The ESG Paradox: Risk, Sustainability, and the Smokescreen Effect

Manpreet Kaur Makkar (), Basit Ali Bhat, Mohsin Showkat and Fatma Mabrouk
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Manpreet Kaur Makkar: Apeejay Institute of Management and Engineering Technical Campus, Jalandhar, Punjab 144007, India
Basit Ali Bhat: Mittal School of Business, Lovely Professional University, Phagwara, Punjab 1444111, India
Mohsin Showkat: School of Commerce, Presidency University, Rajanakunte, Bangalore 560064, India
Fatma Mabrouk: Department of Economics, College of Business Administration, Princess Nourah bint Abdulrahman University, P.O. Box 84428, Riyadh 11671, Saudi Arabia

Sustainability, 2025, vol. 17, issue 16, 1-17

Abstract: Despite numerous global initiatives, such as the Sustainable Development Goals (SDGs) and the implementation of environmental, social, and governance (ESG) metrics aimed at mitigating climate change, promoting social welfare, and addressing a variety of other causes, progress has been significantly slower than expected, particularly in developing economies. Thus, we attempted to link corporate ESG to sustainable development. It was also investigated whether ESG contributes to a reduction in corporate risk. Using panel data and the Generalized Method of Moments (GMM) technique, we examine the relationship between ESG scores and important financial risk indicators such as systematic risk (beta), stock price volatility, unsystematic risk, and the cost of capital (WACC). The findings show that corporations place a disproportionate emphasis on governance (G) rather than environmental (E) and social (S) characteristics. ESG and G governance were also found to be statistically significant predictors of financial risk. This disparity shows that companies may be using high governance scores to conceal underperformance in environmental and social issues, raising worries about greenwashing and superficial compliance. As a result, their contributions to SDGs such as affordable and clean energy (SDG 7), climate action (SDG 13), and reduced inequalities (SDG 10) are minimal. The findings highlight the need for a more open, balanced, and integrated ESG approach, one that not only promotes sustainable development but also improves long-term financial resilience.

Keywords: ESG; environment; social; governance; sustainability; risk; SDG; energy (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2025
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