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

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Author Info

  • Timo Busch

    ()
    (ETH Zuerich, and Duisenberg school of finance)

  • Nils Lehmann

    ()
    (ETH Zuerich)

  • Volker H. Hoffmann

    ()
    (ETH Zuerich)

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    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.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-102/IV/DSF40.

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    Date of creation: 01 Oct 2012
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    Handle: RePEc:dgr:uvatin:20120102

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: GHG-emissions; negative externalities; financial risk; corporate social responsibility; long-term developments;

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    1. Blyth, William & Bradley, Richard & Bunn, Derek & Clarke, Charlie & Wilson, Tom & Yang, Ming, 2007. "Investment risks under uncertain climate change policy," Energy Policy, Elsevier, vol. 35(11), pages 5766-5773, November.
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    3. Glen Dowell & Stuart Hart & Bernard Yeung, 2000. "Do Corporate Global Environmental Standards Create or Destroy Market Value?," Management Science, INFORMS, vol. 46(8), pages 1059-1074, August.
    4. Griffiths, Andrew & Haigh, Nardia & Rassias, Jenine, 2007. "A Framework for Understanding Institutional Governance Systems and Climate Change:: The Case of Australia," European Management Journal, Elsevier, vol. 25(6), pages 415-427, December.
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    6. Andrew King & Michael Lenox, 2002. "Exploring the Locus of Profitable Pollution Reduction," Management Science, INFORMS, vol. 48(2), pages 289-299, February.
    7. Philipp Schreck, 2011. "Reviewing the Business Case for Corporate Social Responsibility: New Evidence and Analysis," Journal of Business Ethics, Springer, vol. 103(2), pages 167-188, October.
    8. Erin Marie Reid & Michael W. Toffel, 2008. "Responding to Public and Private Politics: Corporate Disclosure of Climate Change Strategies," Harvard Business School Working Papers 09-019, Harvard Business School, revised Jun 2009.
    9. Greg Filbeck & Raymond Gorman, 2004. "The Relationship between the Environmental and Financial Performance of Public Utilities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 29(2), pages 137-157, October.
    10. Kjetil Telle, 2006. "“It Pays to be Green” – A Premature Conclusion?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 35(3), pages 195-220, November.
    11. Adam B. Jaffe & Richard G. Newell & Robert N. Stavins, 2004. "Technology Policy for Energy and the Environment," NBER Chapters, in: Innovation Policy and the Economy, Volume 4, pages 35-68 National Bureau of Economic Research, Inc.
    12. Levy David L. & Kolk Ans, 2002. "Strategic Responses to Global Climate Change: Conflicting Pressures on Multinationals in the Oil Industry," Business and Politics, De Gruyter, vol. 4(3), pages 1-27, November.
    13. Volker H. Hoffmann & Thomas Trautmann & Jens Hamprecht, 2009. "Regulatory Uncertainty: A Reason to Postpone Investments? Not Necessarily," Journal of Management Studies, Wiley Blackwell, vol. 46(7), pages 1227-1253, November.
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