examining whether corporate
environmental performance (CEP) positively relates to financial performance (CFP) in real estate
industry. Relying on volumes of literatures on CSR-CFP debate, we develop a model to test such
relationship. Our model uses Tobin?s Q to measure CFP and capture the CSR-related benefits,
27
A REOC is similar to a real estate investment trust (REIT), except that an REOC can reinvest its earnings into the business,
rather than distributing them to unit holders like REITs do.
19
which is intangible in nature. We construct two distinct environmental performance proxies to
examine the appropriateness of environmental screening for sustainable real estate investment.
Our empirical model acknowledges heterogeneous institutional set-up sand market
structure in directing towards environmental sustainable real estate investment across different
Asian economies, and examines the CEP-CFP relation which varies across markets in the region.
Our empirical study found a marginally positive relation between CEP and CFP measured
by both environmental proxies, implying that investors factor environmental information into
their pricing decision in Asia. Our results also find that only in Singapore where real estate
companies committing to green buildings enjoy significantly higher market premium, confirming
that the CEP-CFP relation is highly dependent on environmental institution frameworks. Our
study also document the superiority of using green building practices as screening criteria for
sustainable real estate investment to the conventional social screening, of which the former
represents substantive, concrete and visible corporate resources committing to environmental
sustainability than the latter.
Some important implications can be drawn this study. The positive CEP-CFP relation can
help ease corporate concern to go green without compromising financial objectives. This is
consistent with the existing literature (see for example, King and Lenox, 2002).Those interested
in sustainable real estate investment in Asia should invest in markets where a good combination
of institutional set-up and market structural have been well established and rigorously
implemented. Policy makers are encouraged to design proper environmental legislation as well
as economic programs to direct the economy towards environmentally sustainability.
Finally, the dependency of CEP-CFP relation in real estate industry on the market
structure and institutional framework warrants further studies in more Asian market, such as
Singapore. Due to the data limitation, the current sample only covers the two-year ASR rating
data and green building information, and future research based on longer sampling period can
thus provide additional information about long term relationship between CEP and CFP.
Nevertheless, the current study do contain a sample for individual firma that represent a wide
cross-section of emerging Asian markets as well as a significant proportion of respective market
total stock market capitalization.
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26
Table 1. Summary Statistics of Environmental Measures
Full Sample ASR 2010 ASR 2011
Markets Obs
Environment
Sustainability
Green
Building
Obs
Environment
Sustainability
Green
Building
Obs
Environment
Sustainability
Green
Building
China (Mean) 13 7.4% 15.4% 7 3.6% 14.3% 6 11.8% 16.7%
(Std.dev)
7.0% 37.6% 6.3% 37.8% 5.2% 40.8%
Hong Kong 47 12.1% 25.5% 20 9.1% 25.0% 27 14.3% 25.9%
15.6% 44.1% 14.0% 44.4% 16.6% 44.7%
Indonesia 1 15.8% 0 0 1 15.8% 0
India 7 8.0% 0 3 10.0% 0 4 6.6% 0
7.7%
10.0%
6.6%
Malaysia 1 5.0% 0 1 5.0% 0 0
Philippines 4 46.3% 0 1 85.0% 0 3 33.3% 0
44.8%
. 44.8%
Singapore 29 18.9% 55.2% 8 32.5% 75.0% 21 13.8% 47.6%
29.8% 50.6% 39.3% 46.3% 24.5% 51.2%
Total 102 14.5% 29.4% 40 14.7% 30.0% 62 14.3% 29.0%
22.0% 45.8% 24.8% 46.4% 20.2% 45.8%
(Data Source: Asian Sustainability Rating)
27
Table 2. Summary Statistics of Major Variables
Variables Obs Mean Std. Dev. 1 2 3 4 5 6
1. Tobin's Q 102 0.97 0.33 1
2. Size ($ mil) 102 14,877.68 13,162.34 -0.16 1
3. Leverage (*100) 102 18.36 8.35 0.19* -0.11 1
4. Sale Growth (*100) 102 38.30 122.05 -0.01 0.00 0.03 1
5. ROA (*100) 102 7.62 5.33 -0.10 0.09 -0.20** -0.11 1
6. Firm Age (# of days) 102 5,394 3,405 -0.22** 0.43*** -0.38*** -0.18* 0.15 1
Notes:
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively
28
Table 3. 2SLS Estimate Results of Regression on Environmental Sustainability
(Dependent Variable: Natural logarithm of Tobin's Q)
(1) (2) (3) (4)
Independent Variables
EnvScore (%) 0.3066* 0.3847*
(0.1737) (0.2059)
Green(1=Yes) 0.1487** 0.1435*
(0.0654) (0.0819)
Control Variables
Size ($mil) -0.0269 -0.0401 -0.0026 -0.0336
(0.0425) (0.0463) (0.0459) (0.0474)
Leverage (*100) 0.0060 0.0094** 0.0036 0.0087*
(0.0038) (0.0037) (0.0046) (0.0046)
Sale Growth (*100) -0.0003 -0.0004 -0.0004* -0.0004
(0.0002) (0.0003) (0.0002) (0.0003)
ROA (*100) 0.0022 0.0045 0.0062 0.0061
(0.0042) (0.0033) (0.0061) (0.0046)
Firm Age (# of days) -0.00003*** -0.00002*** -0.00003** -0.00002**
(0.0000) (0.0000) (0.0000) (0.0000)
Intercept 0.1463 0.2282 -0.0205 0.1844
(0.4720) (0.5448) (0.4939) (0.5638)
Year Fixed Effect Y Y Y Y
Market Fixed Effect Y Y Y Y
Adjusted R
2
37.77% 33.86% 39.41% 32.11%
Obs 74 74 66 66
Notes:
The two-stage least square estimation method is employed to in part mitigate the endogenity issue, of which the lagged
environmental performance is taken as the instrument. Since there are 74 overlapping firm-year observations over 2010-2011, the
sample size for IV regression is narrowed down from 102 to 74;
Only the second stage regression results are reported here, while the first-stage regression estimate is available upon request.
Each model includes year and market dummies;
Column (1)-(2) reports estimate results for full sample of 74 data point, while column (3)-(4) report robustness test results only
within REOC group; Newey-West Heteroskedasticity-robust standard errors are reported in the parenthesis; EnvScore and Green
denote disclosure-based environmental dimension of ASR score and green building dummy variable, respectively;
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively.
29
Table 4. 2SLS Estimation of Cross-Country Environmental Sustainability
Regression
(Dependent Variable: Natural Logarithm of Tobin's Q)
(1) (2) (3) (4)
Independent Variables
CH_EntScore 0.5034 0.2436
(0.9734) (0.9822)
HK_EnvScore -0.2972 -0.3519
(0.1797) (0.1856)
SG_EnvScore 0.0013 0.1089
(0.1109) (0.1439)
CH_Green 0.1372 0.0939
(0.1961) (0.1917)
HK_Green 0.0095 -0.0123
(0.0880) (0.0934)
SG_Green 0.2042*** 0.2915*
(0.0710) (0.1512)
Control Variables
Size ($mil) -0.0483 -0.0391 -0.0292 -0.0208
(0.0519) (0.0593) (0.0503) (0.0640)
Leverage (*100) 0.0072 0.0072 0.0037 0.0058
(0.0056) (0.0055) (0.0067) (0.0058)
Sale Growth (*100) -0.0003 -0.0003 -0.0004 -0.0003
(0.0002) (0.0002) (0.0002) (0.0002)
ROA (*100) 0.0015 0.0036 0.0037 0.0073
(0.0046) (0.0036) (0.0062) (0.0055)
Firm Age (# of days) 0.0000 0.0000 0.0000 0.0000
(0.0000) (0.0000) (0.0000) (0.0000)
Intercept 0.3133 0.2383 0.2376 0.0954
(0.6152) (0.6505) (0.6408) (0.7187)
Year Fixed Effect Y Y Y Y
Market Fixed Effect Y Y Y Y
Adjusted R
2
32.84% 33.91% 31.99% 32.65%
Obs 74 74 66 66
Notes:
The two-stage least square estimation method is employed to in part mitigate the endogenity issue, of which the lagged
environmental performance is taken as the instrument. Since there are 74 overlapping firm-year observations over 2010-2011, the
sample size for IV regression is narrowed down from 102 to 74;
Only the second stage regression results are reported here, while the first-stage regression estimate is available upon request.
Each model includes year and market dummies. Interacting variables are constructed between market dummies – CH, HK, and
SG, and environmental measures –EnvScore that is disclosure-based rating and Green indicating commitment to green building
practices.
Column (1)-(2) reports estimate results for full sample of 74 data point, while column (3)-(4) report robustness test results only
within REOC group; Newey-West Heteroskedasticity-robust standard errors are reported in the parenthesis.
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively.
30
Appendix 1. Corporate Environmental Sustainability Score
Question
Number
Environmental Criteria
1
Is there an environment code/policy?
2
Is the environment code/policy comprehensive? (i.e. covers water, energy, building,
transport)
3
Does the company follow an international/national environmental management system? (e.g.
ISO 14001)
4
Does the company provide GHG emissions data?
5
Is the data clear and comprehensive?
6
Does the company provide energy consumption data?
7
Is the energy consumption data clear and comprehensive?
8
Does the company have any energy consumption initiatives?
