In the United States, monitoring the damage caused by human activities to the environment is the responsibility of the Environmental Protection Agency (EPA), a federal institution independent of the government, created in 1970. Its main role is to draw up and enforce environmental regulations, but it also carries out research and information work.

In the event of serious violations, it can initiate investigations and legal proceedings, which regularly lead to fines. Some of these fines can be substantial. At the end of May, for example, Eastman Chemical Resins Inc. was ordered to pay 2.4 million dollars for spilling pollutants into the Monongahela River, near its plant in Pennsylvania.

The financial consequences of these fines are not limited to their amount, because the main issue for companies in this context is maintaining their reputation. This has been clearly demonstrated by a number of research studies over the last two decades. When a fine for environmental damage is announced, the share price of a listed company can fall significantly.

The ability of organisations to bounce back is another aspect of resilience. In finance, recent work has proposed assessing resilience on the basis of two main characteristics: stability, which is measured by the percentage of value lost between the period preceding the shock and the period following it, and flexibility, measured by the time it takes for this value to return to its pre-shock level. The aim of our research is to gain a better understanding of how the organisation can maximise these characteristics in the environmental field.

Sanctions that have repercussions on the stock market

A number of theorical arguments allow us to assume that there is a link between a company's environmental footprint and its ability to bounce back following a fine for violating environmental law. It can be hypothesised that the implementation of internal processes to reduce pollution is likely to offer an organisation sustainable competitive advantages and greater support from stakeholders.

We wanted to check empirically whether this argument was valid. To do this, we collected articles announcing fines of this type in the specialist press. We cross-referenced the information they contained with data on the environmental footprint and the concerned company’s financial information around the date of the event in question. In total, 143 events in the US were analysed.

The fines imposed in our sample ranged from $3,000 to over $300 million between 2006 and 2019, with an average of around $10 million. These fines mainly concerned companies operating in polluting industries. In the days following the sanction, the companies lost an average of 9% of their stock market value, and three quarters managed to recover their pre-shock value in less than two months.

Our analysis shows that the more a company harms the environment, the less flexible it is when faced with the announcement of an environmental fine. In other words, the least environmentally virtuous companies take longer than others to bounce back and have a lower probability of recovering their pre-crisis stock market value. One might think that this phenomenon is linked to the amount of the fine, and that the most polluting companies bounce back less well because they are subject to heavier fines. Our calculations allow us to overcome this bias: the relationship remains just as significant when this factor is taken into account.

But are the fines too lenient?

This suggests that companies that have introduced pollution prevention policies are not only reducing the risk of being targeted by fines. They also make them more resilient on the financial markets should this happen.

The fact that fines create a financial shock for companies is also an important point. However, our results suggest that in the current state of anti-pollution policies, at least in the US, the size of the fines themselves have little effect on the shock suffered by companies.

This casts doubt on the deterrent capacity of existing regulations and raises the question of the optimal level of fines and the intensification of pollution control efforts, particularly for repeat offenders.

The fight against climate and ecological disruption calls for efforts on the part of all organisations, especially those with a large environmental footprint. They will have to adapt to increasingly stringent standards and regulations. Our research is all the more encouraging to embark on this path as it suggests that it confers benefits in terms of financial resilience that go beyond improved relations with stakeholders and benefits for the planet.

*Brice Foulon Doctorant en Finance et RSE, Université Clermont Auvergne (UCA) et

Sylvain Marsat Professeur en Finance, Université Clermont Auvergne (UCA)

See, Sanctionner les entreprises pour atteinte à l’environnement : les mauvais élèves le paient aussi en bourse