THE IMPACT OF ESG RATINGS ON THE SYSTEMIC RISK OF EUROPEAN BLUE-CHIP FIRMS

Mustafa Eratalay () and Ariana Paola Cortés à Ngel

No 139, University of Tartu - Faculty of Economics and Business Administration Working Paper Series from Faculty of Economics and Business Administration, University of Tartu (Estonia)

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 paper we explore whether maintaining higher ESG ratings would reduce 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, (3) Covid-19 augmented the partial effects of volatility, centrality measures and some financial performance ratios. When considering only the Covid-19 period, we found 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)
Pages: 62 pages
Date: 2022
New Economics Papers: this item is included in nep-env, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: The Impact of ESG Ratings on the Systemic Risk of European Blue-Chip Firms (2022)
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