Skip to main content
SpringerLink
Log in

Corporate Environmental Responsibility and Firm Performance in the Financial Services Sector

  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

In this study, we examine whether corporate environmental responsibility (CER) plays a role in enhancing operating performance in the financial services sector. Because achieving success with CER investing is often a long-term process, we maintain that by effectively investing in CER, executives can decrease their firms’ environmental costs, thereby enhancing operating performance. By employing a unique environmental dataset covering 29 countries, we find that the reducing of environmental costs takes at least 1 or 2 years before enhancing return on assets. We also find that reducing environmental costs has a more immediate and substantial effect on the performance of financial services firms in well-developed financial markets than in less-developed financial markets. These results are economically and statistically significant and robust even after alleviating endogeneity and using an additional performance measure. We interpret our empirical results as supporting the social impact and reputation-building hypothesis. Our findings also suggest that policy makers dealing with corporate sustainability management should pursue an environment-centered industry policy not only at the manufacturing sector but also at the financial services sector, as firms in both sectors with lower environmental costs perform better.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Bank of America, for instance, completed $20 billion environmental business initiatives, such as BOA Tower at One Bryant Park in 2010 which they established in 2007 and financed World’s largest distributed solar project in 2011. In addition, they launched their new $50 billion goal to put their capital to achieve many significant environmental milestones (BOA Environmental sustainability 2013). Another example can be found from the BNP Paribas Group that operates in 78 countries and employs nearly 190,000 employees over 7,000 bank branches (of which more than 2,500 are in France). As a participant in the global economy, BNP Paribas has a role to play in protecting the environment. In accordance with this responsibility, acting to combat climate change is one of the BNP Paribas Group’s priorities. As a result, the Group works both to reduce the negative effects and to increase the positive effects that it may have on the environment through (i) financing new infrastructure designed to fight climate change (such as renewable energy, collective urban transportation, water treatment and distribution, the construction of ecological towns, etc.); (ii) in the same way that they encourage their customers to take environmental criteria into account when planning their projects, they take steps to reduce their own ecological footprint as much as possible; and (iii) the “Climate Initiative”—a 3-year program with an endowment of 3 million euros—launched in 2011 by the BNP Paribas Foundation in collaboration with the CSR Delegation, supports five research projects focusing on climate change, its causal factors, and its consequences.

  2. CER investing includes recycling programs and/or clean technology investing.

  3. In a recent work, Wu and Shen (2013) suggest that CSR in the banking industry is positively associated with CFP in terms of return on assets and return on equity. In many developed countries, various financial institutions offer specialized savings accounts to the public while promoting that the savings will be used to finance environmentally sound projects and/or for operations of social entrepreneurs who find it hard to get access to finance from conventional institutions because private households have the opportunity to save or invest their money not only on the basis of financial rewards, but also in the face of the non-monetary value of savings and investments (Scholtens 2006, 2009).

  4. Green (2010), in his U.N. report, suggests that World’s top 3,000 companies created $2.2 trillion environmental damage costs in 2008 year alone. (http://dirt.asla.org/2010/02/24/new-u-n-report-worlds-top-3000-companies-created-2-2-trillion-in-environmental-damage/). According to Vogel (2005), Dupont has saved $2 billion due to energy efficiency practices; BP made $650 million in savings from its energy reduction strategies between 1998 and 2002; and IBM saved $792 million between 1990 and 2002.

  5. Detailed descriptions of the social impact and reputation building versus a trade-off and negative synergy or a positive synergy argument are given in the literature review and hypotheses formulation section.

  6. Karnani (2012) argues that in circumstances in which CFP and social welfare are in direct opposition, an appeal to CER will almost always be ineffective, because top managers are unlikely to act voluntarily against shareholder interests. Jo (2003) suggests, however, that financial analysts have an incentive to follow stocks of socially and environmentally responsible companies, because such stocks meet the growing demands and psychology of the investment community, who want to combine the usual investment goal of maximizing risk-adjusted returns with social and environmental responsibility, the concept persistently advocated by various stakeholders and the investment community for the last five decades.

  7. Mahoney (2012) defines stakeholders as “…those persons and groups who contribute to the wealth-creating potential of the firm and are its potential beneficiaries and/or those who voluntarily or involuntarily become exposed to risk from the activities of a firm… Thus, stakeholders include shareholders, holders of options issued by the firm, debt holders, employees (especially those investing firm-specific human capital), local communities, environment as latent stakeholders, regulatory authorities, the government, inter-organizational alliance partners, customers and suppliers.”

