Corporate Social Responsibility, Negative Externalities, and Financial Risk: The Case of Climate Change

Timo Busch (), Nils Lehmann () and Volker H. Hoffmann ()
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Timo Busch: ETH Zuerich, and Duisenberg school of finance
Nils Lehmann: ETH Zuerich
Volker H. Hoffmann: ETH Zuerich

Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Certain types of corporate social responsibility (CSR) activities can generate an ‘insurance-like’ benefit for firms (Godfrey, 2005). Thus far, this risk management hypothesis has been verified for the effects of firm-specific negative events. We argue that this insurance-like benefit of CSR-activities can be equally expected in the context of long-term developments which threaten current business models. We develop our arguments for the incremental, long-term process of internalizing negative externalities. For this, we consider the negative externalities resulting from the emission of greenhouse gases (GHG) and perform a panel analysis of a sample of 1699 firms over a period of 7 years. Our results show that firms can reduce their market-based risk by curbing their GHG-emissions. We furthermore propose an opposing effect on accounting-based risk, but do not find empirical support for this. We conclude that CSR-activities aimed at reducing a firm’s exposure to specific long-term developments can be sound corporate risk management, even if such activities may not yet be profitable.

Keywords: GHG-emissions; negative externalities; financial risk; corporate social responsibility; long-term developments (search for similar items in EconPapers)
JEL-codes: G30 L20 M14 Q20 (search for similar items in EconPapers)
Date: 2012-10-01
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Citations: View citations in EconPapers (3)

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