9
Does the company set targets on energy consumption?
10
Does the company respond to the latest version of the Carbon Disclosure Project?
11
Does the company respond to the latest version of the Carbon Disclosure Project and make
the CDP data public?
12
Has the company allocated resources to develop energy efficient technologies or solutions?
13
Has the company set targets for % of energy to come from renewable?
14
Does the company provide water consumption data?
15
Is the water consumption data clear and comprehensive?
16
Does the company have any water consumption initiatives?
17
Does the company set targets on water consumption?
18
Does the company provide waste production data?
19
Is the waste production data clear and comprehensive?
20
Does the company have any waste reduction initiatives?
21
Does the company set targets on waste reduction?
Notes:
Binary score, i.e. 1 or 0, is allocated to each criteria; If only local language is available without English version,
half point is granted, which fully takes into account the local expertise on sustainability
31
Appendix 2. Asian Sustainability Rating (ASR) Company Selection
To ensure that the ASR results represent the largest and most important companies domiciled and
listed in Asian markets, several proprietary and comprehensive sample selection measures were
taken. Specifically, a three-step approach was implemented for ASR 2010:
1. An initial shortlist of companies was extracted from a universe of 3,000 publicly listed
companies in Asia, ex Japan. The top 500 companies based on their free float weighted
market capitalization were selected for inclusion;
2. his initial list was subsequently examined and cross-referenced with the Fortune 500 Global
2009 list to ensure that key Asian companies were not excluded;
3. To ensure that the universe provided a detailed view of sustainability performance across
Asia and opportunities for country comparison, ASR extended the research to ensure
coverage of the largest 20 companies in each of the ten Asian markets, by free float market
capitalization.
As far as the ASR 2011 is concerned, other stylized considerations than the
aforementioned measures were undertaken to both reflect the market dynamics and reach broad
market coverage as much as possible. For example, the criteria for firm inclusion were a
minimum free flow market capitalization (FFMC) of US$ 0.5Billion. After several thousand
companies that met that FFMC cut off were taken from the proprietarily chosen markets, China
was arbitrarily capped at 200 companies and Malaysia, Indonesia, Philippines and Thailand set a
minimum of 30 companies so as to maintain a balanced sample. Notably, in the case of the latter
four countries, the ASR 2011 did allow some companies with less than US$ 0.5 Billion FFMC in
the sample in order to satisfy the 30 company minimum that was established for those markets.
32
Appendix 3. Firm Value Decomposition & Tobin’s Q
A firm?s market valuation is based on the present value of future profitability discounted at
financial market risk perception of the firm (Fama, 1970). Typically, a firm?s value can be
composed of two parts: tangible and intangible assets
28
. Given that the potential role of
environmental sustainability reputation in firm valuation is of major interest in this paper, the
following contributes to a specification that justifies the use of Tobin?s Q to capture the
intangible asset value of firms, which follows from prior studies (Lindenberg and Ross, 1981;
Jaffe, 1986; Konar and Cohen, 2001).
The market value can be expressed as:
T I
MV V V = +
(1)
Where MV is the market value of firm, and V
T
and V
I
are the component of firm value
contributed by the tangible and intangible assets of the firm, respectively. In practice, the MV of a
firm is observable and the V
T
is usually measured by replacement cost (RC) of the tangible assets
of firm (Konar and Cohen, 2001). However, V
I
is not visible to markets. Subsequently, let
equation (1) divided by V
T
at both sides,
/ 1 ( / )
T I T
MV V V V = + (2)
Since V
T
can be measured by RC, equation (2) becomes:
/ 1 ( / )
I T
MV RC V V = +
(3)
Clearly, the left side of equation (3) shows how Tobin?s Q is defined by Tobin (1969)
29
.
As such, equation (2) can then be written as:
1 ( / )
I T
Q V V = + or 1 ( / )
I T
Q V V ÷ =
(4)
Thus, for a firm with no intangible asset value, the market value of the firm should equal
the replacement value of its tangible assets, and Tobin?s Q should equal 1. As intangible asset
value of a firm increases, the value of Tobin?s Q will increase accordingly. Although theory does
not indicate a specific functional form for an equation to estimate the Q, most prior literatures
use the additive form derived from the equation (1). As such, the following specification is
28
Tangible asset s consist of replacement value of property, plant and equipment and so forth; Intangible assets are either
production factors or resources that enable firms to earn return over it tangible assets, such as patents, trademarks and brand
names as well as litigation or liability. (Konar and Cohen, 2001)
29
According to Tobin (1969), the Tobin?s Q is defined as the ratio between the market value and replacement value of the same
physical asset, of which the numerator is the valuation in the market for exchanging existing assets while the denominator is the
replacement or reproduction cost in the market for newly produced commodities.
33
estimated to test the impact of various factors, especially environmental sustainability reputation
in this study, on the intangible asset value of the firm:
1 ( / )
I T
Q V V X o | c ÷ = = + +
¿
(5)
Where X is a vector of explanatory and control variables that may affect intangible asset
values.
doc_260672710.pdf
The greenness of real estate industry has much potential to tackle the global warming and climate change, given that it accounts for more than one third of global CO2 emission.
1
Towards Sustainable Real Estate Investments: Perspectives from
Asian Emerging Markets
Li Zhiliang Deng Yongheng
National University of Singapore National University of Singapore
[email protected] [email protected]
Abstract
The greenness of real estate industry has much potential to tackle the global warming and
climate change, given that it accounts for more than one third of global CO2 emission. Despite
the reported benefits of investment in green properties at asset market, little has been known
about the financial economic consequence of integrating environmental sustainability into
corporate strategies. This paper, focusing on the firm value effect of going green, seeks to
provide insight about the market perception of environmental sustainability in the real estate
industry. Tobin?s Q is used to measure the intangible asset of firm value, and the use of two
distinct types of environmental performance proxies can shed new light on the appropriateness of
environmental screening for sustainable property investment. We adopt a two-stage least square
approach (2SLS) is employed to partly alleviate the endogenity issue.
Our results document a marginally positive association between environmental
sustainability and firm value within a sample of Asian public property companies over 2010 and
2011. More importantly, sub-market analysis reports that whether or not, and to what extent
markets value environmental sustainability relies on the underlying institutional frameworks and
market structure. This paper is the first cross-country study on the financial outcome of
environmental sustainability in real estate industry in Asia, and its implications can be substantial
to other emerging Asian economies seeking to promote environmental sustainability in the built
environment.
Keywords: Environmental Sustainability, Real Estate Companies, Asian Emerging Markets,
Firm Value
J EL Codes: G3, M14, Q51
2
1. Introduction
Environmental sustainability
1
has become the central theme of corporate social responsibility
(CSR) nowadays, not only reflecting the public concern about climate change but also the
shifting taste amongst consumers and investors (Stern, 2008). In particular, institutional investors
with real estate exposure, such as pension funds and insurance companies, are facing broad
societal pressure to assess and improve the environmental performance of their real estate
investments (Bauer et al., 2011). Accordingly, the extent that real estate companies? incorporate
environmental sustainability into their business practices now becomes a matter of great interest
to market participants.
To meet the non-financial information needs of investors, several private and public
initiatives have been shaped to evaluate environmental sustainability performance of individual
company or portfolio, e.g., the Carbon Disclosure Project (CDP) and the United Nations Global
Compact (UNGC). Also, public entities are eager to exhibit their environmental awareness and
responsible activities through CSR reporting, engaging third-party CSR rating, or the inclusion
into sustainability indices, and so forth
2
.
More importantly, the global emergence of green building rating systems
3
is gaining
popularity in the real estate industry, being a critical step towards promoting investment in
sustainable real estate and private provision of environmental public goods (Kotchen, 2006).
Properties certified as „green? are not only marketed as having better energy and environmental
performance, but also aligned with higher cash flows and capital values (see Eichholt, Kok and
Quigley, 2010 and 2011a;Fuerst and MacAllister, 2011a and 2011b; Brounen and Kok, 2011;
Kok and Jennen, 2011; and Deng, Li and Quigley, 2012). Moreover, it will also help publicize
property companies? strong commitment to environmental sustainability stewardship (Eichholtz
et al., 2010).
Despite the above mentioned benefits, the progress of mainstreaming investment towards
sustainable property is still stagnant. Some attribute such sluggish progress to the lack of
sufficient information on the financial performance of such investments (Pivo, 2008). Indeed,
there has been so far no publicly available evidence on the financial consequences of committing
to environmental sustainability at firm level, without which investors and property owners are
reluctant to allocate more green property into their investment portfolio. This paper aims to fill
this gap by examining whether or not, and to what extent does corporate environmental
performance (CEP) relate to corporate financial performance (CFP) in the real estate industry.
There is a large volume of literature on corporate social responsibility and corporate
1
Since the Brundlandt report in 1987, environmental sustainability has been widely accepted as development that meets the needs
of the present without compromising the ability of future generations to meet their own needs.
2
For example, KLD, SAM and Innovest are independent third-party CSR or sustainability rating agencies; Dow Jones
Sustainability index, Domini 400 Social index, and FTSE KLD 400 Social index.
