Doing well by doing good with the performance of United Nations Global Compact Climate Change Champions

The paper investigates whether investors are rewarded when firms adopt climate change as a core CSR mission through participation in the United Nations Global Compact (UNGC) and its Climate Change Champions (CCC) initiative. Climate change drives technological innovations and strategic shifts across industries, creating both risks (e.g., for fossil fuel sectors) and opportunities (e.g., renewable power). The UNGC, founded in 2000, is the largest voluntary CSR initiative, with members committing to ten principles spanning human rights, labor, environment, and anti-corruption. Despite prior work on historical, operational, and governance aspects of UNGC firms, there is a noted gap regarding financial performance impacts of joining UNGC, particularly for portfolios constructed via later-generation SRI strategies. This study is the first to examine portfolio performance of UNGC Climate Change Champions, a subset of firms proactively leading climate action under UNGC principles. Using a natural experiment framework based on firms’ decisions to join UNGC and CCC, the study evaluates whether these commitments translate into improved operating and market performance, tests for possible mispricing related to investor preferences and climate risk aversion, and addresses the greenwashing critique by assessing operational changes and outcomes.

The Background section reviews a long-standing debate on whether environmental responsibility imposes costs on profitability. Fama and French (2007) propose that investor disagreement and tastes are valid asset pricing factors; empirical evidence (Ng and Zheng, 2018) shows green energy portfolios can earn positive alphas. SRI may enhance value by lowering costs, increasing market power, or reducing financing costs (Mackey et al., 2007). Meta-analyses and event studies show mixed to neutral effects overall, with markets penalizing eco-harmful behavior and sometimes not fully rewarding eco-friendly actions. The paper outlines four generations of SRI (Renneboog et al., 2008): (1) negative screening, (2) positive screening, (3) integrated sustainability/triple bottom line, and (4) sustainability plus shareholder activism. Prior UNGC-related studies (e.g., Coulmont and Berthelot, 2015; Ortas et al., 2015) suggest improved market-to-book and positive ESG–performance links. Studies on climate policies (Gallego-Alvarez et al., 2014, 2015; Delmas et al., 2015) find long-term improvements in ROE/ROA with emissions reductions. Divestment literature (e.g., Dordi and Weber, 2019; Trinks et al., 2018; Plantinga and Scholtens, 2021) generally finds no decrease in risk-adjusted returns. These strands motivate testing whether UNGC-CCC firms deliver comparable or superior performance and whether standard models misprice such assets due to omitted preference factors.

Hypotheses: H1: UNGC-CCC firms have no difference in financial operating performance compared to their non-UNGC competitors. H2: UNGC-CCC firms have no difference in abnormal return performance than their matched non-UNGC competitors. H3: UNGC-CCC membership affects long-term abnormal return performance after controlling for financial, governance, regional, and country governance factors. Design: Modified portfolio/event-study approach aligned on each UNGC firm’s joining year (t=0) to study long-term effects, isolate changes after joining, and compare with matched non-UNGC competitors in the same time frames. Two panel regression specifications are used: (1) a conditional model of CARs including a UNGC-CCC membership dummy and firm/country controls; (2) a difference-in-differences (DiD) model including UNGC membership, an AFTER PARTICIPATION indicator (0 before, 1 after joining), and their interaction (DIFF IN DIFF), with the same controls. Data and sample: UNGC participants obtained from UNGC website (participants list with membership date, industry, country, status). Financial and returns data from S&P Capital IQ (2015–2021). Timeframe: from 2000 (UNGC launch) through December 2015. Population includes 117 unique publicly traded UNGC-CCC firms (115 active, 2 inactive) across ten SIC sectors and multiple regions. Matched competitors are non-UNGC, selected one-to-one from Capital IQ competitor lists based on similarity in finances/operations; matched sample reduces to 54 UNGC-CCC firms with one competitor each. Descriptive checks indicate broadly similar characteristics, with some differences (UNGC-CCC have higher external director share, higher leverage, and higher gross margins in some comparisons). Performance measures: Dependent variable is Cumulative Abnormal Returns (CAR) estimated via CAPM, Fama–French 3-factor, and Fama–French 5-factor models; operating performance used in some tests is ROA. Market benchmark: value-weighted MSCI World Index. Estimation/event windows: estimation window of 60 to 24 months before t=0; event window from 24 months before to 36 months after t=0; abnormal returns also computed up to 120 months post-joining. Additional analyses compute performance in relative time (−24 to +60 months around t=0), event-time blocks, and calendar time (portfolio formed as firms join from 2000–2015). Test statistics follow Brown and Warner (1980), aggregating abnormal returns across firms to compute portfolio AR, CAR, and CAAR with Z-tests. Controls: Firm-level controls include ROA, gross margin (ROS), total debt-to-equity, Altman Z-score, log total assets, board composition (% external directors), ownership structure (% insiders, % owned by CEO). Country-level controls are World Bank WGI dimensions: control of corruption, political stability/absence of violence, rule of law, government effectiveness, regulatory quality, voice and accountability. Regional dummies included. Additional controls include Brent/WTI oil prices, gross profit to assets, and operating expense ratio. Robustness: Re-run conditional models on the one-to-one matched sample; estimate across CAPM, FF3, FF5, and ROA specifications, and across relative and calendar time.

