The Green Value of REITs

The concept of corporate social responsibility (CSR) and its effect on firm performance is receiving increasing academic interest. However, most of the literature excludes the financial sector and, more important, listed property funds. This is surprising, as the real estate sector has a major impact on the environment, both via the consumption of natural resources in the building process, and thereafter in daily use of the property. Prior studies have shown that more sustainable buildings can result in savings on energy and maintenance costs, health and productivity benefits as well as reputation benefits for corporate tenants. These benefits could consequently result in higher rent levels and building valuations. Therefore, we argue that a sustainability focus of property companies could be associated with a positive relationship between market valuation and operating performance indicators. This paper bridges the gap in current research by investigating this relationship, using two unique databases: the KLD corporate social responsibility ratings database and Innovest Strategic Value Advisorsí sustainability ratings. For a sample of more than 200 US REITs, we analyze the effects of CSR on operating performance and firm valuation (Tobinís Q) over a time span of 10 years, taking a special interest in solving the endogeneity issue using econometric techniques.