The Impact of ESG Ratings on the Systemic Risk of European Blue-Chip Firms

Mustafa Eratalay () and Ariana Paola Cortés Ángel
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Ariana Paola Cortés Ángel: School of Economics and Business Administration, University of Tartu, Narva Mnt. 18, 51009 Tartu, Estonia

JRFM, 2022, vol. 15, issue 4, 1-41

Abstract: There are diverging results in the literature on whether engaging in ESG related activities increases or decreases the financial and systemic risks of firms. In this study, we explore whether maintaining higher ESG ratings reduces the systemic risks of firms in a stock market context. For this purpose we analyse the systemic risk indicators of the constituent stocks of S&P Europe 350 for the period of January 2016–September 2020, which also partly covers the COVID-19 period. We apply a VAR-MGARCH model to extract the volatilities and correlations of the return shocks of these stocks. Then, we obtain the systemic risk indicators by applying a principle components approach to the estimated volatilities and correlations. Our focus is on the impact of ESG ratings on systemic risk indicators, while we consider network centralities, volatilities and financial performance ratios as control variables. We use fixed effects and OLS methods for our regressions. Our results indicate that (1) the volatility of a stock’s returns and its centrality measures in the stock network are the main sources contributing to the systemic risk measure, (2) firms with higher ESG ratings face up to 7.3% less systemic risk contribution and exposure compared to firms with lower ESG ratings and (3) COVID-19 augmented the partial effects of volatility, centrality measures and some financial performance ratios. When considering only the COVID-19 period, we find that social and governance factors have statistically significant impacts on systemic risk.

Keywords: systemic risk; network centrality; sustainable; ESG; volatility; principal components; COVID-19 (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: THE IMPACT OF ESG RATINGS ON THE SYSTEMIC RISK OF EUROPEAN BLUE-CHIP FIRMS (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:15:y:2022:i:4:p:153-:d:781555

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