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Does ESG Investment Influence Firm Risk During the COVID-19 Pandemic? Evidence from European Markets

Year 2024, Volume: 53 Issue: 3, 409 - 432, 28.03.2025

Seyfullah Selimefendigil

https://doi.org/10.26650/ibr.2024.53.1429651

Abstract

In recent decades, corporate social performance (CSP) has gained in importance. Because of concerns raised by consumers, investors, fund providers, and governmental organizations about sustainability, businesses are motivated to work toward a more sustainable environment. This paper examines the nexus between environmental, social, and governance factors (ESG) and various risk types, including market and accounting-based risk, using a data set comprising 1400 firmyear observations spanning the period from 2015 to 2022 from European countries. It examines both aggregated and disaggregated ESG scores and their associations with accounting-based default risk, measured by Altman’s Z’’ and Zmijewski’s ZM-scores, as well as market risk proxied by beta. To explore the nexus between ESG and risk factors, panel data analysis with both time and unit effects was used and considered with cluster robust standard errors. This study shows that economic cycles have an impact on these relationships, with ESG factors demonstrating a risk-mitigating effect during the COVID-19 pandemic, but no impact before the COVID-19 pandemic. Moreover, this study highlights the comparative informativeness of measuring systematic beta risk compared with traditional accounting-based risk assessments.

Keywords

Corporate Social Performance COVID-19 Firm risk Stakeholder Theory Agency Theory

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Year 2024, Volume: 53 Issue: 3, 409 - 432, 28.03.2025

Seyfullah Selimefendigil

https://doi.org/10.26650/ibr.2024.53.1429651

Abstract

References

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  • Al Amosh, H., Khatib, S. F. A., & Ananzeh, H. (2022). Environmental, social and governance impact on financial performance: evidence from the Levant countries. Corporate Governance (Bingley), 23(3), 493-513. https://doi.org/10.1108/CG-03-2022-0105 google scholar
  • Albuquerque, R., Koskinen, Y., & Zhang, C. (2019). Corporate social responsibility and firm risk: Theory and empirical evidence. Management Science, 65(10), 4451-4469. https://doi.org/10.1287/mnsc.2018.3043 google scholar
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  • Boubaker, S., Cellier, A., Manita, R., & Saeed, A. (2020). Does corporate soci- al responsibility reduce financial distress risk? Economic Modelling, 91 (May), 835-851. https://doi.org/10.1016/j.econmod.2020.05.012 google scholar
  • Bouslah, K., Kryzanowski, L., & M’Zali, B. (2013). The impact of the dimensions of so-cial performance on firm risk. Journal of Banking and Finance, 37(4), 1258-1273. https://doi.org/10.1016/j.jbankfin.2012.12.004 google scholar
  • Bouslah, K., Kryzanowski, L., & M’Zali, B. (2018). Social Performance and Firm Risk: Impact of the Fi-nancial Crisis. Journal of Business Ethics, 149(3), 643-669. https://doi.org/10.1007/s10551-016-3017-x google scholar
  • Branca, A. S., Pina, J., & Lopes, M. C. (2012). Corporate giving, competition and the economic cycle. ISEG-Departamento de Economia. google scholar
  • Broadstock, D. C., Chan, K., Cheng, L. T. W., & Wang, X. (2021). The role of ESG performance during ti-mes of financial crisis: Evidence from COVID-19 in China. Finance Research Letters, 38(August 2020). https://doi.org/10.1016/j.frl.2020.101716 google scholar
  • Brower, J., & Dacin, P. A. (2020). An Institutional Theory Approach to the Evolution of the Corporate Social Performance - Corporate Financial Performance Relationship. Journal of Management Studies, 57(4), 805-836. https://doi.org/10.1111/joms.12550 google scholar
  • Cespa, G., & Cestone, G. (2007). Corporate social responsibility and managerial entrenchment. Journal of Economics and Management Strategy, 16(3), 741-771. https://doi.org/10.1111/j.1530-9134.2007.00156.x google scholar
  • Cohen, G. (2022). ESG risks and corporate survival. Environment Systems and Decisions, 43(1), 16-21. https://doi.org/10.1007/s10669-022-09886-8 google scholar
  • Cooper, E., & Uzun, H. (2019). Corporate social responsibility and bankruptcy. Studies in Economics and Finance, 36(2), 130-153. https://doi.org/10.1108/SEF-01-2018-0013 google scholar
  • Denis, D. J., & Denis, D. K. (1995). Performance changes following top management dismissals. The Jour-nal of Finance, 50(4), 1029-1057. google scholar
  • Desender, K., & Epure, M. (2015). Corporate Governance and Corporate Social Performance: Boards, Ow-nership and Institutions. Academy of Management Proceedings, 2015(1), 16433. https://doi.org/10.5465/ ambpp.2015.16433abstract google scholar
  • Do, T. K. (2022). Corporate social responsibility and default risk: International evidence. Finance Research Letters, 44(August 2020), 102063. https://doi.org/10.1016/j.frl.2021.102063 google scholar
  • Duque-Grisales, E., & Aguilera-Caracuel, J. (2021). Environmental, Social and Governance (ESG) Scores and Financial Performance of Multilatinas: Moderating Effects of Geographic Inter-national Diversification and Financial Slack. Journal of Business Ethics, 168(2), 315-334. https://doi.org/10.1007/s10551-019-04177-w google scholar
  • Engström, F., & Martinsson, S. (2020). Environmental , Social and Governance-Ratings and Risk in Sweden. Umeâ University. google scholar
  • Eratalay, M. H., & Ângel, A. P C. (2022). The Impact of ESG Ratings on the Systemic Risk of European Blue-Chip Firms. Journal of Risk and Financial Management, 15(4). https://doi.org/10.3390/jrfm15040153 google scholar
  • European Commission. (2013). Disclosure of nonfinancial and diversity information by certain large compa-nies and groups. In Euro-Lex (Vol. 53, Issue 9). google scholar
  • Fama, E. F., & French, K. R. (2007). Disagreement, tastes, and asset prices. Journal of Financial Economics, 83(3), 667-689. https://doi.org/10.1016/j.jfineco.2006.01.003 google scholar
  • Ferriani, F., & Natoli, F. (2020). ESG risks in times of Covid-19. AppliedEconomicsLetters, June 2020, 1-8. google scholar
  • Godfrey, P. C., Merrill, C. B., & Hansen, J. M. (2009). The relationship between corporate social responsibi-lity and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425-445. google scholar
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Details

Primary Language English
Subjects Business Administration
Journal Section Articles
Authors

Seyfullah Selimefendigil 0000-0001-7017-9673

Publication Date March 28, 2025
Submission Date February 1, 2024
Acceptance Date December 24, 2024
Published in Issue Year 2024 Volume: 53 Issue: 3

Cite

APA Selimefendigil, S. (2025). Does ESG Investment Influence Firm Risk During the COVID-19 Pandemic? Evidence from European Markets. Istanbul Business Research, 53(3), 409-432. https://doi.org/10.26650/ibr.2024.53.1429651
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