3
LEED and Energy Star in the U.S., BREEAM in the U.K., Green Mark in Singapore, Green Star in Australia, and HKBEAM in
Hong Kong
3
financial performance debating on issues relating to environmental sustainability. One intriguing
question has been the source of this controversy: can firms? environmental performance be
aligned with the added value? On the one hand, skeptics perceive that CSR is too expensive to
comply with the shareholder value-maximization principles (Friedman, 1962; Henderson, 2002);
on the other hand, CSR has been increasingly embraced within the business community due to its
perceived tangible and intangible benefits (e.g., Shrivastava, 1995; Turban and Greening, 1996).
Nonetheless, several decades? research has yielded mixed results, largely attributed to the
measurement problem of environmental screening (Waddock et al., 1997), methodological
inconsistencies (Ulman, 1985; Griffin et al., 1997), or endogenity issues (e.g., Nogareda et al.,
2006).
This paper extends the existing literature and provides evidence that there is a positive
relationship between firms? environmental and financial performance in the real estate industry.
Given the intangible nature of CSR-related benefits (Turban and Greening, 1996), Tobin?s Q, a
forward-looking financial variable capturing market expectation of future profitability, is used to
measure firm valuation. Tobin?s Q measure is adequate to reflect the intangible reputation effect,
investor trust, and investor risk
4
(e.g., Guenster et al., 2010; Dowell et al., 2000; Konar and
Cohen, 2001). Our empirical analysis is based upon a very rich data. We employed two types of
environmental sustainability proxies: (1) the environmental dimension of “Asian Sustainability
Rating” score, which is a disclosure-based proxy developed by the “Responsible Research”; (2)
the binary variable indicating concrete green property commitments of real estate firms. The
empirical results of this study can shed light on the appropriateness of the environmental
screening for sustainable real estate investment
5
.
To address the potential endogenity problem and omitted variable bias, an instrument
variable (IV) approach is employed in our empirical analysis to examine the CEP-CFP link in
several Asian emerging markets from 2010 to 2011. Many Asian economies are at different
stages of economic development and have different levels of environmental awareness.
Furthermore, the uniqueness of institutional and cultural background allows some governments
among these Asian economies to promote sustainable real estate investment via a top-down
approach. Such unique institutional variations allow us to test whether the debated CEP-CFP
relation may vary across markets, depending on the underlying institutional frameworks to
encourage environmental sustainability in the built environment.
Our empirical results document marginal evidence of a positive association between real
estate companies? environmental performance and firm valuation measured by Tobin?s Q. More
importantly, our results suggest that the extent to which individual market values environmental
sustainability of real estate investment is significantly different, subject to both the underlying
4
Plausibly, using this variable may avoid the bias of manipulation of some accounting-based variables.
5
Pivo (2005) pointed out that one screening process is needed for investors to determine whether director indirect
sustainable property investment products meet their needs. He suggests that in the real estate industry, green
building certification is more appropriate than the conventional social screening. As such, by using the two types of
environmental screening approach this study allows us to identify which type is materially applicable to the context
of sustainable real estate investment.
4
environmental policy and market structure. In particular, only in Singapore where underlying
environmental institution is well developed and strictly implemented, a real estate company with
superior environmental performance enjoys higher market value. The results also suggest that
committing to green building practices is seen to be more visible than the disclosure-based
environmental proxy to market participants.
Our empirical results indicate positive CEP-CFP relation will help ease corporate
managers? concern to go green without compromising financial objectives which is consistent
with the existing literature (e.g., King and Lenox, 2002). For those interested in sustainable real
estate investment in Asia, our results suggest investing in markets where a proper combination of
stringent environmental policy and incentive program has been well established and rigorously
implemented. Furthermore, findings of this paper will provide useful information to policy
makers to guide the built environment towards environmental sustainability.
The rest of the paper proceeds as follows: Section 2 conducts a literature review on CSR
and its effect on CFP; Section 3 discusses institutional difference; Data collection and analysis
are presented in Section 4, followed by the empirical analysis in Section 5; Section 6 concludes
and discusses some limitations and further research.
2. Literature Review on CSR
In recent years, CSR and its subsets, e.g., CEP in this study, have become societal focus that
requires the business community to take on responsibility towards environmental, social and
government issues in general (Orlizky, 2001). Among different perspectives of CSR,
McWilliams and Siegel (2001), for example, defines it as actions furthering social good beyond
the interest of the firm and what is required by law. Others (e.g., Heal, 2005) consider CSR as
being able to avoid social distributional conflicts and thus reduce the externality. Notably, there
has been a wide divide in the theoretical argument on the CSR-CFP debate (Griffin and Mahon,
1997).
2.1 Opponents for CSR
Above all, those criticizing CSR rely on the neoclassical microeconomics that the costs
associated with CSR improvement are likely to outweigh the financial benefits, which is
inconsistent with the underlying principle of shareholder wealth maximization (e.g., Friedman,
1962 and 1970; Telle, 2006). Understandably, environmental activities involve much of
corporate financial resources, but the potential benefits of such measures are mostly in the distant
future, if any (e.g., Henderson, 2002; Walley and Whitehead, 1994). Thus, it argues that there is
no role for CSR and that firms should only care about their shareholders? profit (Friedman, 1962).
Further, McWilliams et al., (2006) and McWilliams & Siegel (2001) report that the overall effect
of CSR is neutral in equilibrium.
5
The criticisms of CSR may also be rooted in the arguments of stakeholder theory and
corporate governance. According to Freeman (1984), managers need to balance the interests of
all stakeholders, rather than shareholders? interests only, to the extent that the aggregate welfare
is maximized (Renneboog et al. 2008). And yet, it fails to address the problem of how to
aggregate welfare and how to make the tradeoff amongst stakeholders. Also, in a competitive
market, firms pursuing social or environmental objectives by lowering their economic profits
may not survive the competition (e.g., Renneboog et al., 2008; Baumol, 1991). Shleifer (2004)
even argues that competitive pressure from markets, to some extent, encourages unethical
corporate behavior.
In the meantime, from the corporate governance viewpoint, only if internal control
structures and managerial incentive are properly established, would managers choose to
maximize stakeholders? wealth. It appears, however, that the objective function of managers in
the CSR domain is not clearly defined and thus their performances are unaccountable, probably
generating more conflict of interest and agency cost (e.g., Jensen, 2001; Tirole, 2006). Moreover,
the multi-task nature of managers to achieve both financial and social goals greatly weakens their
incentives to pursue high risk-adjusted returns and may be used for entrenching their own utility
(Tirole, 2001), again resulting in additional agency problems.
2.2 Proponents for CSR
Advocates for CSR can also be rooted in the neoclassical microeconomics in that CSR may help
address the agency problems and the external costs. As is assumed in the social welfare theorem,
there is no conflict between a company?s shareholder value and social value maximization in a
competitive and complete market
6
, and the resource allocation is Pareto-optimal and the social
value is maximized accordingly (Renneboog et al., 2008). However, in the presence of
externalities
7
, shareholder profit-maximizing behavior does not necessarily imply social welfare-
maximizing outcomes (Jensen, 2001). Heal (2005) finds that the government does not fully
resolve all problems with external effects. In this regard, CSR activities can substitute missing
markets and reduce conflicts of interest among stakeholders. Based on Ghatak?s (2006) model
where only those who care about CSR attributes are willing to buy ethical goods, CSR can create
a Pareto improvement for the entire economy and thus maximize wealth. Consequently, the
reduced agency cost enhances corporate profits and financial performance at least in the long
term.
Additionally, the stakeholder theory is gaining momentum in the modern organizational
structures to overcome the externality (Barnett and Salomon, 2006). Essentially, the stakeholder
theory suggests that management must satisfy the expectations and demands of several groups
(e.g., shareholders, employees, customer, and government) that have some interests in a firm and
can influence its outcome or can be influenced by firms (Freeman, 1984; McWilliams et al.,
6
Social value is defined as the sum of the value generated for all stakeholders.
7
The costs and benefits of an agent?s action are affected by or affect others? actions in the economy.
6
2006). Furthermore, it can be embedded into the resource-based view of firm (e.g., Barney, 1991;
Hart, 1995) that corporate economic success and competitive advantage evolves from internal
resources and capabilities.
Notably, only proactive environmental governance that is valuable, rare, and difficult to
imitate by competitors is a source of financial benefits which is intangible in nature (e.g., King
and Lenox, 2001; Derwall et al., 2011), such as stakeholder relationships and brand images (e.g.,
Davis, 1973; Derwall et al., 2010). Likewise, CSR may be rationalized to mitigate asymmetric
information by signaling firms? reputation or product quality (e.g., Fombrun and Shanley, 1990;
Barnea and Rubin, 2006). In addition, investors may view companies with poor environmental
reputation as risky to invest in and thus demand a higher risk premium (e.g., Hamilton, 1995).
Also, firms with a good reputation of environmental sustainability could attract a qualified
workforce, as an improved corporate environmental reputation makes talent recruitment and
retention easier than poor performers. Beyond the above benefits, in this paper, sustainable real
estate can lead to enhanced employee health and productivity, which ultimately increases CFP
(see Hoffman et al., 1993; Wargocki et al., 2004; Bauer et al., 2009).
Taken as a whole, when these (intangible) benefits are financially relevant, it can be
anticipated that CSR-related activities tend to positively affect companies? financial performance.
2.3 Capital Market Response to CSR
Capital-market participants have increasingly incorporated the Environmental, Social and
Governance (ESG) aspects into their investment decision-makings (e.g., Groysberg et al., 2011).
