To stay solvent, firms must engage in good environmental practices

It is valuable for companies to engage in good environmental practices — particularly if they want to maintain their solvency and be perceived as a good credit risk. That is one of the main insights to be found in the Research Paper “Corporate Environmental Management and Credit Risk” from Maastricht University researchers Prof. Rob Bauer and Daniel Hann, PhD. The paper was awarded the 2010 Moskowitz Prize. Awarded each year by the Center for Responsible Business at the Haas School of Business during the annual SRI in the Rockies Conference, the Moskowitz Prize recognizes outstanding research on responsible investing.

The study looks at 582 US companies over a period of 10 years. Over that time the companies with good environmental records were deemed more ‘creditworthy’, a contrast to companies with questionable environmental practices, who paid higher costs for financing. “Our conceptual framework is based on the view that environmental practices influence the solvency of borrowing firms by determining their exposure to legal, reputational, and regulatory risks,” say the authors, adding that “firms that engage in environmental misconduct can incur costly penalties and evoke strong negative reactions from both financial and non-financial stakeholder, all of which affect default risk and thus impair the value of their fixed income securities.”

This paper won the 2010 Moskowitz Prize competition (awarded by the Center for Responsible Business at the Haas School of Business, in cooperation with the Social Investment Forum, the Moskowitz Prize promotes the concept, practice, and growth of socially responsible investing).

References

This article may be reproduced according to our terms of use with attribution (and link, if online) to fsinsight.org. To be cited as: “To stay solvent, firms must engage in good environmental practices”, Rob Bauer, Daniel Hann, fsinsight.org, March 12, 2011.