Report from the Research Frontier: February 2020

New findings: A low ranking may be worse than no ranking; Air pollution leads to investing errors; To keep society functioning, get involved

Every month, researchers publish dozens of articles on business sustainability. NBS highlights insights at the frontier of knowledge. See all monthly highlights.

A Low Ranking May be Worse than No Ranking

Companies can spend a lot of time and resources in hopes of getting included on one of the many sustainability lists and rankings. But new research shows that being ranked can be worse for a company’s financial performance than being left out of a ranking altogether.

Researchers Ben Lewis and Chad Carlos studied how investors respond to companies included on the 100 Best Corporate Citizens (BCC) List, which ranks companies based on ESG performance. They found that firms near the bottom of the ranked list experienced a 1.3 per cent drop in stock price on the day the BCC List was released, compared to similar companies not included in the ranking.

A possible explanation: Ranking systems lead investors to compare firms on the list, highlighting differences  between firms at the bottom and top of the rankings. Because unranked firms avoid such comparisons, their stock may actually end up performing better.

“Our advice is to realize that corporate reputation and rankings are a long-term game,” Lewis told NBS. “Companies just beginning their sustainability journey should focus on building a corporate citizenship program that is targeted, consistent, and relevant to stakeholders.” The researchers found that having such a program actually buffered firms low on the BCC List from the stock decline experienced by their peers.

Read the article: Lewis, B.W., & Carlos, C. 2019. The risk of being ranked: Investor response to marginal inclusion on the 100 Best Corporate Citizens list. Strategic Management Journal.

Read the news release.

Air Pollution Leads to Investing Errors

Air pollution isn’t just bad for our lungs. Exposure to pollution negatively affects mood and cognitive functioning. And there are clear implications for business decision-making as well.

Investors in polluted areas are more likely to sell winning assets while holding onto losing assets, new research shows. Investors exposed to high pollution are 3 to 4 times more likely to make this error, roughly speaking.

The results are based on investments in a large Chinese mutual fund: 770,000 investment accounts trading from 2007 to 2015, across China. Researchers linked investment decisions to the local air quality index.

What explains this pattern? The authors suggest that because air pollution can cause bad moods, investors try to cheer themselves up by realizing gains. Researcher Hong Zhang told NBS that the air pollution likely also reduces productivity, through its negative effect on moods.

Businesses and governments need to act on this information, said Zhang. Businesses can adopt clean technology, relocate, and better control indoor air quality, he said. But firm actions likely can’t solve pollution fully, he added: “A wide scheme of tax (on pollution) and incentive policies (on green tech) may be necessary to address the issue.”

Zhang conducted the research with colleagues Jennifer (Jie) Li, Massimo Massa and  Jian Zhang.

Read the article: Li, J., Massa, M., Zhang, H., & Zhang, J. 2019. Air pollution, behavioral bias, and the disposition effect in China. Journal of Financial Economics

More about the impact of air pollution on the stock market.

To Keep Society Functioning, Get Involved

Our societies rest on “institutions”: established organizations, rules, and behaviors. These institutions include education, health care, and even democracy.

Even long-standing institutions can become neglected and decline. Researchers Wren Montgomery and Tina Dacin studied how one institution — the water supply in Detroit, Michigan — decayed, and how diverse actors worked to strengthen it.

In Detroit, financial trouble and long neglect threatened the public water supply. In 2013-2014, a broad coalition sought to improve infrastructure and support low-income clients. They made progress, although many Detroiters still lack access to water.

The effort to improve water services involved workers at the Detroit water department, local community leaders, government and corporate executives, and others. Many of these groups and individuals had historically been at odds, but they shared a passion for water and public water services.

The lesson for business: “No single action or actor can renew a large institution on their own,” the authors explained. Different groups, with different abilities, are needed to address complex challenges.

It’s easy to assume that institutions will always be there, Montgomery told NBS. In Detroit, the water infrastructure and water were taken for granted.  But institutions and nature itself require ongoing attention.

Read the article: Montgomery, W., & Dacin, T. 2019. Water wars in Detroit: Custodianship and the work of institutional renewal, Academy of Management Journal.