For example, mutual funds that invested in socially responsible firms by 2007 have assets under
management of more than $2.5 trillion and $2 trillion dollars in the United States and Europe,
respectively (Ioannou and Serafeim, 2011)
Apart from the prior economics and managerial advocates of CSR, financial economists
add important perspectives on its benefits in terms of risk-adjusted return to investors, risk-
sharing opportunities, and the market segment of social (green) investors (see Moskowitz, 1972;
Merton, 1997; Hamilton, Jo and Statman, 1993; Heinkel et al., 2001; Derwall et al., 2011).
Importantly, whether investors gain by holding responsible companies depends on how capital
market values CSR (Guenster et al., 2010).
Despite early studies reporting that the market does not value CSR (e.g., Luther et al.,
1992; Luther and Matatko, 1994; Bauer, Derwall, and Otten, 2007), recent studies tend to
document a learning process that CSR information is gradually incorporated into asset pricing,
e.g., Gompers et al. (2003), Derwall et al. (2005), Bauer et al. (2006), Derwall et al. (2010), and
Ghoul et al. (2010). Meanwhile, others document favorable business cases for the significant
effect of CSR on CFP.
For example, Spicer (1978) and Shane and Spicer (1983) argue that CSR activities reduce
the threat of litigation risk. Karpoff et al. (2005) claim that investors „price-protect? against
lawsuit risks from environmentally irresponsible activities. Also, Hong and Kacperczyk (2007)
7
find that litigation risk associated with socially contentious companies has become more relevant
to investors expecting to earn premium from holding those stocks. Moreover, CSR activities
matter to other idiosyncratic risks as well, such as reputation, investor trust, and customer loyalty,
which lay further basis for eschewing environmentally controversial companies (e.g.
Vandermerwe and Oliff, 1990; Russo and Fouts, 1997).
3. Institutional Difference in Asia
Having reviewed and analyzed general arguments on the CSR & CFP relation, it is possible that
the aforementioned association may run in another direction under different underlying policy
regimes (Ziegler et al., 2011). Porter et al (1995) contend that social benefits arising from
environmental policies come at the expense of private cost and the direction of this balance
depends on the underlying policy regimes. Under appropriately designed environmental
standards, innovation can be spurred to lower production cost and enhance resource productivity,
ultimately achieving the mutual interests of environmental improvement and competitiveness. As
such, how CSR, or CEP, affect firms? financial performance depends on the structure of the
market that determines the interplay between social costs and benefits (e.g., Cheung et al., 2010).
According to Ziegler et al. (2011), the stakeholder theory is likely to be reinforced under
stringent institutions where social climate also demand better corporate responses to
environmental issues such that good stakeholder relationships enable companies to be largely
free from regulatory or market risks. Therefore, a good reputation of environmental performance
seems to be a more important intangible resource under such circumstance. In contrast, the
criticisms of CSR (e.g., Friedman, 1970) may be weakened if stringent regulation leads to higher
non-compliance costs when firms do not react. Heinkel et al. (2001) argue that environmental
polluters opt for reforming when the cost of pollution exceeds the reform cost. Overall, both the
strengthening of the stakeholder theory and the weakening of the cost argument can benefit
environmentally sustainable companies in the real estate industry.
Nowadays, Asian markets are at the different stages of economic cycles and urbanization
process, as well as different levels of environmental awareness, naturally leading to distinct
approaches to promote investment towards sustainable property. Keep in mind that the impact of
institutional factors on the CSR-CFP linkage is of major focus in the paper, the following
contributes to discussing and analyzing the institutional frameworks and market structure to
promote sustainable real estate investment in China, Hong Kong and Singapore
8
.
3.1 Green Certification System
Established by Akerlof (1970) and Jensen and Meckling (1976), the asymmetric information
8
Only these three markets that take up over 80% of sample data have green certified properties, while other markets are of minor
interest in this respect.
8
regarding the quality standards may make property market participants either stick to producing
conventional buildings, or misuse the concept of green property as a (deceptive) marketing tool
(Zheng et al., 2011). As such, to address the information asymmetry, scholars argue that a rating
system providing credible and transparent energy and environmental performance of buildings is
required to serve as a direct push to promote investment towards and activate the market of
sustainable real estate (e.g., Qian and Chan, 2008; Lee and Yik, 2004)
The Singapore Green Mark (GM) rating scheme was launched in 2005 by the Building
and Construction Authority (BCA), which essentially assess buildings? environmental and energy
performance. Since its inception, the number of green certified projects has significantly
increased from 17 in 2005 to over 1,000 in 2011.
In contrast, Hong Kong rely more on the private sector to voluntarily promote green
properties. In particular, the HK-BEAM
9
rating system was launched in 2002 by private
developers, such as Swire properties. As of October 2009, up to 37% of commercial space and
nearly 28% of dwellings have been certified green. So far, China has yet to adopt a well-
functioning green rating standard for its real estate sector. Since 2007, the Ministry of Housing
and Urban-Rural Development (MOHURD) has been seeking to create a nationwide program
called the “China Green Building Evaluation Label”. Nonetheless, green buildings in China are
still rare. The very low market penetration of green certification may be attributed to the lack of
public recognition of the program, and insufficient institutional and financial mechanism to
reward those who achieved higher scores for energy efficiency (Zheng et al., 2011)
3.2 Regulatory Instrument
Government intervention is said to be one of the most effective ways to promote sustainable
properties (e.g., Varone and Aebischer, 2000). Still, it is debatable how governments can
supplement the market for green building adoption, for each government has its own concerns
and policy instruments. While some favor economic tools to correct externalities due to the
subsidized private cost (e.g., Chan, 2000; Jaffe et al., 2002), others argue that legislation and
regulations remain superior (e.g., Rivers and Jaccard, 2006). Eyre (1997) holds that a mix of
economic and regulatory instruments could be more appropriate for internalizing environmental
externalities. Notably, regulatory instruments may deter opportunistic behaviors in an imperfect
market and create a level playing field for all competitors in the green property market (Chan et
al., 2009).
As mandated by the 2
nd
green building Master-plan
10
, all new government buildings in
Singapore with over 5,000 m
2
must achieve top green ratings and existing ones with over 10,000
m
2
will be at least green mark gold-plus level
11
. Also, 80% of building must be green by 2030
10
.
Remarkably, thanks to the revised building control act in 2008, Singapore becomes one of the
9
It refers to Hong Kong Building Environmental Assessment Method Society
10
http://www.bca.gov.sg/GreenMark/others/gbmp2.pdf
11
There are four levels of the Green Mark certification, i.e., Platinum, Gold-plus, Gold, and Certified, based on total score gained
for each building project.
9
few countries in the world to set minimum environmental sustainability performance for
buildings, namely, all eligible new building projects must fulfill a level that is on par with the
Green Mark Certified standard. That way it explicitly creates a product market for green real
estate.
In contrast, regulations on green property are still in the infancy in Hong Kong and China.
Compulsory mandates on buildings? energy efficiency are still pending in Hong Kong. Yet, it
affirms that the environmental performance of all newly built government buildings with a floor
area of over 10,000 m
2
must be certified as green by either LEED or HK-BEAM. In anticipation
that aggregate energy demand will rise sharply in China, the 11th “Five Year Plan Guidelines”
contains a target of 20% reduction in China?s energy intensity, 40% of which should come from
energy conservation in buildings. New buildings will be more affected by new design standards
mandating 50% energy savings compared to the1980s standards by the end of the 2010s.
3.3 Economic Instruments
Sustainable properties involving an array of innovative construction techniques is perceived to
have higher upfront costs than conventional ones (OECD, 2003), lifting the green property
market entry barrier. Thus, either cost savings or increased valued, or both, is necessary to make
sustainable real estate attractive to stakeholders. Some argue that monetary or fiscal incentives
may leverage the higher capital expenses, as they are both efficient and effective means to
economize buildings? energy consumption (e.g., Jaffe et al., 2002; Dennis, 2006). Others hold
that the greater availability of green technologies and human capital, the lower the threshold of
green property investment (e.g., Prakash, 2002). Also, market economic force, e.g., energy price,
matters to sustainable real estate, since increased life-cycle cost will make green properties
favorable (e.g., Lee and Yik, 2004).
To ease the financial burdens of going green, a wide range of monetary incentive schemes
are released, e.g., the US$20 million cash subsidy for new buildings (GMIS-NB), a US$100
million for existing buildings (GMIS-EB), and the gross floor area scheme (GM-GFA), coupled
with the “Building Retrofit Energy Efficiency Finance” (BREEF) scheme entitling building
owners bank loans to retrofit their buildings to a greener standard. Also, Singapore strengthens
R&D input to build up expertise in green building design and technologies as well as to develop
industry capability to ensure sufficient supply of green building professionals. Moreover, recent
evidence of sale price premium associated with Singapore green housing projects (Deng, Li and
Quigley, 2012) corroborates a societal attitude towards environmental concern that can be
translated into demand for green buildings and further affect supply-side behavior. Lastly,
electricity price are adjustable periodically to incentivize energy conservation.
