The reciprocal relationship between corporate social performance and financial risk : a quantitative study on publicly listed firms in the Nordics

Abstract

The interest in corporate social performance (CSP) and socially responsible investing (SRI) has increased remarkably over the past years as a result of numerous global developments and heightened pressures from internal and external stakeholders. The mixed views and ambiguous empirical evidence on the implications that CSP has on corporations’ financial risk has left corporate managers and investors with an unclear answer as to how much effort should be put into socially responsible activities. This paper purposefully attempts to fill this research gap by examining the relationship between CSP and financial risk for a sample of 150 publicly listed firms in the Nordics, excluding Iceland, between the years 2002 and 2017. We find it to be particularly interesting to investigate this region given the leading role that the Nordic countries play when it comes to sustainable investing. Environmental, social and governance (ESG) scores provided by Thomson Reuters ASSET4 database are used as proxies for CSP, whereas firm risk is measured by total, systematic and firm-specific risk. By employing a panel autoregressive (VAR) model, we find a negative and bi-directional causality between aggregate ESG and total and specific risk. At a disaggregate level, we reveal that each ESG dimension also impacts total and specific risk negatively. The reciprocal effect of firm risk on CSP, in turn, depends on the ESG dimension in question: total and specific risk negatively affect environmental performance, positively and negatively impact social performance (alternatingly), and positively impact corporate governance. As for systematic risk, no significant interaction with the CSP measures is found. Comprehensively, our findings provide evidence of an intricate relationship between CSP and firm risk and they support the idea that there is a business case for corporate social responsibility and performance in the Nordic market. Keywords: Corporate