Former ABP research head wins Moskowitz Prize with paper showing bond costs of enviro concerns

US companies exposed to environmental issues paid up to 64 basis points more for debt.

An academic paper that shows that environmental concerns such as litigation and regulation mean that exposed companies are paying up to 64 basis points (0.64%) more for their debt, has won the 2010 Moskowitz Prize, the only global award recognizing outstanding quantitative research in the field of socially responsible investing (SRI). The paper by Rob Bauer, the former head of research at ABP, the Dutch pension fund, and Daniel Hann, a PhD student, both of Maastricht University’s European Centre for Corporate Engagement (ECCE), studied the environmental profile and debt costs of 582 US public corporations between 1995 and 2006. It found that environmental concerns were associated with a higher cost of debt financing and lower credit ratings. Conversely, the paper found that proactive environmental practices for companies were correlated to a lower cost of debt. It said the results were robust to numerous controls for company and bond specific characteristics, alternative model specifications, and industry membership.
The research shows that companies that engage in environmental misconduct can incur costly penalties and evoke strong negative reactions from both financial andnon-financial stakeholders, each of which affects their default risk and reduces the value of their fixed income securities. It said the relevance of environmental management concerns for bond investors had increased over the recent decade, corresponding with the view that widespread climate change concerns have heightened investors’ awareness of potential regulatory changes and other associated financial risks. The Moskowitz Prize, which is presented at the SRI in the Rockies conference, is named after Milton Moskowitz, one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios. Rob Bauer worked for 12 years at ABP Investments as a fund manager and head of research. He is now professor of finance (chair: institutional investors) at Maastricht University School of Business and Economics in The Netherlands.
Daniel Hann is a Ph.D. student at Maastricht with research interests in ESG engagement on firm financial performance, and sustainable investing.

See downloads (left hand column) for Bauer/Hann research paper.