In Hong Kong, government launched a US$57 million funding program as of April 2009
to encourage private sector to make their facilities more energy efficient, which is relatively
smaller in scale than Singapore. Traditionally, local government injects little investment into
R&D. The institutional environment in Hong Kong, i.e., the lack of markets for innovations in
the building sector led to a low entry barrier to the conventional building market. Accordingly,
10
key market players have little incentives to venture into new business of sustainable real estate
(Chiang et al., 2001; Chan et al., 2009); As for China, to attain energy efficiency in building
sector, subsidies of 20% of the total investment costs are proposed for projects saving between
15% and 25% on energy, while projects with a rate above 25% can apply for up to 30%
investment subsidy. However, the progress towards maturing green building technology and
cultivating green professionals is in the early stage. Besides, China government keeps electricity
price low, which could have been another direct incentive to conserve energy (Zheng et al., 2011)
3.4 Stock Exchange Engagement
Given that CSR reporting is an integral part of efforts to increase the availability of non-financial
information (e.g., Ioannou and Serafeim, 2011), stock exchanges have complemented to educate
investors and prompt listed firms to disclose non-financial performance, respectively. Yet, few
have made it mandatory so far, especially in Asia where ESG issues have gain momentum just
recently. As such, CSR reporting is set out as voluntary guidelines at most stock exchanges.
The Singapore Stock Exchange (SGX) issued a “Policy Statement on Sustainability
Reporting” and proposed a guide for its listed companies to use for their sustainability
reporting
12
, stating that “Sustainability reporting is not a mandatory requirement for listed
companies under the listing manual…Conceivably, there will be progress towards mandatory
reporting through regulations and rules in the future”; Similarly, Hong Kong Exchanges and
Clearing (HKEx) and China have launched a consultation paper that calls for voluntary
disclosure on ESG issues, which could evolve into a “comply or explain” regime in the future if
the market participants are ready.
Importantly, to generate greater awareness, some exchanges launched / will launch
sustainability index where leaders in addressing ESG issues are included. By 2011, SGX has
reiterated the plan to launch sustainability indices, whereas HKEx has for now decided not to
launch an index of its own given the launch of the Hang Seng Corporate Sustainability index in
July 2010. In contrast, China outperform its counterparts in that three sustainability indices in
Shanghai Stock Exchange (SSE) has been launched since 2008, i.e., SSE 180 Corporate
Governance Index, SSE Corporate Governance Index, and SSE Social Responsibility Index.
4. Data Collection &Analysis
4.1 Environmental Data
Prior studies have advised a number of measures of CSR/CEP: forced-choice survey instruments
(Aupperle, 1991), self-reported toxic release inventory (TRI) (e.g., Konar and Cohen, 2001), or
CSR rating score (e.g., KLD, Innovest). And yet, little contextual and geographic considerations
12
http://www.sgx.com/wps/wcm/connect/cp_en/site/regulation/public_consul-
tation/pc_28Aug2010?presentationtemplate=design_lib/PT_Printer_Friendly
11
are given to Asia. One exception could be the CLSA (Credit Lyonnais Securities Asia) used by
Cheung et al. (2010), Klapper and Love (2004) and Durnev and Kim (2005). However, this
indicator is constructed with subjective responses to 57 questions and merely reflects corporate
governance dimension of CSR.
Given the data richness, two types of environmental performance proxies at real estate
industry are used in this paper. Firstly, we use the disclosure-based CSR rating score – the “Asian
Sustainability Rating” (ASR)
13
by “Responsible Research”, a leading provider of independent
ESG research in Asia
14
. One advantage of the ASR dataset is its comprehensiveness in capturing
the full picture of ESG factors through a set of 100 proprietary sustainability indicators
representing nearly all of the most realistic assessment of achievable best sustainability practices
specifically for companies in MSCI AC (All Country) Asia ex Japan
15.
Importantly, the ASR score can
be disaggregated into four sub-groups, of which its environmental dimension is used to measure
CEP in this paper:
- General: Assessment of the presence and comprehensiveness of overall sustainability
reporting.
- Environment: Assessment of environmental policy and reporting on resource usage and
carbon emission. Importantly, this dimension assesses both transparency on resource
consumption information and the extent of environmental responsiveness (See Appendix
1 for details)
- Social: Assessment of engagement with community, supplier, employees and customers.
- Governance: Assess governance policy, reporting, systems, financial control, board
quality and independence, audit quality and so forth.
- Insert Appendix 1 Here -
Another advantage of the ASR is its in-depth understanding of local markets by having
analysts with local market expertise and language skills (e.g., Mandarin, Cantonese, Korean,
Hindi and English). Further, the ASR aims at accurately reflecting the strategic sustainability of
Asian companies by giving a half point score if the data is only in the local language without
English version
16
.To explicitly control for the lack of transparency and high family ownership in
Asian capital markets (Cheung et al., 2010), listed subsidiaries are treated as separated investable
entities from holding companies in the sense that information declared by the holding company
is not considered sufficient for developing an understanding of the subsidiary?s sustainability
practices.
13
It has been so far the first comprehensive CSR rating exclusively for Asian listed companies.
14
In 29 June 2012, It was acquired by the “Sustainalytics BV”, a Amsterdam-based responsible investment research firm aiming
to add talent and expertise in the Asian responsible investment market into its global environmental, social and governance
research and analysis
15
To make sure that the resulting findings are as unbiased as possible, there is neither engagement and questionnaire nor the
highly subjective elements in the methodology. Thus, All ASR assessments are done in-house and based on publicly available
information such as annual reports, sustainability or CSR reports, press releases and website information
16
Scoring for each criterion is binary and a full point can only be achieved if submissions are in English reflecting the fact that
this is the language companies must use if they are to successfully and responsibly communicate with the global investment
community.
12
Moreover, all data point used are collected from public source without direct engagement
with companies, e.g., stock exchanges filings, annual financial and/or CSR reports, company or
NGO websites. That way ASR is not immune to the assumption that reporting is a proxy of
performance
17
, which plagues most studies using disclosure as the proxy for CSR performance.
Similar with the Kinder, Lyndenberg and Domini (KLD) dataset, each data point is
equally-weighted to reckon the aggregated and disaggregated ASR scores. Up to date, literature
has not drawn a theoretically derived ranking of importance for the various stakeholder groups a
guide for empirical work (Cheng et al., 2011), whilst some use differential weights based on
either subject academic opinion (Graves and Waddock, 1994) or analytic hierarchy process to
derive weights (Ruf et al., 1993). Mitchell et al (1997) even hold that finding a universally
accepted ranking is impossible theoretically. Therefore, this paper follows prior studies (e.g.,
Waddockand Graves, 1997; Hillman and Keim, 2001; Waldman et al., 2006) by assigning equal
weights to each of data point of ASR. Presumably, the distinct materiality of sub-dimension of
ASR can be partly measured by the different number of data points within each category.
To ensure that the largest and most influential companies domiciled and listed in Asian
countries are covered in the ASR
18
, several approaches and criteria are applied to form the ASR
company universe (See Appendix 2 for details). In total, a universe of 542 and 750 publicly listed
companies are included for the ASR 2010 and the ASR 2011, respectively
19
, of which 40 real
estate entities (4 REITs and 36 REOCs) are for ASR 2010 and 62 (11 REITs and 51 REOCs) are
for ASR 2011. There are 37 companies rated twice over the sample period.
- Insert Appendix 2Here -
Secondly, to mitigate concerns about the symbolic nature of disclosure-based CSR rating
(see Patten, 1991; Gray and Bebbington, 2007; Cormier et al., 2011), another variable –“Green
Building” measuring a concrete and substantive environmental sustainability practice in real
estate industry is considered. This binary variable has the value of 1 if a listed real estate
company develops, operates or owns green properties certified by the Green Mark, HKBEAM or
LEED labeling program; and value of 0 otherwise. Its validity is backed by the notion that green
real estate is not only marketed for its ability to reduce resource usage, but also helps identify
property companies with strong commitment to environmental sustainability (Eichholtz et al.,
2010; Deng, Li and Quigley, 2011).
Given the inherent distinction between the two types of environmental proxies, different
capital market responses are possible and different empirical results are thus anticipated.
17
Though the ASR team acknowledges that it is challenging to report on all activities being undertaken, it is vital that companies
prioritize the communication of their internal practices in order to better inform investment decisions.
18
Banking, Real Estate, Telecoms and Utilities are considered the high impact sectors for which several sector specific indicators
are developed.
19
ASR analysts compile information and benchmark companies at the beginning of each year and the ASR report will usually be
released to the public every September. Noticeably, the ASR review companies? sustainability performance of the past fiscal year.
Thus, the ASR 2010 and ASR 2011 proxy for the corporate sustainability performances for the FY 2009 and FY 2010,
respectively.
13
4.2 Dependent Variable
Previous literatures imply CSR benefits are mostly intangible in nature, if any (e.g., Turban and
Greening, 1996; Waddock and Graves, 1997; Gardberg and Fomburn, 2006). Hence, Tobin?s Q is
used in this paper, as it is widely understood as an indicator of intangible value (e.g., Dowell et al.,
2000; Konar and Cohen, 2001). Also, Guenster et al (2010) argue that the use of Tobin?s Q is
sufficient particularly when analyzing CSR, as it reflects reputation effects and investor trust. Also,
in contrast with accounting-based measures, i.e., ROA and ROE, using this variable can avoid
backward-looking bias and data manipulation.
