ESG performance and firm risk in the U.S. financial firms

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.