Does the Stock Market Encourage Sustainability? Evidence from UK Investment Announcements

This paper examines the stock market reaction to company investment decisions with and without a sustainability objective. Abnormal returns are estimated using a standard event study methodology for a sample of 517 investment announcements for listed UK firms for the period 2013 to 2021. Using a sample of 90 sustainable investments and 427 non-sustainable investments, we test whether 90 announcements with a sustainability agenda are more positively viewed by market participants than 427 announcements without a sustainability agenda. This study documents significant positive stock market reactions to both sets of investments, but abnormal returns are higher for investments without a sustainability agenda. The difference in abnormal returns between both sets of investments is not statistically significant. The findings reported in this study suggest that classifying corporate investment decisions according to information content indicative of a sustainability agenda contains price-sensitive information. This has implications for information made available to the market and will therefore promote price discovery, reducing the information asymmetry between informed and uninformed investors and allowing improved market efficiency in categorizing investment decisions according to investment objectives. In a market-based system, the positive valuation of investments associated with sustainability undertakings has implications for allocative efficiency, because firms become more attractive regarding the future allocation of funds to investment projects that address sustainability concerns, indicating that new sustainable investments should be encouraged.