  8. Defining and measuring CSR have also been an important task in the literature. Earlier studies such as Frederick (1994) and Griffin (2000) report that there is no consensus on the content of CSR. However, Beurden and Gossling (2008) analyze existing CSR studies and identify three categories: social concerns; social actions such as philanthropy, social programs, and pollution control; and corporate reputation ratings. Brickley et al. (2002) argue that the stock market can value such intangible assets as a firm’s reputation which is produced by its ethical behavior as a collective.

  9. Focusing on the CSR brand, Ogrizek (2002) argues that CSR branding is also becoming of paramount importance to the financial service industries. If a financial firm mismanages the CSR branding, its reputation can be damaged, which could have direct and indirect negative effects on firm performance. Luo and Bhattacharya (2006) use CSR to investigate the relation between CSR and firm market value. They develop a conceptual framework for predicting that (a) customer satisfaction partially mediates the relation between CSR and firm market value, (b) corporate abilities moderate the financial returns to CSR, and (3) these moderated relations are mediated by customer satisfaction. They find that the results supporting this framework and customer satisfaction play a significant role in the relation between CSR and CFP.

  10. Trucost Plc is a U.K.-based environmental research company that creates databases estimating these externality costs for 3,500 of the world’s largest corporations.

  11. One can argue that accounting operating costs such as expenses might be correlated to total environmental costs. We explore this possibility. The correlations between expenses to revenues and external environmental costs at times t−1 and t−2, however, are very low (0.024 and 0.023) and statistically insignificant.

  12. We use Capital to Assets as a capital adequacy indicator, Expenses to Revenues as an efficiency indicator, and Asset Growth Rate as a growth indicator.

  13. Ind EC/TEC is the total indirect environmental costs to total environmental costs.

  14. In a recent analysis, Jo et al. (2014) show that the Asia Pacific region has the highest total environmental costs to total assets, while Europe has the lowest total environmental costs to total assets in the manufacturing industry.

  15. We estimate a regression with the total environmental costs at times t−3, t−4, and t−5 as well, but the coefficient is insignificant and hence un-tabulated.

  16. This is followed by firms in Europe with the total environmental costs coefficient for time t-1 of −0.012.

  17. We also use the median of FD Score for dividing our sample like Table 3.

  18. When we include all the component total environmental cost items in the same regression, due to serious multicollinearity problem, the coefficients become unstable and insignificant.

References

  • Albinger, H. S., & Freeman, S. J. (2000). Corporate social performance and attractiveness as an employer to different job seeking populations. Journal of Business Ethics, 28(3), 243–253.

    Article  Google Scholar 

  • Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

    Article  Google Scholar 

  • Bank of America. (2013). Leveraging our strengths and leading by example. Global impact: Environment sustainability. http://about.bankofamerica.com/en-us/global-impact/environmental-sustainability.html#fbid=ytz34Z8wJ3f.

  • Barclay, M. J., & Smith, C. (1995). The maturity structure of corporate debt. Journal of Finance, 50(2), 609–631.

    Article  Google Scholar 

  • Barnett, M. L., & Salomon, R. (2006). Beyond dichotomy: The curvilinear relationship between social responsibility and financial performance. Strategic Management Journal, 27(11), 1101–1156.

    Article  Google Scholar 

  • Bassen, A., Meyer, K., & Schlange, J. (2006, November). The influence of corporate responsibility on the cost of capital (Vol. 984406). Available at SSRN: http://ssrn.com/abstract.

  • Benson, B. W., & Davidson, W, I. I. I. (2009). Reexamining the managerial ownership effect on firm value. Journal of Corporate Finance, 15(5), 573–586.

    Article  Google Scholar 

  • Beurden, P. V., & Gossling, T. (2008). The worth of values—A literature review on the relation between corporate social and financial performance. Journal of Business Ethics, 82(2), 407–424.

    Article  Google Scholar 

  • Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143.

    Article  Google Scholar 

  • Bolton, P., Scheinkman, J., & Xiong, W. (2006). Executive compensation and short-termist behavior in speculative markets. Review of Economic Studies, 73(3), 577–610.

    Article  Google Scholar 

  • Boyle, E. J., Higgins, M. M., & Rhee, S. G. (1997). Stock market reaction to ethical initiatives of defense contractors: Theory and evidence. Critical Perspectives on Accounting, 8(6), 541–561.

