Does the optimization of a company's environmental performance reduce its systematic risk? New evidence from European listed companies

Abstract

The objective of this study is to examine the relationship between a company's environmental performance and its systematic risk. Using a sample of 351 European listed companies over the 2007–2015 period, the technique of principal components analysis is applied to calculate a synthetic global index of corporate environmental performance using 71 evaluation criteria suggested by the ASSET4 database. Using this same approach, subindices of the global index are calculated using the following ASSET4 dimensions: reduction of emissions, product innovation, and reduction of resource usage. To test the relationship between these variables and risk, panel data regression techniques are applied. Results indicate that the synthetic global index of environmental performance negatively affects the systematic risk of company. The decomposition of this global index into three subindices shows that those subindices relating to the reduction of environmental emissions and of resource usage make it possible to significantly reduce systematic risk, whereas the subindex relating to product innovation has a rather moderate effect. Thus, environmental performance, like governance, can be considered as an insurance mechanism for the company, which reduces the probability of events occurring, which negatively affect its cash flow and risks faced by shareholders.

Tanggung Jawab Sosial Dan Risiko Sistematis: Efek Moderasi Dari Fleksibilitas Keuangan Dan Investasi Penelitian Dan Pengembangan

“…Dengan menyajikan CSR akan memberikan nama baik pada perusahaan tersebut sehingga para investor ataupun stakeholder dapat menilai melalui tanggung jawab sosial perusahaan terhadap lingkungan (Djoutsa et al, 2020). Selain itu, konsumen akan lebih tertarik pada perusahaan yang telah melakukan kontribusi terhadap masyarakat maupun lingkungan.…”

“…Hubungan tanggung jawab sosial dengan risiko sistematis Djoutsa et al (2020) menjelaskan bahwa risiko sistematis yang berhubungan dengan perusahaan dapat dipengaruhi oleh keputusan manajemen dalam operasi, pendanaan, dan investasi perusahaan tersebut. Beberapa diantara keputusan manajemen akan mempengaruhi risiko sistematis perusahaan.…”

“…Penelitian yang dilakukan menjelaskan bahwa ROA dan ROE dapat mempengaruhi profitabilitas saham dan tingkat risiko sistematis perusahaan (Campbell et al, 2010). Oleh karena itu, Cai et al (2016) dan Djoutsa et al (2020) menggunakan kedua rasio profitabilitas (ROA dan ROE) untuk mengendalikan risiko sistematis. ROA merupakan rasio yang menunjukkan kemampuan perusahaan dalam menggunakan sumber daya alamnya (Nuzula et al, 2019).…”

The determinants of environmental performance and its effect on the financial performance of European-listed companies

“…– We initially build a global synthetic index of the environmental performance of the company, which takes into account three main dimensions (the reduction of emissions, product innovation, and the reduction of resource consumption) proposed by Thomson-Reuters (2015) and Djoutsa Wamba et al (2020). In previous studies (Ambec and Lanoie, 2009), only one dimension is generally analyzed (reduction of emissions), while Xue et al (2017) hold that the results obtained on one dimension cannot be transferred to another or draw conclusions on the global construct from the results of a single dimension.…”

“…Environmental performance is in the majority of the cases considered as the environmental effects caused by companies (Cole et al, 2008; King and Lenox, 2001), the ability of the company to manage in an efficient and durable way the operations of transformation of physical flows (Janicot, 2007), or as the result of the environmental efforts made by the company as well as the change in the ecological pressure given this result (Turki, 2014). It is considered as a reflexive variable going from its multidimensional view (Djoutsa Wamba et al, 2020; Endrikat et al, 2014; Trumpp et al, 2015). For this purpose, it is measured using three dimensions, which take into account the way in which a company uses the best practices of management to avoid environmental risks and benefit from environmental opportunities (Thomson-Reuters, 2015).…”