Typically, a firm?s market value is based on the present value of future profitability
discounted at financial market risk perception of the firm (Fama, 1970). Following prior studies (e.g.,
Lindenberg and Ross, 1981; Jaffe, 1986; Konar and Cohen, 2001), Tobin?s Q increases with the
intangible asset value of firms (for details, please refer to Appendix 3)
- Insert Appendix 3 Here -
In this paper, due to the missing data on the replacement cost of corporate tangible assets
for most firms, we follow the way Kaplan and Zingales (1997) and Guenster et al. (2010)
compute Tobin?s Q. In essence, it is the ratio of the market value of assets to the book value of
assets
20
.Though there are other more sophisticated methods e.g., Perfect and Wiles (1994), this
type of calculation appears the most efficient and applicable approximation to ensure data
richness for our sample.
4.3 Independent Variables
We match the ASR data to the “Compustat” and“Bloomberg” database by ticker, company name
and GVKEY number
21
. Since the ASR is released in each September, all financial information is
matched to appropriate year-end to mitigate the look-ahead bias (Baquero et al., 2005; Jaffe et al.,
1989). To account for firms? heterogeneities, several control variables, such as firm size, leverage,
sale growth, profitability, and firm age, are considered.
Following the seminal work of Waddock and Graves (1997), firm size and leverage are
included: size is measured by the natural logarithm of book value of total asset, and leverage is
proxied by the ratio of long-term debt to asset. Also, to condition on any difference in corporate
characteristics relevant to firm value, we include past 1-year sale growth (e.g., Schmalensee,
1989; Hirsch, 1991). Besides, firm age, i.e., the difference between the first trading day on the
“Factset” dataset and the respective ending date of analysis is calculated. Presumably, the age of
20
The market value of assets is defined as the sum of the book value of assets and the market value of common stock outstanding
minus the sum of the book value of common stock and balance sheet deferred taxes
21
It is the identifier of individual stock in the COMPUSTAT database.
14
a firm?s assets may negatively relate to intangible-asset value because a firm with older
technology and equipment may be less efficient and thus not as profitable as one with new
technology (Konar& Cohen, 2001). Further, profitability measured by return on asset (ROA) is
also included as suggested by Derwall et al. (2010)
In addition, time fixed effects control for macro-economic climate common to all. Also,
market fixed effects in which real estate companies are listed rather than originated are included
to manifest the fact that public real estate companies are eager to establish environmental
reputation by complying with local regulations market participants are more familiar with.
Although R&D expenses tend to positively relate to intangible firm value (e.g., Konar and Cohen,
2001; King and Lenox, 2002), we fail to collect such information given the notorious data
scarcity in Asia.
To empirically examine the potential impact of different national regulatory or
institutional frameworks on the CSR-CFP relationship, several interacting variables between
market fixed effects and the two environmental sustainability proxies are constructed accordingly.
4.4 Descriptive Statistics
As shown in Table 1, there are 40 and 62 real estate companies included in the ASR 2010 and
ASR 2011, respectively. Over 80% of firms are listed in China, Hong Kong and Singapore.
Specifically, Hong Kong-listed firms have the largest representation with 47 firm-year
observations, while firms from Indonesia and Malaysia only appear once. As a whole, the
environment dimension of ASR remains consistent at 14%. Specifically speaking, improvements
in the environmental performance can be seen in China and Hong Kong, while dramatic drop
takes place in India, Philippine and Singapore, of which results of the latter two may be
attributed to the addition of poor performers to the data sample.
- Insert Table 1Here -
Furthermore, around 30% of firms commit to green buildings, of which firms listed in
Singapore and Hong Kong, are regional leaders.
Table 2 presents summary statistics of major financial variables. Compared to other
variables, there seems a wide variation in firms? sale growth opportunities. Importantly,
correlations among control variables are acceptably low, leading multi-co-linearity not to be an
issue in regression.
- Insert Table 2Here -
5. Empirical Analysis
5.1 Prior Empirical Studies on CSR-CFP Debate
15
Empirical literatures relating CSR to CFP fall into three subsets: event studies; portfolio studies;
multivariate regression analysis. Until now, most studies have been too fragmented to draw any
generalized conclusions (Orlitzky et al., 2003). Ulman (1985) and Griffin et al. (1997), for
example, posit that methodological inconsistencies make most evidences incomparable and
inconclusive. Other flaws include stakeholder mismatching (Wood, 1991), measurement errors
(Waddock and Graves, 1997), omitted variable bias (e.g., Aupperle et al., 1985), and endogenity
issues (e.g., Nogareda et al., 2006), etc.
Firstly, event studies examine the immediate effect of new information content of an
environmental issue on the announcement return (MacKinlay, 1997).Literatures have reported a
negative market reaction to the release of bad environmental news(e.g., Joshiet.al., 2005; Kona
and Cohen, 1997), as well as the asymmetric effect (e.g., Hamilton, 1995; Klassen et al., 1996)
22
.
And yet, the validity of the linkage is challenged by the so-called “cash-flow effect” that
investors may react to cash-flow projections instead of environmental news; Secondly, portfolio
analysis typically involves a comparison of risk-adjusted returns between mutually exclusive
portfolios with differing environmental performance. Scholars (e.g., Guenster et al., 2010 and
Derwall et al., 2005) find a positive and dynamic relation between environmental performance
and stock returns, while Cohen et al. (1997) find that investors receive neither a premium nor a
penalty for investing in environmental leaders. Notably, portfolio analyses exclusively examine
the investor perspective and do not examine causal effects.
Thirdly, multivariate regressions are used to explore relatively long-run CSR and CFP
relation. In particular, some find CSR to be positively related to financial performance and
negatively linked with financial risks (Spicer, 1978; Konar and Cohen, 2001), whereas others fail
to report a significant CSR-CFP relation (e.g., Chen and Metcalf, 1980;Mahapatra, 1984;
Elsayed and Paton, 2005). Nonetheless, those results should be interpreted with the caution that
correlation does not necessarily imply causation.
An important caveat is the issue of the endogenity between CSR and CFP : on the one
hand, based on the “good management theory” (e.g., Waddock and Graves, 1997; Sharma and
Vredenburg, 1998), good management of relationships with stakeholders, such as government,
employees or investors, can improve legitimacy, staff productivity and market visibility and
reputation, which ultimately lead to competitive advantages; on the other hand, the “slack
resource theory” (e.g., Waddock and Graves, 1997; Margolis and Walsh, 2003) hold that firms
with superior financial performance are more likely to commit to socially responsible practices
because they have more resources to afford CSR activities than less profitable companies.
Among few studies addressing the endogenity issues are Wagner et al. (2002), Aerts et al. (2008),
and Galdeano-Gomez (2008), and Cheng et al. (2011), in which either the simultaneous equation
model or instrumental variables (IV) approach is employed.
Emerging literatures on CSR in Asia provide some evidence that environmental
22
That is, stock price increase following positive environmental information about the firm is less strong than a price decline in
response to negative news
16
information is valued by market participants but at a gradual pattern (e.g., Pargal and Wheeler,
1996; Powers et al., 2010). For example, Gupta and Golder (2005) using Indian data find the
market penalized environmental unfriendly behavior with negative abnormal returns of up to
30%. By contrary, Wang and Yuan (2004) find that the effect of environmental certification, such
as ISO 9000 and ISO 14000, on equity pricing is statistically insignificant in China. Also, the
Japanese stock market seems to respond to environmental information significantly after the
underlying environmental policy got more stringent (Takeda and Tomozawa, 2008). Nonetheless,
most of the results offer a short-term perspective, leading to weak economic and statistical
significance in the CSR-CFP relation.
5.2 Model Specification
As compared to the event study examining the short-term market reaction to CSR and the
portfolio approach using asset pricing model, the multivariate regression approach is appropriate
to this paper?s data sample.
Importantly, it is noted that CSR and firm value may be associated through other
variables, i.e., correlated with error terms. For example, high-value firms are more likely to
attract investors, and greater international investor holdings may lead to better performance in
CSR (Cheung et al., 2010). Thus, to address the endogenity issues that result in biased and
inconsistent estimates, this study follows Cheng et al (2011) using instrumental variables (IV)
approach
23
to partly mitigate the endogenity issues and omitted variable bias. The instrument is
the lagged environmental sustainability performance measured by the two proxies, aiming to
capture the persistence of environmental performance measures.
24
3 1
1 1
it n n n n it
n n
it it
Q c X ENV M Y | ¸ o o c
= =
+ = + + + +
¿ ¿
(1)
In model (1), Q
i
denotes the natural logarithm of Tobin?s Q. c is a constant and is an
independently identical distribution (iid) error term. includes a set of value-relevant control
variables, such as firm size, leverage, sale growth, profitability, and firm age. M
n
aims to capture
market fixed effects
25
.The year dummy, Y
n,
is intended to control for macro-economic attributes
common to all
26
. , , are estimated coefficients. Importantly, ENV
it
represents both
23
The advantage of the instrumental variables approach is that the estimated coefficients are more likely to be consistent,
whereas the estimates from an instrumental variables approach are less efficient because the standard errors are large (Wooldridge,
2002)
24
The lagged disclosure-based CSR rating score and green dummy appear good instruments in that their correlation with
environmental measures are significantly high and that with Tobin?s Q is insignificantly low. Correlation test are available upon
request
25
There are 7 markets in the raw data. To gain economic significance, we group India, Indonesia, Philippine and Malaysia
markets as one category–“others”. The validity of doing so is backed up by the small portion of firm-year observations in the data
sample. Besides, China, Hong Kong and Singapore markets are measured separately.