    Article  Google Scholar 

  • Brammer, S., Brooks, C., & Pavelin, S. (2006). Corporate social performance and stock return: UK Evidence from disaggregate measures. Financial Management, 35(3), 97–116.

    Article  Google Scholar 

  • Brickley, J. A., Smith, C. W, Jr, & Zimmerman, J. L. (2002). Business ethics and organizational architecture. Journal of Banking & Finance, 26(9), 1821–1835.

    Article  Google Scholar 

  • Cheng, B., Ioannou, I., & Serafeim, G. (2013). Corporate social responsibility and access to finance. Strategic Management Journal (forthcoming).

  • Cornett, M. M., & Tehranian, H. (1992). Changes in corporate performance associated with bank acquisitions. Journal of Financial Economics, 31(2), 211–234.

    Article  Google Scholar 

  • Cowton, C. J., & Thompson, P. (2000). Do codes make a difference? The case of bank lending and the environment. Journal of Business Ethics, 24(2), 165–178.

    Article  Google Scholar 

  • Crespo, A. H., & del Bosque, I. R. (2005). Influence of corporate social responsibility on loyalty and valuation of services. Journal of Business Ethics, 61(4), 369–385.

    Article  Google Scholar 

  • Creyer, E. H. (1997). The influence of firm behavior on purchase intention: Do consumers really care about business ethics? Journal of Consumer Marketing, 14(6), 421–432.

    Article  Google Scholar 

  • Dawkins, C., & Fraas, J. W. (2011). Coming clean: The impact of environmental performance and visibility on corporate climate change disclosure. Journal of Business Ethics, 100(2), 303–322.

    Article  Google Scholar 

  • De la Cuesta-González, M., Muñoz-Torres, M. J., & Fernández-Izquierdo, M. Á. (2006). Analysis of social performance in the Spanish financial industry through public data: A proposal. Journal of Business Ethics, 69(3), 289–304.

    Article  Google Scholar 

  • Derwall, J., Guenster, N., Bauer, R., & Koedijk, K. (2005). The eco-efficiency premium puzzle. Financial Analyst Journal, 61(2), 51–63.

    Article  Google Scholar 

  • Dhaliwal, D., Oliver, L., Tsang, A., & Yang, G. (2011). Voluntary nonfinancial disclosure and the cost of capital: The initiation of corporate social responsibility reporting. Accounting Review, 86(1), 59–100.

    Article  Google Scholar 

  • Dhaliwal, D., Radhakrishnan, S., Tsang, A., & Yang, G. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility (CSR) disclosure. Accounting Review, 87(3), 723–759.

    Article  Google Scholar 

  • Eichenbaum, M. S., Hansen, L. P., & Singleton, K. J. (1988). A time series analysis of representative agent models of consumption and leisure choice under uncertainty. Quarterly Journal of Economics, 103(1), 51–78.

    Article  Google Scholar 

  • El Ghoul, S., Guedhami, O., Kwok, C. C., & Mishra, D. R. (2011). Does corporate social responsibility affect the cost of capital? Journal of Banking & Finance, 35(9), 2388–2406.

    Article  Google Scholar 

  • Frederick, W. C. (1994). From CSR1 to CSR2 the maturing of business and society thought. Business and Society, 33(2), 150–164.

    Article  Google Scholar 

  • Freeman, R. E. (1984). Strategic management: A stakeholder approach (p. 46). Boston: Pitman.

    Google Scholar 

  • Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York times Magazine, September 13.

  • Green, J. (2010). World’s top 3000 companies created $2.2 trillion in environmental damage. New U.N. Report. http://dirt.asla.org/2010/02/24/new-u-n-report-worlds-top-3000-companies-created-2-2-trillion-in-environmental-damage/.

  • Greening, D. W., & Turban, D. B. (2000). Corporate social performance as a competitive advantage in attracting a quality workforce. Business and Society, 39(3), 254–280.

    Article  Google Scholar 

  • Griffin, J. J. (2000). Corporate social performance: Research directions for the 21st century. Business and Society, 39(4), 479–491.

    Article  Google Scholar 

  • Guenster, N., Derwall, J., Bauer, R., & Koedijk, K. (2006). The economic value of corporate eco-efficiency. Centre for Economic Policy Research (CEPR) Working Paper.

