ESG Risks and Market Valuations: Evidence from the Energy Sector

Rahul Verma () and Arpita A. Shroff
Additional contact information
Rahul Verma: Finance, Marilyn Davies College of Business, University of Houston-Downtown, Houston, TX 77002, USA
Arpita A. Shroff: Finance, Marilyn Davies College of Business, University of Houston-Downtown, Houston, TX 77002, USA

IJFS, 2025, vol. 13, issue 2, 1-26

Abstract: The link between ESG and financial performance is still under debate. In this study, we explore which aspects of ESG specifically drive market valuations through both systematic and idiosyncratic risk channels. We analyze the impact of the three core ESG pillars, 10 subcategories, and associated controversies on market valuations in the energy sector. This analysis reveals that the environmental factor has a stronger impact (regression coefficient = 0.05) than the governance factor (regression coefficient = 0.003), emphasizing the need to prioritize environmental performance in ESG strategies. The positive coefficients for environmental resource use (0.005) and innovation (0.008) indicate that investments in efficiency and clean technologies are beneficial, while the negative coefficient for emissions (−0.004) underscores the risks associated with poor emissions management. These findings suggest that environmental risks currently outweigh governance risks for the energy sector, reinforcing the importance of aligning governance practices with environmental goals. To maximize ESG effectiveness, energy firms should focus on measurable improvements in resource efficiency, innovation, and emissions reduction and transparently communicate this progress to stakeholders. The evidence suggests that energy firms approach the ESG landscape differently, with sustainability leaders benefiting from higher valuations, particularly when ESG efforts are aligned with core competencies. However, many energy companies under-invest in value-creating environmental initiatives, focusing instead on emission management, which erodes value. While they excel in emission control, they lag in innovation, missing opportunities to enhance valuations. This underscores the potential for ESG risk analysis to improve portfolio performance, as sustainability can both create value and mitigate risks by factoring into valuation equations as both risks and opportunities. This study uniquely contributes to the ESG–financial performance literature by disentangling the specific ESG dimensions that drive market valuations in the energy sector, revealing that value is created not through emission control but through strategic alignment with eco-innovation, governance, and social responsibility.

Keywords: ESG; environment; social; governance; energy; valuation (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7072/13/2/113/pdf (application/pdf)
https://www.mdpi.com/2227-7072/13/2/113/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:13:y:2025:i:2:p:113-:d:1682043

Access Statistics for this article

IJFS is currently edited by Ms. Hannah Lu

More articles in IJFS from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().