Companies with better environmental risk management have a lower cost of capital.
The moral imperative to address environmental issues like global climate change has never been stronger in the zeitgeist. Yet making the business case for environmental risk management has long been a tug of war between softer concepts such as “reputation risk” and “stakeholder engagement” on the one side and the cold, hard need to maximize shareholder value on the other.Two professors have taken steps to bridge that gap. Their article, “Environmental Risk Management and the Cost of Capital,” published in the June 2008 issue of Strategic Management Journal, establishes that environmental risk management practices lower the overall cost of capital for companies.Mark P. Sharfman and Chitru S. Fernando, professor of strategic management and Michael F. Price Professor of Finance, respectively, at the University of Oklahoma’s Michael F. Price College of Business, studied Standard & Poor’s 500 companies that reported data to the U.S. Environmental Protection Agency on their emissions and disposal of toxic substances and that also were ranked by Massachusetts-based KLD Research & Analytics Inc. on their environmental performance. In all, 267 companies were studied, and the authors looked at environmental risk management data that had an impact on the cost of capital for the 267 companies in 2002.B