Document Type

Article

Version Deposited

Published Version

Publication Date

Spring 5-2024

Publication Title

Review of Finance Economics

DOI

10.1002/rfe.1208

Abstract

This study examines the association between the environmental, social, and governance (ESG) performance and firm risk in U.S. financial firms. We find a significant negative association between the composite ESG performance and total, idiosyncratic, and systematic risks after controlling for firm and year fixed effects and other risk predictors. We also examine the effect of each pillar of ESG on this relationship and find that “S” and “G” exhibit a significant negative relationship with both systematic and idiosyncratic risks of firms, while “E” is only associated with systematic risk. Lastly, we demonstrate that ESG performance is negatively associated with the extent to which leverage contributes to firm risk, supporting our premise that ESG alleviates financial risk. Overall, we provide empirical evidence of potential risk management benefits of ESG in the financial industry

Comments

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made. © 2024 The Author(s). Review of Financial Economics published by Wiley Periodicals LLC on behalf of University of New Orleans.

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