Does community and environmental responsibility affect firm risk? Evidence from UK panel data 1994-2006

Abstract

The question of how an individual firm's environmental performance impacts its firm risk has not been examined in any empirical UK research. Does a company that strives to attain good environmental performance decreases its market risk or is environmental performance just a disadvantageous cost that increases such risk levels for these firms? Answers to this question have important implications for the management of companies and the investment decisions of individuals and institutions. The purpose of this paper is to examine the relationship between corporate environmental performance and firm risk in the British context. Using the largest dataset so far assembled, with Community and Environmental Responsibility (CER) rankings for all rated UK companies between 1994 and 2006, we show that a company's environmental performance is inversely related to its systematic financial risk. However, an increase of 1.0 in the CER score is associated with only a 0.02 reduction in firm's risk and cost of capital.

Corporate Governance and Corporate Social Responsibility Disclosure: Evidence from the US Banking Sector

“…CSR engagement also Corporate Governance and CSR Disclosure 6 reduces the risk that firms' performance is negatively affected by labour disputes, product safety scandals and consumer fraud (Waddock and Graves, 1997). Accordingly, firms which are perceived to have high CSR standards are subject to lower firm specific risks due to lower cash flow variability (Salama et al, 2011).…”

“…This suggests that managers' typical inclination to limit their risk exposure to protect their human capital has been eroded by the structure of their executive pay packages. As CSR engagement and disclosure tend to reduce firms' risk profiles (Simpson and Kohers, 2002;Scholtens, 2008;Salama et al, 2011;Ghoul et al, 2011), CEOs might view CSR reporting as detrimental to maximising their remuneration.…”

“…Extensive prior research suggests that CSR reporting can impact positively on stakeholders' perceptions of firm performance, firm value and firm risk, and thereby on firms' profitability, cost of capital and share price (Gray, Kouhy and Lavers, 1995b;Simpson and Kohers, 2002;Scholtens, 2008;Godfrey, Merrill and Hansen, 2009;Salama, Anderson and Toms, 2011;Ghoul, Guedhami, Kwok and Mishra, 2011;Cormier, Ledoux and Magnan, 2011;Lourenco, Branco, Curto and Eugenio, 2012). Moreover, as CSR reporting contributes to the reduction of information asymmetry between managers and investors as well as other stakeholders, comprehensive CSR reporting aids the supervision and control of managers.…”

The link between corporate social performance and financial performance: empirical evidence from Japanese firms

“…Early studies show that investors perceive socially responsible firms as low risk with respect to investment (Orlitzky and Benjamine, 2001). More recent research also indicates a negative relationship between CSP and market-based risk (Boutin-Dufresne and Savaria, 2004;Gregory et al, 2014;Mishra and Modi, 2013;Salama et al, 2011). Other research highlights the influence of CSR on costs of capital (Ghoul et al, 2011;Goss and Roberts, 2011).…”

“…However, managerial decisions that are made without consideration for stakeholder concerns may increase business risk by damaging employees' motivation, the quality of products, the firm's reputation, or clients' trust. Therefore, effective stakeholder management reduces the uncertainty of future business and decreases financial market risk (e.g., Salama et al, 2011).…”