Stakeholder engagement: Investors' environmental risk aversion and corporate earnings

Abstract

How does investors' aversion to environmental risk affect their reaction towards firms' earnings announcements? We explore this by analyzing earnings announcements made by U.S. firms between 2002 and 2016. The results show that environmental performance at the firm level is important for investors as this influences the investment behaviors of investors who have some degree of aversion to environmental risk. These investors appreciate the earnings by firms that exhibit a high level of environmental performance, i.e., firms that have successfully addressed environmental risks. However, earnings are of secondary importance for investors who are highly averse to environmental risk since environmental concerns take precedence.