The Relationship between the Environmental and Financial Performance of Public Utilities

A growing body of research has centered on the issue of the relationship between financial and environmental performance. The lack of consensus in this literature can be attributed to several factors. The cost of complying with environmental regulation can be significant and detrimental to shareholder wealth maximization. Conversely, a firm that can effectively control pollution might also be able to effectively control other costs of production and hence earn a higher rate of return. We utilize data from the Investor Responsibility Research Center as well as a proprietary database to investigate the relationship between environmental performance and financial performance in electric utilities. Utilities, as producers and distributors of energy, produce substantial amounts of pollution. However, since public utilities are regulated, studying the financial and environmental performance of utilities affords us the opportunity to see what role regulation plays in enhancing or diminishing the relationship between financial and environmental performance. Our results differ from earlier studies in that we find do not find a positive relationship between holding period returns and an industry-adjusted measure of environmental performance nor do we find that regulatory climate appears to explain returns. While there does not appear to be a clearly defined relationship between regulatory climate and a compliance based measure of environmental performance, there is evidence of a negative relationship between financial return and a more pro-active measure of environmental performance. We offer several possible interpretations of these results and extensions for future research.