To stay solvent, firms must engage in good environmental practices
March 12, 2012
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).
More on this research by Maastricht University
Rob Bauer is Professor of Finance, Maastricht University