  • Hart, S. L., & Ahuja, G. (1996). Does it pay to be green? An empirical examination of the relationship between emission reduction and firm performance. Business Strategy and the Environment, 5(1), 30–37.

    Article  Google Scholar 

  • Heinkel, R., Kraus, A., & Zechner, J. (2001). The effect of green investment on corporate behavior. Journal of Financial and Quantitative Analysis, 36(4), 431–450.

    Article  Google Scholar 

  • International Institute for Sustainable Development. (2013). Sustainable banking: A global guide. http://www.iisd.org/business/banking/sus_banking.aspx.

  • Islam, Z., Ahmed, S., & Hasan, I. (2012). Corporate social responsibility and financial performance linkage: Evidence from the banking sector of Bangladesh. Journal of Organizational Management, 1(1), 14–21.

    Google Scholar 

  • Jensen, M., & Meckling, W. (1976). Theory of firm: Managerial behavior, agency costs, and capital structure. Journal of Financial Economics, 3, 305–360.

    Article  Google Scholar 

  • Jo, H. (2003). Financial analysts, firm quality, and social responsibility. Journal of Behavioral Finance, 4(3), 172–183.

    Article  Google Scholar 

  • Jo, H., & Harjoto, M. A. (2011). Corporate governance and firm value: The impact of corporate social responsibility. Journal of Business Ethics, 103(3), 351–383.

    Article  Google Scholar 

  • Jo, H., & Harjoto, M. A. (2012). The causal effect of corporate governance on corporate social responsibility. Journal of Business Ethics, 106(1), 53–72.

    Article  Google Scholar 

  • Jo, H., Kim, H., Lee, B. S., & Park, K. (2014). Corporate environmental responsibility and firm performance around the world. Working Paper, KAIST.

  • Karnani, A. (2012). The case against corporate social responsibility. Wall Street Journal, June 14.

  • Kim, Y., & Statman, M. (2012). Do corporations invest enough in environment responsibility? Journal of Business Ethics, 105(1), 115–129.

    Article  Google Scholar 

  • King, A., & Lenox, M. (2002). Exploring the locus of profitable pollution reduction. Management Science, 48, 289–299.

    Article  Google Scholar 

  • Konar, S., & Cohen, M. (2001). Does the market value environmental performance? Review of Economics and Statistics, 83(2), 281–289.

    Article  Google Scholar 

  • Lown, C., Osler, C., Strahan, P., & Sufi, A. (2000). The changing landscape of the financial services industry: What lies ahead? (39–55) FRBNY Economic Policy Review/October.

  • Luo, X., & Bhattacharya, C. B. (2006). Corporate social responsibility, customer satisfaction, and market. Journal of Marketing, 70(1), 1–18.

    Article  Google Scholar 

  • Mahoney, J. (2012). Towards a stakeholder theory of strategic management. Working paper. University of Illinois at Urbana-Champaign.

  • Mahoney, L., & Roberts, R. (2007). Corporate social performance, financial performance and institutional ownership in Canadian firms. Accounting Forum.

  • Makni, R., Francoeur, C., & Bellavance, F. (2009). Causality between corporate social performance and financial performance: Evidence from Canadian firms. Journal of Business Ethics, 89(3), 409–422.

    Article  Google Scholar 

  • Margolis, J. D., & Walsh, J. P. (2003). Misery loves companies: Rethinking social initiatives by business. Administrative Science Quarterly, 48(2), 268–305.

    Article  Google Scholar 

  • Marom, I. Y. (2006). Toward a unified theory of the CSP–CFP link. Journal of Business Ethics, 67(2), 191–200.

    Article  Google Scholar 

  • McWilliams, A., & Siegel, D. (2000). Corporate social responsibility and financial performance: Correlation or misspecification? Strategic Management Journal, 21(5), 603–609.

    Article  Google Scholar 

  • Miles, M. P., & Covin, J. (2000). Environmental marketing: A source of reputational, competitive, and financial advantage. Journal of Business Ethics, 23(3), 299–311.

    Article  Google Scholar 

  • Mohr, L. A., Webb, D. J., & Harris, K. E. (2001). Do consumers expect companies to be socially responsible? The impact of corporate social responsibility on buying behavior. Journal of Consumer Affairs, 35(1), 45–72.

    Article  Google Scholar 

  • Nehrt, C. (1996). Timing and intensity effects of environmental investments. Strategic Management Journal, 17(7), 535–547.

