Are best in class companies also investors’ favorites? Stock market reactions to the CDP A-List in Europe

This study investigates the stock market reactions to the CDP A-List announcement for European companies. The CDP A-Lists are published annually and aim to identify the "best in class" companies based on sustainability disclosures. Based on an event study approach, we find that stock prices of listed large-cap companies generally do not react on the announcement, while small-caps experience significantly negative revaluations of their stocks around the publication date. These results indicate two important insights. First, large-cap companies are obviously intensively covered by capital market participants also with respect to their sustainability efforts. Consequently, the A-List of the Carbon Disclosure Project cannot generate additional insights for these corporations. Second, this informational market efficiency does not hold for smaller companies and the publication of the A-List is relevant news. As a consequence, investors adjust stock market valuations significantly. Remarkably, these adjustments show a negative sign. Best in class smaller companies with respect to sustainability disclosures are perceived to be less attractive (short-term) investment opportunities in the stock market which implies that the perceived benefits of high-quality sustainability disclosures are overcompensated by even higher perceived challenges posed by environmental standards and related costs. These results mirror the difficulties to finance the sustainable transformation of mid-size companies in Europe.