The Effect of Shale Gas Booms on Environmental CSR Activity

Changhwan Choi & Chune Young Chung (정준영) — International Review of Financial Analysis, Vol. 95 (2024) 103400. doi:10.1016/j.irfa.2024.103400

Research Question

Do physical environmental risks in a firm's local community cause firms to increase their environmental CSR commitments? This question matters because while the literature documents that governance and disclosure affect CSR, the causal role of external environmental shocks on firm environmental behavior remains underexplored. The authors address this gap by leveraging an exogenous source of environmental risk: the staggered timing of shale gas well discoveries across US counties from 2000 to 2013.

Shale gas booms are an ideal natural experiment for several reasons. First, they generate new and uncertain environmental risks — water contamination, air pollution, and earthquake risk from hydraulic fracturing — that affect local communities broadly, not just oil and gas firms. Second, the long-term environmental consequences of fracking are ambiguous to both locals and scientists, amplifying perceived uncertainty. Third, the staggered county-month timing of shale discoveries enables a difference-in-differences identification strategy with clean counterfactuals.

Data and Methodology

The sample covers 15,443 firm-year observations from 359 counties across 28 states between 2000 and 2013. Environmental CSR is measured using the MSCI KLD database, which assesses firms across five environmental strength indicators (beneficial products, pollution prevention, recycling, clean energy, and other strengths) and seven environmental concern indicators (hazardous waste, regulatory problems, ozone-depleting chemicals, substantial emissions, agriculture chemicals, climate change, and other concerns). The Environmental CSR variable is constructed as strengths minus concerns.

The two shale boom variables are: Boom (indicator), equal to one if a county is in the top tercile of all county-years by shale well activity in a given year, and Log (total shale wells), the log of cumulative shale wells drilled in the county from 2003 to year t. The baseline OLS regression includes county fixed effects and state-by-year fixed effects to control for time-invariant local differences and time-varying state-level shocks. Standard errors are double-clustered by county and year.

Key Results

Main effect: Both shale boom variables are positive and statistically significant predictors of Environmental CSR (p < 0.01). The coefficient on Boom (indicator) is 0.150, representing a 20.4% increase relative to the sample's standard deviation of environmental CSR (0.736). This is economically meaningful — larger than the contribution of Tobin's q and comparable to R&D intensity.

Mechanism — environmental strengths, not concern reduction: The increase in environmental CSR is driven primarily by firms proactively enhancing environmental strengths (e.g., increased recycling, clean energy investment) rather than reducing environmental concerns. At the subcategory level, recycling and clean energy show the strongest positive responses; hazardous waste concerns are reduced. This pattern suggests firms respond to shale boom pressure by building environmental reputations, not merely minimizing liabilities.

Robustness: Pre-trend analysis confirms no significant differences in environmental CSR between treated and control firms in the two years before a boom occurs (Year t−2 and Year t−1 coefficients are statistically insignificant). The effect emerges from Year t+3 onward, consistent with the long-term nature of environmental CSR commitments. Results are robust to propensity-score matching, firm fixed effects, and exclusion of oil, financial, real estate, and construction industries.

Heterogeneity — three amplifying channels:

• Litigation risk: The effect is stronger for firms in high-pollution industries, firms located in counties with active environmental litigation, and firms with high ex-ante litigation risk estimates. Higher expected legal liability from environmental shocks increases incentives to improve environmental reputation.
• Stakeholder interactions: The effect is stronger for firms with more suppliers, customers, and business segments — consistent with stakeholder demands for environmental accountability spreading through supply chains and business networks.
• Long-term orientation: The effect is stronger when a firm's institutional ownership skews toward long-term investors, and weaker when the CEO is older. Firms with longer investment horizons are more willing to commit to environmental CSR projects with latent returns.

Firm value: An increase in environmental investments following a shale boom is positively associated with changes in Tobin's q, providing evidence that environmental CSR driven by local environmental risk is value-enhancing rather than value-destroying.

Implications for Institutional Investors

This paper has several implications for stewardship and ESG engagement strategy. First, it establishes that environmental CSR is not only a function of internal governance but responds causally to local physical environmental risk — suggesting that place-based risk mapping can predict where corporate environmental engagement will intensify. Second, the finding that environmental CSR is value-enhancing in this context provides empirical grounding for ESG integration strategies that weight environmental strengths positively. Third, the litigation risk channel indicates that firms facing greater legal exposure to environmental harm are more responsive to stakeholder pressure — a lever that active shareholders and engagement-focused investors can utilize. Finally, the long-term orientation channel suggests that the composition of institutional ownership itself shapes corporate environmental behavior: shifting a firm's shareholder base toward long-horizon investors may accelerate voluntary environmental investment.

Selected References

1. Gilje, E.P. (2019). Do firms engage in risk-shifting? Empirical evidence. Review of Financial Studies, 32(8), 2925–2954.
2. Liang, H., & Renneboog, L. (2017). On the foundations of corporate social responsibility. Journal of Finance, 72(2), 853–910.
3. Dyck, A., Lins, K.V., Roth, L., & Wagner, H.F. (2019). Do institutional investors drive corporate social responsibility? International evidence. Journal of Financial Economics, 131(3), 693–714.
4. Spence, D.B. (2017). Fracking, private governance, and the public good. University of Chicago Law Review, 75, 1015.
5. Choi, C., & Chung, C.Y. (2024). The effect of shale gas booms on environmental CSR activity. International Review of Financial Analysis, 95, 103400.