This paper investigates the relationship between corporate social and environmental performance and financial performance for a sample of publicly traded US real estate companies. Using the MSCI ESG (formerly KLD) database on seven Environmental, Social & Governance dimensions in the 2003-2010 period, and weighting the dimensions according to prominence in the real estate sector, we model Tobin's Q and annual total return in a panel data framework. The results indicate a positive relationship between ESG rating and Tobin's Q but this effect is driven by ESG concerns rather than strengths. Consistently across all model specifications, overall ESG ratings are associated with lower returns. Negative scores appear to result in higher returns in the short run but positive scores have no significant impact on returns.

1. Is CSR Commitment Linked to Investment Performance
in the Real Estate Sector?
by
Franz Fuerst **
Marcelo Cajias *
Pat McAllister**
Anupam Nanda**
Property/Finance Seminar Series, University of Aberdeen, 3 June 2011
** Henley Business School, University of Reading
*IREBS, University of Regensburg

2. Motivation for this paper
• “The social responsibility of business is to increase its
profits” Milton Friedman, 1970
• Argument: CSR reduces profits (jobs) without clear
mandate, potentially dubious motives (entrenched
management)
• BUT: implicitly negates existence of market failures,
negative externalities
• Contributions of human, social capital and environmental
quality to profitability?
• CSR – CFP link studied intensively in mainstream
econ/finance lit but very little empirical evidence in real
estate.

3. Why do companies engage in CSR?
• Bansal and Roth’s (2000) 3 types of motive
profiles:
1) Caring profile: organizational leadership
2) Competitive profile: business advantage,
reaction to perceived competitive threat.
Stakeholder theory : financial benefits of
improving relatioinships with employees,
suppliers, customers and local community
3) Concerned profile: pre-emptive, collective
response in an effort to obtain reputational
and regulatory benefits.

4. Expected impact of CSR on CFP (returns)
 Hypothesis 1: None: CSR is neutral either because it
is irrelevant or because impact on intangibles are not
fully valued by market
 Hypothesis 2: Negative: CSR lowers risk, hence lower
returns. Cost of capital lower, neutral investors
demand higher returns for investing in non-CSR. CSR
increases agency costs.
 Hypothesis 3: Positive: Higher demand by SR
investors. Signaling effect to customers & employees.

5. Transmission mechanisms between CSR and CFP
5

6. Is CSR relevant to the real estate sector?
 CSR as a form of non-price competition. Relevant for RE?
 Most real estate businesses are asset driven and capital
intensive. Also, switching to competitor is costly or
impractical for customers (leases etc.) ->Limited scope for
CSR policies?
 Real estate service companies and other human capital
intensive sectors expected to have higher incentive and
scope for CSR.
 BUT: enormous increase in awareness of environmental
issues in real estate

7. Measuring CSR: The KLD Database
Dimension Indicators (examples)
Community Relations
Charitable Giving, Volunteering Programs, Investment
Controversies, Tax Disputes
Corporate Governance
Transparency, Political Accountability, CEO Compensation,
Diversity Representation & Promotion of Women and Minorities, Work-
Life Balance
Employee Relations Union Relations, Employee Involvement, Profit Sharing, Health
& Safety
The Environment Clean Energy, Recycling, Beneficial Products & Management,
Climate Change Concern
The Product
Product Quality & Safety, Antitrust Action,
Human Rights
Indigenous Peoples, Labor Rights

8. Index Calculation & Modeling Strategy
2100100100 
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concernsofnumber
concernsofsum
strengthsofnumber
strengthsofsum
IndexKLD
Basic structure of fixed-effects panel model:
qijt = Tobin’s Q (or total return)
Kijt = KLD index (or KLD strenghts, KLD concerns)
Xijt = vector of financial attributes
μj = firm-specific fixed effect
ωj = sector FE
λt= year fixed effect
qijt=α+Kijtβ+Xijtγ+μi+ωj+λt+uijt

9. Definitions of Financial Variables
Variable Definition
Tobin’s Q
Long term firm value measured as market capitalization
plus debt (long and short) term debt and preferred stock
divided by total assets.
Return (%)
Annual change in share price in %
Return on Assets (%)
Net income before preferred dividends+(interest expense
on debt-interest capitalized)*(1-Tax rate)/Average of last
year´s and current year´s total assets*100.
Leverage (%)
Ratio of short term debt and current proportion of long
term debt divided by total assets
Total Assets ($mil.)
Total current assets, long term receivables, investments in
unconsolidated subsidiaries, other investments, net
property plant and equipment and other assets.
Market Cap ($mil.)
Calculated as Market Price-Year End * Common Shares
Outstanding
NAREIT Return (%) Annual return on NAREIT index in %

10. Summary statistics
Variable N Mean SD
Tobin’s Q
735 1.309 0.7685
Total Return (%)
735 0.063 0.421
KLD Index
735 48.868 3.235
KLD Index_Strength 735 3.082 5.540
KLD Index_Concern 735 5.346 5.270
Return on Assets (%) 735 5.416 6.120
Leverage (%) 735 6.100 13.780
Total Assets ($mil.) 735 6,180,892 16,063704
Market Cap ($mil.) 735 3,370,918 4,409,203
NAREIT Return (%) 735 0.078 0.279