Operating performance: In relative time (−3 to +5 years around joining), UNGC-CCC firms exhibit higher mean ROA and ROC than competitors: ROA 4.87% vs 2.34% (difference +2.53 p.p., p<0.01) and ROC 8.13% vs 4.09% (+4.04 p.p., p<0.01). Gross margin (ROS) is lower for UNGC-CCC in this relative window: 33.20% vs 40.43% (−7.24 p.p., p<0.01). Market risk premium is lower for UNGC-CCC: 13.63% vs 22.09% (−8.46 p.p., p<0.05). Sharpe ratios are similar (0.282 vs 0.289). In calendar time (2000–2015), UNGC-CCC show higher ROA: 3.14% vs 1.62% (+1.53 p.p., p<0.05); ROC difference is not statistically significant; ROS is higher for UNGC-CCC: 39.68% vs 33.37% (+6.90 p.p., p<0.01). Sharpe ratio is slightly higher for UNGC-CCC (0.236 vs 0.220). Operating expense ratio declines around joining: significant decreases between years −3 to 0 and −3 to +3 (both p<0.01), indicating real operational improvements. Market return performance (CARs): Fama–French 5-factor CARs around joining show no statistically significant abnormal returns for UNGC-CCC or for competitors in relative or calendar time. Example relative-time CARs for UNGC-CCC: ~7% at month 0 and −6% at +60 months, both non-significant; competitors range −2% to 12.6%, non-significant. Overall, UNGC-CCC and competitors earn appropriate risk-adjusted returns with no significant abnormal gains or losses. Panel regressions (aggregate sample): UNGC membership dummy has non-significant coefficients across CAPM, FF3, FF5, and ROA models, indicating membership per se does not drive abnormal performance. Critically, AFTER PARTICIPATION (post-joining indicator) shows significant positive effects on abnormal returns of approximately 23.6% to 35.4% over the 15-year period (p<0.01), evidencing a causal improvement after joining. However, the DIFF IN DIFF interaction indicates significant underperformance versus competitors after joining, by 16.8% to 37.4% (about −1.10% to −2.35% per year; p<0.01). Robustness tests on the one-to-one matched sample confirm non-negative membership effects and similar control variable behavior. Synthesis: UNGC-CCC firms improve operating performance and exhibit lower risk/volatility. Risk-adjusted returns are broadly comparable to competitors, with evidence of positive post-joining effects but relative underperformance versus matched peers in DiD, which the authors interpret as potential mispricing linked to investor tastes and disagreement not captured by standard models.

Findings address whether climate-focused CSR harms or helps firm and investor outcomes. UNGC-CCC firms display superior accounting performance (higher ROA/ROC), declining operating expense ratios around joining, and lower risk, contradicting the greenwashing critique and suggesting real operational changes. Despite improved operations, risk-adjusted market returns do not show significant abnormal outperformance in aggregate; DiD results show relative underperformance versus competitors after joining, while the post-joining indicator itself is significantly positive. The authors reconcile this by positing mispricing: standard asset pricing models omit preference-based factors (investor aversion to climate risk and taste for pro-environmental firms) and heterogeneous expectations. Consistent with Fama and French (2007), such tastes and disagreement should be priced. Investors may accept lower expected returns from ethical/low-risk firms, aligning with observed lower risk premiums and comparable/higher Sharpe ratios for UNGC-CCC. The results suggest that incorporating preference factors (e.g., via the Popular Asset Pricing Model) could resolve the anomaly and more accurately price CCC firms. Overall, doing good is not penalized: firms earn normal risk-adjusted returns while delivering better operating performance and lower risk.

This study is the first to analyze portfolio performance of fourth-generation SRI-screened firms that are UNGC Climate Change Champions. It documents material operational improvements (e.g., lower operating expenses) and superior accounting returns for UNGC-CCC firms relative to non-UNGC competitors, refuting greenwashing concerns. After joining UNGC, firms experience a positive long-term effect on performance, though standard models show no significant abnormal return advantage overall and a relative DiD underperformance versus competitors, consistent with mispricing due to omitted preference factors. The evidence supports extending asset pricing models to include investor tastes and disagreement. Practically, investing in UNGC-CCC does not entail a penalty: lower returns, where observed, reflect lower risk. The authors encourage more firms, including those in fossil-fuel-related sectors, to join UNGC and adopt CCC commitments as a pathway to improved operations and shareholder value while contributing to climate goals. Future research could refine pricing models that embed heterogeneous preferences, examine longer horizons and more recent cohorts, and explore sectoral or regional heterogeneity in CCC impacts.

The study relies on proprietary S&P Capital IQ data (not publicly available) and covers the period 2000–2015. The one-to-one matched competitor sample reduces the UNGC-CCC sample to 54 firms due to matching constraints. While the design aligns event windows and includes extensive firm, governance, regional, and country controls to address selection and confounding, the natural experiment remains observational. Some baseline differences exist between UNGC-CCC and competitors (e.g., board composition, leverage, margins), and results may reflect period- and sample-specific dynamics.