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

TLDR

The impact of a firm’s social and environmental performance on its risk has not been empirically studied in the UK, yet understanding whether good environmental performance reduces market risk or imposes costs is crucial for management and investment decisions. This study examines the relationship between corporate environmental performance and firm risk in the British context. The authors use the largest UK dataset of community and environmental responsibility (CER) rankings for all rated companies from 1994 to 2006 to analyze the relationship. They find that higher CER scores are associated with lower systematic financial risk, with a 1.0 increase in CER linked to a 0.028 reduction in β.

Abstract

The question of how an individual firm's social and 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 decrease 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 assembled so far, 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 0.028 reduction in its β.