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November 24, 2010
2010 Moskowitz Prize is Awarded to Researchers from the European Center for Corporate Engagement
    by Robert Kropp

Authors Bauer and Hann receive the annual prize for quantitative research in sustainable investing for their study on the effects of corporate environmental management on the cost of debt.

Launched in 1996 by the Social Investment Forum (SIF), the Moskowitz Prize for Socially Responsible Investing is awarded annually at the SRI in the Rockies conference.

The 2010 prize, for what the
Haas School of Business describes as "the only global award recognizing outstanding quantitative research in the field of socially responsible investing (SRI)," was awarded to Rob Bauer and Daniel Hann of Maastricht University and the European Center for Corporate Engagement (ECCE) for their paper entitled Corporate Environmental Management and Credit Risk.

In their prize-winning paper, the authors "demonstrated for the first time the effect of environmental management on credit risk and the cost of corporate debt," according to ECCE. Focusing on 582 US corporations between 1995 and 2006, the report studies the effects of corporate environmental management on the interest rates that companies pay for corporate bonds. The authors compile their sample from the
KLD STATS database, which since 1991 has analyzed trends in the social and environmental performance of the 3,000 largest US-based corporations.

The authors found "comprehensive evidence that the environmental management of public corporations has credit risk implications for bond investors…the credit market does not only respond to the potential misreporting of existing environmental liabilities, but also prices the environmental management of borrowing firms in anticipation of associated losses."

"The results are consistent with the view that the regulatory implications of climate change have sensitized lenders to the downside risk of poor environmental practices," the report concludes.

In an
interview following the announcement, Hann said, "Environmental incidents can result in costly legal, reputational, and regulatory consequences for the borrower. And that again has value implications for their investments. What we do is to use these ratings to quantify the environmental performance of companies, and then relate their environmental profiles to the interest that they pay on new corporate bonds."

Referring to the finding that a low environmental management score has greater weight on the interest pricing of corporate bonds than does a high score, Bauer said, "Negative information is given more weight. A good environmental management system for an oil producer is seen as self-evident, a necessary condition. But if a corporation isn't on top of this, it's immediately penalized through higher capital costs."


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