The impact of environmental, social and governance scores on corporate risk: evidence from Chinese listed companies

Jing Huang, Zhuoran Zhang, Shih-tse Lo and Yihong Huang

Journal of Operational Risk

Abstract: The existing literature provides limited evidence on how environmental, social and governance (ESG) performance relates to corporate risk (in particular, total risk and systemic risk) in China. Using a comprehensive panel of companies listed on China’s A-share market (45 850 firm-year observations, and volatility-based risk measures constructed from 1 025 106 firm-day return records), this study examines whether changes in ESG performance are associated with firms’ market-based risk exposure. The results show that ESG score upgrades are significantly associated with higher total risk (ð ›½ 0:1868, ð ‘ < 0:001) and higher systemic risk, whereas ESG downgrades are associated with reduced risk exposure. The ESG–risk association is more pronounced in environmentally sensitive industries. In dimension-level analyses, environmental and social improvements are positively associated with risk, while governance exhibits a modest negative association. Mediation analyses further indicate that stock price volatility partially transmits the relationship between ESG changes and risk outcomes.

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Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ3:7963811

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