Are Boards’ Risk Management Committees associated with Firms’ Environmental Performance?

Abstract

We examine the relationship between board of director committees tasked with risk management and environmental performance, based on a sample of 1,466 firm-year observations from 2007 to 2015. We find that the presence of board committees dedicated only to risk management is associated with better environmental performance. The human capital of risk committees (measured by board tenure, committee tenure, experience, and qualifications) is also positively related to environmental performance. Our findings suggest that the benefits of risk management committees extend to non-financial matters, such as environmental performance. Our findings further suggest that environmental performance is now managed through the regular governance mechanisms within firms. This supports the notion that environmental performance is managed for economic reasons and for the benefit of investors, rather than for the aggrandisement of individual managers. Our findings should be of interest to boards, CEOs, and CFOs who are interested in risk management, as well as to investors, lenders, and auditors who are interested in assessing risk.

Keywords: Environmental Performance; Risk Management Committee