Sustainable Investment and Corporate Governance Working Papers, Sustainable Investment Research Platform
No 2008/2:
Industry Risk Moderates the Relation between Environmental and Financial Performance
Natalia Semenova ()
and Lars Hassel ()
Abstract: This study extends previous research on the relation
between different measures of environmental and financial performance by
introducing moderating effects of inherent environmental industry risk. We
provide empirical evidence from the MSCI World Index U.S. companies by
using the GES Investment Services® risk rating for the period 2003-2006.
The inherent environmental industry risk has a significant moderating
effect on the form of the relation between environmental
preparedness/performance and operating performance of the companies. In
high risk or polluting industries, environmental management is costly and
reduces the operating performance of companies. In low risk sectors, such
as banking and insurance, leading companies on environmental management are
also more profitable. The paper makes a distinction between the
reputational benefits of environmental preparedness and the operational
gains of environmental performance when studying the effects on market
value. A significant direct effect of environmental preparedness on the
market value of the companies is present, while the relation between
environmental performance and market value is stronger in low risk
industries than in high risk industries. In low risk industries, the market
value of the companies is also on average higher and more attuned to
benefits to environmental performance than in high risk industries.
Keywords: Environmental risk and opportunity; financial performance; return on assets; Tobin’s Q; panel data analysis; (follow links to similar papers)
28 pages, September 16, 2008
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