26
The year of 2010 is the base group.
17
measures of environmental performance, i.e., the disclosure-based environmental rating score
and the binary variable indicating green building practices. Thus, o measures the possible
association between environmental performance and firm valuation in real estate industry.
1
2 3
1 1 1
it it n n n n n it it
n n n
n
M Y M ENV Q c X | ¸ o | c
= = =
= + + + + +
¿ ¿ ¿
(2)
Model (2) is developed to investigate if the CSR-CFP association varies across markets
with differing regulatory and institutional frameworks. To accomplish it, several interacting
variables between market dummies and environmental measures are created, and ?
n,
captures
this potential effect accordingly.
The IV regressions are estimated using the two-step least square method (2SLS), as
follows:
1 3
1 1
ENV
it n n n n it
n n
it it
ENV a Z X M w Y o | ¸ o
= =
= + + + + +
¿ ¿
(3)
1 2 3
*
1 1 1
it it n n n n n it it
n n n
n
Q M Y M ENV c X | ¸ o | c
= = =
+ = + + + +
¿ ¿ ¿
(4)
where
ENV
it
Z denotes instruments and others denote exogenous variables in model (3).
*
it
ENV is the
fitted value of
it
ENV from model (3), which is subsequently used as an independent variable in
model (4). In the following tables, only the second-stage regressions are reported, while the first-
stage is available upon request.
5.3 Empirical Results
Table 3 reports the 2SLS estimate results of model (1), of which environmental performance are
measured by disclosure-based rating score in column (1) and by green building dummy variable
in column (2), respectively. Using the lagged environmental performance measures as instrument
reduces the sample size to 74 firm-year observations that appear twice over the sample period.
- Insert Table 3 Here -
Overall, most control variables have expected sign, except for the sale growth and
riskiness. Only firm age is statistically significant across all model specifications. Notably,
column (1) and (2) both yield positive results, though marginally significant at 10% level. The
economic significance is substantial: 1% increase in the environmental dimension of ASR rating
score is associated with about 30% increase in firm value proxied by Tobin?s Q, while a 15%
firm value premium is commanded by real estate companies committing to green property,
ceteris paribus.
Table 4 provides estimate results for model (2).Interestingly, column (1) using the
18
disclosure-based rating environmental proxy reports no significant results, whilst column (2)
with the substantive green building proxy finds significant results at 1% level. Economically, it
suggests that compared to other markets, only in Singapore are real estate companies committing
to green buildings valued higher by capital market by roughly 20%, ceteris paribus. Plausibly, it
can be attributed to the well combination of stringent regulatory and institutional frameworks
and market structure that draw societal interest in corporate efforts to address environmental
issues.
- Insert Table 4 Here -
Furthermore, given the inherent difference between real estate investment trusts (REITs)
and real estate operating companies (REOCs)
27
, robustness test are conducted to perform the
above IV regression estimation only within REOCs sample with a smaller of 66 firm-year
observations. Results from column (3)-(4) in Table 3 again provide the marginal evidence of the
positive relation between environmental performance and firm value, which is significant at 10%
level. Also, results in column (3)-(4) of Table 4 remain consistent in that only in Singapore are
real estate companies committing to green buildings valued higher than its non-green
counterparts.
In addition, for any specification of Table 4, EnvScore are by no means significant, which
may lend support to the criticisms of the symbolic nature of disclosure-based CSR rating (e.g.,
Patten, 1991; Gray and Bebbington, 2007; Cormier et al., 2011)
6. Conclusion and Future Research
The past decade has witnessed the growing popularity of CSR among business community and
policy makers. Given the fact that real estate sector accounts for over one third of global energy
consumption (RICS, 2008), it provides a tremendous potential to address global CO2 emission
and achieve energy efficiency (Eichholtz et al., 2010). Institutional investors are eager to assess
and improve the environmental performance of their direct and indirect property holdings, and in
turn real estate companies tend to improve their environmental performance to draw investor
interest via either CSR reporting or committing to green building practices.
Despite the growing literatures reporting economic returns to direct investment in energy
efficiency and sustainability in buildings at asset markets (e.g., Eichholtz et al., 2010; Deng et al.,
2012), little has been known about the financial consequence of incorporating environmental
sustainability into corporate strategy. This paper fills gap by examining whether corporate
environmental performance (CEP) positively relates to financial performance (CFP) in real estate
industry. Relying on volumes of literatures on CSR-CFP debate, we develop a model to test such
relationship. Our model uses Tobin?s Q to measure CFP and capture the CSR-related benefits,
27
A REOC is similar to a real estate investment trust (REIT), except that an REOC can reinvest its earnings into the business,
rather than distributing them to unit holders like REITs do.
19
which is intangible in nature. We construct two distinct environmental performance proxies to
examine the appropriateness of environmental screening for sustainable real estate investment.
Our empirical model acknowledges heterogeneous institutional set-up sand market
structure in directing towards environmental sustainable real estate investment across different
Asian economies, and examines the CEP-CFP relation which varies across markets in the region.
Our empirical study found a marginally positive relation between CEP and CFP measured
by both environmental proxies, implying that investors factor environmental information into
their pricing decision in Asia. Our results also find that only in Singapore where real estate
companies committing to green buildings enjoy significantly higher market premium, confirming
that the CEP-CFP relation is highly dependent on environmental institution frameworks. Our
study also document the superiority of using green building practices as screening criteria for
sustainable real estate investment to the conventional social screening, of which the former
represents substantive, concrete and visible corporate resources committing to environmental
sustainability than the latter.
Some important implications can be drawn this study. The positive CEP-CFP relation can
help ease corporate concern to go green without compromising financial objectives. This is
consistent with the existing literature (see for example, King and Lenox, 2002).Those interested
in sustainable real estate investment in Asia should invest in markets where a good combination
of institutional set-up and market structural have been well established and rigorously
implemented. Policy makers are encouraged to design proper environmental legislation as well
as economic programs to direct the economy towards environmentally sustainability.
Finally, the dependency of CEP-CFP relation in real estate industry on the market
structure and institutional framework warrants further studies in more Asian market, such as
Singapore. Due to the data limitation, the current sample only covers the two-year ASR rating
data and green building information, and future research based on longer sampling period can
thus provide additional information about long term relationship between CEP and CFP.
Nevertheless, the current study do contain a sample for individual firma that represent a wide
cross-section of emerging Asian markets as well as a significant proportion of respective market
total stock market capitalization.
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26
Table 1. Summary Statistics of Environmental Measures
Full Sample ASR 2010 ASR 2011
Markets Obs
Environment
Sustainability
Green
Building
Obs
Environment
Sustainability
Green
Building
Obs
Environment
Sustainability
Green
Building
China (Mean) 13 7.4% 15.4% 7 3.6% 14.3% 6 11.8% 16.7%
(Std.dev)
7.0% 37.6% 6.3% 37.8% 5.2% 40.8%
Hong Kong 47 12.1% 25.5% 20 9.1% 25.0% 27 14.3% 25.9%
15.6% 44.1% 14.0% 44.4% 16.6% 44.7%
Indonesia 1 15.8% 0 0 1 15.8% 0
India 7 8.0% 0 3 10.0% 0 4 6.6% 0
7.7%
10.0%
6.6%
Malaysia 1 5.0% 0 1 5.0% 0 0
Philippines 4 46.3% 0 1 85.0% 0 3 33.3% 0
44.8%
. 44.8%
Singapore 29 18.9% 55.2% 8 32.5% 75.0% 21 13.8% 47.6%
29.8% 50.6% 39.3% 46.3% 24.5% 51.2%
Total 102 14.5% 29.4% 40 14.7% 30.0% 62 14.3% 29.0%
22.0% 45.8% 24.8% 46.4% 20.2% 45.8%
(Data Source: Asian Sustainability Rating)
27
Table 2. Summary Statistics of Major Variables
Variables Obs Mean Std. Dev. 1 2 3 4 5 6
1. Tobin's Q 102 0.97 0.33 1
2. Size ($ mil) 102 14,877.68 13,162.34 -0.16 1
3. Leverage (*100) 102 18.36 8.35 0.19* -0.11 1
4. Sale Growth (*100) 102 38.30 122.05 -0.01 0.00 0.03 1
5. ROA (*100) 102 7.62 5.33 -0.10 0.09 -0.20** -0.11 1
6. Firm Age (# of days) 102 5,394 3,405 -0.22** 0.43*** -0.38*** -0.18* 0.15 1
Notes:
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively
28
Table 3. 2SLS Estimate Results of Regression on Environmental Sustainability
(Dependent Variable: Natural logarithm of Tobin's Q)
(1) (2) (3) (4)
Independent Variables
EnvScore (%) 0.3066* 0.3847*
(0.1737) (0.2059)
Green(1=Yes) 0.1487** 0.1435*
(0.0654) (0.0819)
Control Variables
Size ($mil) -0.0269 -0.0401 -0.0026 -0.0336
(0.0425) (0.0463) (0.0459) (0.0474)
Leverage (*100) 0.0060 0.0094** 0.0036 0.0087*
(0.0038) (0.0037) (0.0046) (0.0046)
Sale Growth (*100) -0.0003 -0.0004 -0.0004* -0.0004
(0.0002) (0.0003) (0.0002) (0.0003)
ROA (*100) 0.0022 0.0045 0.0062 0.0061
(0.0042) (0.0033) (0.0061) (0.0046)
Firm Age (# of days) -0.00003*** -0.00002*** -0.00003** -0.00002**
(0.0000) (0.0000) (0.0000) (0.0000)
Intercept 0.1463 0.2282 -0.0205 0.1844
(0.4720) (0.5448) (0.4939) (0.5638)
Year Fixed Effect Y Y Y Y
Market Fixed Effect Y Y Y Y
Adjusted R
2
37.77% 33.86% 39.41% 32.11%
Obs 74 74 66 66
Notes:
The two-stage least square estimation method is employed to in part mitigate the endogenity issue, of which the lagged
environmental performance is taken as the instrument. Since there are 74 overlapping firm-year observations over 2010-2011, the
sample size for IV regression is narrowed down from 102 to 74;
Only the second stage regression results are reported here, while the first-stage regression estimate is available upon request.
