Do Polluting Firms Care About the Environment?

Abstract

We provide direct evidence on how firms prioritize the Corporate Environment Responsibility (CER) budget as part of their Corporate Social Responsibility (CSR) in India. We argue that polluting firms share higher responsibility towards the environment and hence they should spend more on CER, compared to non-polluting firms (stakeholder theory), and also their managers should signal a higher commitment by internalizing CER when they expand their operation (legitimacy theory). Based on 2,464 CSR reports of Indian firms, our results indicate that only 19% spend on CER. However, within the firms that spend on CER, polluting firms not only spend more but also prioritize CER within CSR expenses budget. Further, our analysis indicates that, compared to non-polluting firms, polluting firms’ environmental spending budgets increase with an increase in their capital expenditure. However, we find that polluting firms’ overall CSR commitment favors non-CER than CER expenses. In conclusion, our results call for more global evidence and policy debate on CER investments by firms.

Keywords: Corporate environmental responsibility, Corporate Social Responsibility, Stakeholder theory, Legitimacy theory, Government policy, Pollution