The Impact of Environmental and Social Performance on the Financial Performance of Extractive Sector Firms

We investigate the relationship between corporate financial performance (CFP) and environmental and social performance (CSP) in a sample (n=165) of large, publicly traded U.S. mining and oil and gas firms. Using optimally scaled principal components analysis to generate aggregate measures of CSP strengths and concerns, we find higher concerns are related to higher volatility of unexpected earnings and discount rates. Furthermore, these earnings shocks are more likely to be negative as concerns increase. Decomposing this relationship shows that negative environmental performance dominates proactive environmental management as a driver of unexpected earnings, but proactive community efforts increase the magnitude of earnings shocks. We document some evidence of the strategic use of CSR, with those firms that have greater risk investing more proactively in CSR.