Each model includes year and market dummies;
Column (1)-(2) reports estimate results for full sample of 74 data point, while column (3)-(4) report robustness test results only
within REOC group; Newey-West Heteroskedasticity-robust standard errors are reported in the parenthesis; EnvScore and Green
denote disclosure-based environmental dimension of ASR score and green building dummy variable, respectively;
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively.
29
Table 4. 2SLS Estimation of Cross-Country Environmental Sustainability
Regression
(Dependent Variable: Natural Logarithm of Tobin's Q)
(1) (2) (3) (4)
Independent Variables
CH_EntScore 0.5034 0.2436
(0.9734) (0.9822)
HK_EnvScore -0.2972 -0.3519
(0.1797) (0.1856)
SG_EnvScore 0.0013 0.1089
(0.1109) (0.1439)
CH_Green 0.1372 0.0939
(0.1961) (0.1917)
HK_Green 0.0095 -0.0123
(0.0880) (0.0934)
SG_Green 0.2042*** 0.2915*
(0.0710) (0.1512)
Control Variables
Size ($mil) -0.0483 -0.0391 -0.0292 -0.0208
(0.0519) (0.0593) (0.0503) (0.0640)
Leverage (*100) 0.0072 0.0072 0.0037 0.0058
(0.0056) (0.0055) (0.0067) (0.0058)
Sale Growth (*100) -0.0003 -0.0003 -0.0004 -0.0003
(0.0002) (0.0002) (0.0002) (0.0002)
ROA (*100) 0.0015 0.0036 0.0037 0.0073
(0.0046) (0.0036) (0.0062) (0.0055)
Firm Age (# of days) 0.0000 0.0000 0.0000 0.0000
(0.0000) (0.0000) (0.0000) (0.0000)
Intercept 0.3133 0.2383 0.2376 0.0954
(0.6152) (0.6505) (0.6408) (0.7187)
Year Fixed Effect Y Y Y Y
Market Fixed Effect Y Y Y Y
Adjusted R
2
32.84% 33.91% 31.99% 32.65%
Obs 74 74 66 66
Notes:
The two-stage least square estimation method is employed to in part mitigate the endogenity issue, of which the lagged
environmental performance is taken as the instrument. Since there are 74 overlapping firm-year observations over 2010-2011, the
sample size for IV regression is narrowed down from 102 to 74;
Only the second stage regression results are reported here, while the first-stage regression estimate is available upon request.
Each model includes year and market dummies. Interacting variables are constructed between market dummies – CH, HK, and
SG, and environmental measures –EnvScore that is disclosure-based rating and Green indicating commitment to green building
practices.
Column (1)-(2) reports estimate results for full sample of 74 data point, while column (3)-(4) report robustness test results only
within REOC group; Newey-West Heteroskedasticity-robust standard errors are reported in the parenthesis.
Significance level of 1%, 5%, and 10% is indicated by *, **, and ***, respectively.
30
Appendix 1. Corporate Environmental Sustainability Score
Question
Number
Environmental Criteria
1
Is there an environment code/policy?
2
Is the environment code/policy comprehensive? (i.e. covers water, energy, building,
transport)
3
Does the company follow an international/national environmental management system? (e.g.
ISO 14001)
4
Does the company provide GHG emissions data?
5
Is the data clear and comprehensive?
6
Does the company provide energy consumption data?
7
Is the energy consumption data clear and comprehensive?
8
Does the company have any energy consumption initiatives?
9
Does the company set targets on energy consumption?
10
Does the company respond to the latest version of the Carbon Disclosure Project?
11
Does the company respond to the latest version of the Carbon Disclosure Project and make
the CDP data public?
12
Has the company allocated resources to develop energy efficient technologies or solutions?
13
Has the company set targets for % of energy to come from renewable?
14
Does the company provide water consumption data?
15
Is the water consumption data clear and comprehensive?
16
Does the company have any water consumption initiatives?
17
Does the company set targets on water consumption?
18
Does the company provide waste production data?
19
Is the waste production data clear and comprehensive?
20
Does the company have any waste reduction initiatives?
21
Does the company set targets on waste reduction?
Notes:
Binary score, i.e. 1 or 0, is allocated to each criteria; If only local language is available without English version,
half point is granted, which fully takes into account the local expertise on sustainability
31
Appendix 2. Asian Sustainability Rating (ASR) Company Selection
To ensure that the ASR results represent the largest and most important companies domiciled and
listed in Asian markets, several proprietary and comprehensive sample selection measures were
taken. Specifically, a three-step approach was implemented for ASR 2010:
1. An initial shortlist of companies was extracted from a universe of 3,000 publicly listed
companies in Asia, ex Japan. The top 500 companies based on their free float weighted
market capitalization were selected for inclusion;
2. his initial list was subsequently examined and cross-referenced with the Fortune 500 Global
2009 list to ensure that key Asian companies were not excluded;
3. To ensure that the universe provided a detailed view of sustainability performance across
Asia and opportunities for country comparison, ASR extended the research to ensure
coverage of the largest 20 companies in each of the ten Asian markets, by free float market
capitalization.
As far as the ASR 2011 is concerned, other stylized considerations than the
aforementioned measures were undertaken to both reflect the market dynamics and reach broad
market coverage as much as possible. For example, the criteria for firm inclusion were a
minimum free flow market capitalization (FFMC) of US$ 0.5Billion. After several thousand
companies that met that FFMC cut off were taken from the proprietarily chosen markets, China
was arbitrarily capped at 200 companies and Malaysia, Indonesia, Philippines and Thailand set a
minimum of 30 companies so as to maintain a balanced sample. Notably, in the case of the latter
four countries, the ASR 2011 did allow some companies with less than US$ 0.5 Billion FFMC in
the sample in order to satisfy the 30 company minimum that was established for those markets.
32
Appendix 3. Firm Value Decomposition & Tobin’s Q
A firm?s market valuation is based on the present value of future profitability discounted at
financial market risk perception of the firm (Fama, 1970). Typically, a firm?s value can be
composed of two parts: tangible and intangible assets
28
. Given that the potential role of
environmental sustainability reputation in firm valuation is of major interest in this paper, the
following contributes to a specification that justifies the use of Tobin?s Q to capture the
intangible asset value of firms, which follows from prior studies (Lindenberg and Ross, 1981;
Jaffe, 1986; Konar and Cohen, 2001).
The market value can be expressed as:
T I
MV V V = +
(1)
Where MV is the market value of firm, and V
T
and V
I
are the component of firm value
contributed by the tangible and intangible assets of the firm, respectively. In practice, the MV of a
firm is observable and the V
T
is usually measured by replacement cost (RC) of the tangible assets
of firm (Konar and Cohen, 2001). However, V
I
is not visible to markets. Subsequently, let
equation (1) divided by V
T
at both sides,
/ 1 ( / )
T I T
MV V V V = + (2)
Since V
T
can be measured by RC, equation (2) becomes:
/ 1 ( / )
I T
MV RC V V = +
(3)
Clearly, the left side of equation (3) shows how Tobin?s Q is defined by Tobin (1969)
29
.
As such, equation (2) can then be written as:
1 ( / )
I T
Q V V = + or 1 ( / )
I T
Q V V ÷ =
(4)
Thus, for a firm with no intangible asset value, the market value of the firm should equal
the replacement value of its tangible assets, and Tobin?s Q should equal 1. As intangible asset
value of a firm increases, the value of Tobin?s Q will increase accordingly. Although theory does
not indicate a specific functional form for an equation to estimate the Q, most prior literatures
use the additive form derived from the equation (1). As such, the following specification is
28
Tangible asset s consist of replacement value of property, plant and equipment and so forth; Intangible assets are either
production factors or resources that enable firms to earn return over it tangible assets, such as patents, trademarks and brand
names as well as litigation or liability. (Konar and Cohen, 2001)
29
According to Tobin (1969), the Tobin?s Q is defined as the ratio between the market value and replacement value of the same
physical asset, of which the numerator is the valuation in the market for exchanging existing assets while the denominator is the
replacement or reproduction cost in the market for newly produced commodities.
33
estimated to test the impact of various factors, especially environmental sustainability reputation
in this study, on the intangible asset value of the firm:
1 ( / )
I T
Q V V X o | c ÷ = = + +
¿
(5)
Where X is a vector of explanatory and control variables that may affect intangible asset
values.
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