    Article  Google Scholar 

  • Ogrizek, M. (2002). The effect of corporate social responsibility on the branding of financial services. Journal of Financial Services Marketing, 6(3), 215–228.

    Article  Google Scholar 

  • Pae, J., & Choi, T. H. (2011). Corporate governance, commitment to business ethics, and firm valuation: Evidence from the Korean stock market. Journal of Business Ethics, 100(2), 323–348.

    Article  Google Scholar 

  • Porter, M. (1990). The competitive advantage of nations. London: MacMillan.

    Google Scholar 

  • Preston, L. E., & O’Bannon, D. P. (1997). The corporate social–financial performance relationship. Business and Society, 36(4), 419–429.

    Article  Google Scholar 

  • Ruf, B. M., Muralidhar, K., Brown, R. M., Janney, J. J., & Paul, K. (2001). An empirical investigation of the relationship between change in corporate social performance and financial performance: A stakeholder theory perspective. Journal of Business Ethics, 32(2), 143–156.

    Article  Google Scholar 

  • Russo, M. V., & Fouts, P. A. (1997). A resource-based perspective on corporate environmental performance and profitability. Academy of Management Journal, 40(3), 534–559.

    Article  Google Scholar 

  • Scholtens, B. (2006). Finance as a driver of corporate social responsibility. Journal of Business Ethics, 68(1), 19–33.

    Article  Google Scholar 

  • Scholtens, B. (2009). Corporate social responsibility in the international banking industry. Journal of Business Ethics, 86(2), 159–175.

    Article  Google Scholar 

  • Simpson, W. G., & Kohers, T. (2002). The link between corporate social and financial performance: Evidence from the banking industry. Journal of Business Ethics, 35(2), 97–109.

    Article  Google Scholar 

  • Thomas, S., Repetto, R., & Dias, D. (2007). Integrated environmental and financial performance metrics for investment analysis and portfolio management. Corporate Governance: International Review, 15(3), 421–426.

    Article  Google Scholar 

  • Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.

    Article  Google Scholar 

  • Vance, S. C. (1975). Are socially responsible corporations good investment risks? Management Review, 64(8), 18–24.

    Google Scholar 

  • Vogel, D. (2005). The market for virtue: The potential and limits of corporate social responsibility. Washington, DC: Brookings.

    Google Scholar 

  • Waddock, S. A., & Graves, S. M. (1997). The corporate social performance–financial performance link. Strategic Management Journal, 18(4), 303–319.

    Article  Google Scholar 

  • Weber, O., Koellner, T., Habegger, D., Steffensen, H., & Ohnemus, P. (2008). The relation between sustainability performance and financial performance of firms. Progress in Industrial Ecology, 5(3), 236–254.

    Article  Google Scholar 

  • Wintoki, M., Linck, J., & Netter, J. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of Financial Economics, 105(3), 581–606.

    Article  Google Scholar 

  • Wooldridge, J. M. (2002). Econometric analysis of cross section and panel data. Cambridge, MA: The MIT Press.

    Google Scholar 

  • Wu, M., & Shen, C. H. (2013). Corporate social responsibility in the banking industry: Motives and financial performance. Journal of Banking & Finance, 37(9), 3529–3547.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Santa Clara University, Santa Clara, CA, USA

    Hoje Jo

  2. College of Business, Korea Advanced Institute of Science and Technology (KAIST), Seoul, South Korea

    Hakkon Kim & Kwangwoo Park

Authors
  1. Hoje Jo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Hakkon Kim
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Kwangwoo Park
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Hakkon Kim.

Additional information

We would like to thank Kee-Hong Bae, Sadok El Ghoul, Omrane Guedhami, Inmoo Lee, Jae Kyu Lee, Neil McIndoe, and Youngjae Ryu for very useful comments. An earlier version of this paper received the outstanding paper award from the doctoral consortium at the 2013 annual meetings of the Allied Finance Associations in Korea.

Appendices

Appendix 1

See Table 13.

Table 13 Trucost data explanation
Full size table

Appendix 2

See Table 14.

Table 14 Variable definitions and measures
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Jo, H., Kim, H. & Park, K. Corporate Environmental Responsibility and Firm Performance in the Financial Services Sector. J Bus Ethics 131, 257–284 (2015). https://doi.org/10.1007/s10551-014-2276-7

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-014-2276-7

Keywords

Search

Navigation