New Stories From Old Data? Evidence From a Novel KLD Measure of Relative Environmental Responsibility

Abstract

We develop a novel KLD-based metric of environmental corporate responsibility rivalry capturing the sustainability engagements of a firm relative to its “green” and “toxic” peers. We document that our measure has superior predictive power about firms’ future pollution levels when compared to alternative unitary environmental scores. Our results show that firms with superior relative environmental performance exhibit higher sales growth, profitability, corporate valuation, and future stock returns, suggesting that firms compete in the market for environmental corporate ratings and that relative – in addition to unitary – environmental metrics are linked to financial performance.

Keywords: corporate social responsibility; ESG (environmental, social, governance) performance; KLD data; ratings; performance measurement; competitive advantage; reputational capital; sustainability

JEL Classification: M14; G30; G32