The Penalization of Non-Communicating UN Global Compact’s Companies by Investors and Its Implications for This Initiative’s Effectiveness

Abstract

Companies that have joined the United Nations Global Compact (UNGC) are required to submit a Communication on Progress (COP), which is an environmental, social, and governance (ESG) report, to the UNGC every year. If they fail to do so, they are marked and listed as non-communicating on the UNGC website. Using the event study methodology, this study shows that a company that fails to report to the UNGC is penalized in the financial markets with an average cumulative abnormal return of −1.6% over a period of 5 trading days around the event. Although a major critique against the UNGC is that the initiative’s voluntary nature and its lack of external monitoring and sanction mechanisms render it ineffective in terms of the business participants’ implementation of the UNGC principles into their operations, this result suggests that investors may be able to pressure UNGC business participants to increase their compliance with the UNGC requirements and to “walk the talk.”