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

Author

Listed:
  • Timo Busch

    (ETH Zuerich, and Duisenberg school of finance)

  • Nils Lehmann

    (ETH Zuerich)

  • Volker H. Hoffmann

    (ETH Zuerich)

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.

Suggested Citation

  • Timo Busch & Nils Lehmann & Volker H. Hoffmann, 2012. "Corporate Social Responsibility, Negative Externalities, and Financial Risk: The Case of Climate Change," Tinbergen Institute Discussion Papers 12-102/IV/DSF40, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120102
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    References listed on IDEAS

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    Cited by:

    1. Stefan Lewandowski, 2017. "Corporate Carbon and Financial Performance: The Role of Emission Reductions," Business Strategy and the Environment, Wiley Blackwell, vol. 26(8), pages 1196-1211, December.
    2. Kleemann, Linda & Murphy-Bokern, Donal, 2014. "Reducing greenhouse gas emissions in the food sector: Effects of corporate responsibility," Kiel Working Papers 1967, Kiel Institute for the World Economy (IfW Kiel).
    3. Yoori Yang & Cynthia Stohl, 2020. "The (in)congruence of measures of corporate social responsibility performance and stakeholder measures of corporate social responsibility reputation," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(2), pages 969-981, March.

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    More about this item

    Keywords

    GHG-emissions; negative externalities; financial risk; corporate social responsibility; long-term developments;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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