Elsevier

Ecological Economics

Volume 132, February 2017, Pages 307-328
Ecological Economics

Environmental and Financial Performance of Fossil Fuel Firms: A Closer Inspection of their Interaction

https://doi.org/10.1016/j.ecolecon.2016.10.004Get rights and content

Highlights

  • We investigate an international sample of firms for the period 2002-2013.

  • We compare fossil fuel intense firms among themselves and with other non-fossil fuel intense firms.

  • Fossil fuel firms score better regarding their efforts to improve environmental performance.

  • Environmental outperformance seems to reduce their financial returns, but can benefit risk management.

  • Fossil fuel firms show differences regarding financial and environmental performance.

Abstract

We investigate the relationship between environmental and financial performance of fossil fuel firms. To this extent, we analyze a large international sample of firms in chemicals, oil, gas, and coal with respect to several environmental indicators in relation to financial performance for the period 2002–2013. We find that these firms have significantly higher scores on environmental performance efforts than other firms. We use a simultaneous equations system to identify the direction of the relationship between environmental and financial performance of the firms. We find that environmental outperformance has no impact on financial performance for chemical firms, reduces returns and risks for coal companies, has a mixed impact on returns in oil and gas, and reduces financial risks for oil and gas firms. Financial outperformance reduces environmental performance in all fossil fuel (sub)industries investigated. Our findings mainly support the opportunistic view regarding the impact of financial returns, which holds that financial performance negatively impacts social performance. Regarding financial risk, we find support for the stakeholder perspective where good environmental performance is beneficial from a finance perspective. We conclude to substantial differences in the environmental-financial performance relationship along fossil fuel firms in different subindustries.

Introduction

Given the impact of fossil fuels on climate change, it seems very relevant to investigate how the environmental performance of fossil fuel firms (firms in oil and gas, coal, and chemicals) relates to their financial performance. More specifically, is good financial performance associated with sound environmental performance, or is there a trade-off? Further, is this relationship the same along different performance measures and (sub)industries? Answering these questions is important to assess the potential for changes in operations by fossil fuel firms to transform the energy system. Several studies find that energy-intense companies are punished by the stock market for poor environmental performance (see Patten, 1992, Kolk et al., 2001, Kollias et al., 2012). These studies usually focus on the impact of events on company reputation (see, e.g., Spence, 2011), but not on company operations and related cash flows. Scholtens (2008) and Lioui and Sharma (2012) investigate the potential reasons why there would be a link between environmental and financial performance. The former study finds that it is highly dependent on the way in which these performances are being measured. The latter finds a negative direct impact of environmental on financial performance but a positive indirect impact.

Our study specifically investigates environmental and financial performance of fossil fuel firms. As such, it tries to focus on a much more homogeneous category than understood by the concept ‘social performance’ and its equivalents, which also relates to governance, ethical, and social issues with firms. To be precise, we investigate environmental and financial performance in three subindustries: chemicals, coal, and oil and gas. We rely on both qualitative and quantitative environmental performance indicators that are much more fine-grained than those used in the literature thus far. Further, we rely on different financial performance measures to avoid biases and to account for the underlying value structure of firms. We also address endogeneity and try to detect structural relations between environmental and financial performance. We find that fossil fuel firms have significantly higher scores for their environmental performance efforts relative to firms in other industries, but it shows that this is highly sensitive to (sub)industry classification. It will not come as a surprise that we also find that fossil fuel firms produce more waste and emissions than firms in other industries. Further, we find that environmental outperformance does not impact the financial performance of chemical firms, reduces returns and risks for coal companies, and has a mixed impact on returns in oil and gas, and reduces financial risks for firms in oil and gas. Financial outperformance reduces environmental performance in all the types of fossil fuel firms investigated. This shows that there are substantial differences in the relationships studied for the different subindustries. These findings suggest that any policy approach should account for the value chain at the subindustry level, since a ‘one size fits all’ policy is likely to have very distorting effects and, hence, is doomed to be ineffective.

The remainder of this paper proceeds as follows. We first discuss the background of the relationship between financial and environmental performance of the fossil fuel firms (i.e. firms in oil and gas, coal, chemicals). Then, we introduce the data and methods employed in our analysis. Next, we report the results from the univariate analysis and show the estimation results of the regression models. Finally, we discuss our conclusions.

Section snippets

Background and Hypotheses

Bénabou and Tirole, 2006, Bénabou and Tirole, 2010 argue that there are basically three reasons as to why firms and institutions would want to behave in a responsible manner (please note that these responsibilities pertain to environmental, ethical, social and governance characteristics). The first is altruism, that is, ‘doing the right thing’. Here, the firm does incur costs to avoid or reduce externalities, but does not necessarily get something in return, such as lower expenses or higher

Data and Method

We investigate environmental and financial performance of a large international sample of firms in both fossil fuel-related (firms in oil and gas, coal, chemicals) and ‘non-fossil fuel-related’ industries (of course, we are well aware of the indirect usage of fossil fuels in all firms and in fact there is no industry that does not indirectly consume any fossil fuel) for the period 2002–2013. This period is motivated primarily on the basis of data availability of both the financial and the

Results

We first present the descriptive statistics and the univariate analysis. Then, we provide the findings from the regression analyses.

Discussion and Conclusion

We study the performance of a large, international sample of companies that are highly intense regarding the use of fossil fuels with respect to several environmental dimensions of corporate social responsibility in the period 2002–2013. We relate their environmental performance to various measures of corporate financial performance. The fossil fuel firms are of particular interest as their social costs are substantially above their private costs: External effects are a major concern with these

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