ESG investing and the financial performance : a panel data analysis of developed REIT markets

Environmental, social, and governance (ESG) investing in the corporate real estate industry has notably increased since the mid-2000s. Utilizing PVAR-Granger causality model and a fixed-effects panel data model with a rich dataset comprising 234 ESG-rated REITs across five developed economies from 2003 to 2019, this study investigates both the causal relationship and the sign of the association between corporate social and financial performance for the REIT industry. The results suggest that stock market investors pay attention to individual E/S/G metrics and price each component of ESG investing differently, with environmental (E-investing) and social (S-investing) practices being the significant social performance factors influencing the financial performance of REITs. This study is the first attempt to test the social impact hypothesis of the stakeholder theory of the corporation and the neoclassic trade-off argument to explore corporate social responsibility and the market valuation of REITs. We find strong support for the trade-off hypothesis in our full-sample analysis and argue that REITs' environmental policies and activities involve high financial costs that may drain off capital and other company resources and lead to decreasing market returns. We also find that investors have attached a higher value to REITs' social investing performance in the post-GFC period, from 2011 to 2019. A positive premium for S-investing supports the social impact hypothesis, indicating that companies that reduce or ignore socially responsible actions to lower their implicit costs incur higher explicit costs, giving rise to competitive disadvantage.