11. Distribution of KLD scores by industry
SIC 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile
2357 Heavy Construction 0.93 0.54 0.35 0.00
3577 Food Products 3.43 0.81 2.11 2.90
3728 Home Construction 18.07 6.22 3.86 5.48
5752 Gambling 8.41 2.16 1.40 2.90
5753 Hotels 6.54 1.62 1.75 6.45
5777 Recreational Services 0.62 0.27 0.35 1.61
8633 Real Estate Holding & Development 4.36 3.24 2.81 3.55
8637 Real Estate Services 1.87 2.70 1.05 2.58
8671 Industrial & Office REITs 5.30 15.41 16.49 11.29
8672 Retail REITs 6.54 16.76 18.25 13.55
8673 Residential REITs 10.59 8.38 9.47 4.19
8674 Diversified REITs 3.74 1.62 4.21 4.19
8675 Specialty REITs 9.66 12.43 12.98 9.03
8676 Mortgage REITs 2.49 7.30 7.37 13.55
8677 Hotel & Lodging REITs 1.25 2.70 8.77 4.19
8771 Asset Managers 2.49 2.43 0.70 4.52
8775 Specialty Finance 1.25 1.62 0.70 10.00
8777 Investment Services 11.21 11.89 6.32 0.00

12. Average KLD Scores of Industry Groups 2003-09
2003 2004 2005 2006 2007 2008 2009
3728 Home Construction 49.25 47.77 47.45 46.40 45.27 44.86 46.42
5752 Gambling 48.07 47.42 46.64 46.61 46.97 46.74 47.50
5753 Hotels 50.50 50.10 49.49 50.05 49.91 49.70 49.31
8633 Real Estate Developmt 48.33 48.48 46.92 48.66 49.13 48.74 49.29
8637 Real Estate Services 50.57 50.19 49.56 48.81 50.40 49.21 49.25
8671 Industrial &Office REITs 49.40 49.14 49.28 49.56 49.37 49.48 49.58
8672 Retail REITs 49.25 49.72 49.15 49.04 49.37 49.24 49.45
8673 Residential REITs 49.12 46.63 47.59 47.20 47.69 47.94 48.58
8674 Diversified REITs 49.80 49.80 49.83 48.84 49.57 48.86 49.17
8675 Specialty REITs 48.74 48.78 49.46 48.95 49.01 48.90 49.05
8676 Mortgage REITs 50.87 50.06 49.89 50.20 50.02 50.55 49.84
8677 Hotel REITs 50.78 50.52 50.45 49.66 49.66 49.66 49.72
8771 Asset Managers 52.52 50.43 49.71 48.86 48.26 47.76 48.44
8775 Specialty Finance 47.96 47.96 49.04 48.08 47.41 47.41 48.13
8777 Investment Services 49.26 49.00 48.73 49.15 48.89 48.37 48.59
TOTAL 49.83 49.46 49.33 48.91 48.81 48.69 48.64

13. Fixed Effects Panel Fixed Effects Panel
KLD score 0.026 *
KLD score (t-1) -0.009
KLD strengths 0.020 *
KLD strenghts (t-1) -0.002
KLD concerns 0.000
KLD concerns (t-1) 0.008 .
Leverage 0.003 0.002
Return on Assets 0.008 . 0.008 *
Market Cap 0.502 *** 0.505 ***
Age of Company -0.159 *** -0.156 ***
N 539 539
R-Squared 0.804 0.813
Adj. R-Squared 0.660 0.664
Results of Sector-Adjusted Total Returns

14. Random
Effects
Random Effects
Piecewise
Random
Effects
(S/C)
KLD score (t) -0.001
KLD score (t-1) -0.004
KLD piece 1 (t) 0.002 **
KLD piece 1 (t-1) 0.000
KLD piece 2 (t) 0.002 *
KLD piece 2 (t-1) 0.000
KLD strengthts (t) 0.008
KLD strengthts (t-1) 0.007 *
KLD concerns (t) 0.007 *
KLD concerns (t-1) -0.003
Leverage 0.003 . 0.003 . 0.003 *
Return on assets 0.011 *** 0.011 *** 0.011 ***
Market cap 0.153 *** 0.151 *** 0.149 ***
Asset growth 0.001 * 0.001 * 0.001 *
Age of company -0.015 *** -0.014 *** -0.014 ***
NOI/Revenues 0.252 * 0.237 * 0.244 *
N 753 753 753
Adj. R-Squared 0.494 0.500 0.505
Results of Sector-Adjusted Tobin’s Q

15. Summary
 First comprehensive empirical study of CSR – CFP link for real estate
industry, avoids some pitfalls of earlier studies (industry controls, flawed
index calculation etc.)
 BUT: Preliminary results are weak and sensitive to model specification
 Estimations generally show:
 positive association between contemp. KLD score & Tobin’s Q
 positive association between contemp. KLD score & total return
 positive association between contemp. KLD strengths & total return
 positive association between both KLD strengths and concerns & Q

16. Further work
 Data problems (balanced/unbalanced panel,binary, equal weights etc.)
 Disaggregation by CSR dimension and type of real estate company
 Taking better account of risk
 Augment existing database on financial and CSR performance with
information about the asset holdings of REITs (exposure to green
buildings exposure etc.)
 Quantile regression (best/worst performers)
 Can natural experiment/treatment effects research design help?

17. THANK YOU
F.FUERST@READING.AC.UK