Triangulating Environmental Performance: What Do Corporate Social Responsibility Ratings Really Capture?

TLDR

The rise of socially responsible investing has spurred many CSR rating methods and research linking environmental and financial performance, yet the abundance of data creates commensurability, overload, and confusion. The study aims to identify the principal components of corporate environmental performance using a unique dataset of ratings from three leading purveyors. By combining these ratings, the authors extract principal components that represent corporate environmental performance. Two distinct factors—processes and outcomes—explain 80 % of the variance, and financial performance is associated with process measures but not with outcome measures.

Abstract

The emergence of socially responsible investing has led to the development of a large number of methodologies for rating corporate social responsibility and to a growing body of research exploring the link between environmental and financial performance. Increased availability of information potentially generates an abundance of riches upon which to base investment decisions, but it also raises issues of commensurability, information overload, and confusion. Using a unique data set combining environmental ratings from three leading purveyors, we identify the principal components of corporate environmental performance. We find that two distinct factors—the environmental processes and practices implemented by firms, and the environmental outcomes they generate—explain 80% of the variance of the data. We also find corporate financial performance to be associated to process but not to outcome measures.