The Effect of Corporate ESG Performance on Financial Risk

Abstract

This paper examines the effect of corporate ESG performance on financial risk through the data of Chinese listed companies from 2015 to 2023. Panel data regression and firm-level clustered standard errors were used to show that a high level of ESG performance is associated with a low level of financial risk, and thus good ESG can help to reduce risk. Based on the analysis of ESG sub-indicators, social performance is the most detrimental factor to financial risk; the components of environment and governance are relatively weak and do not have statistical significance. Analysis of heterogeneity shows that the reduction effect of risk for ESG varies based on the level of a company's ESG rating and the industry, being more pronounced in the service sector than in manufacturing. According to the above mechanism analysis, a high ESG performance will help improve the company's operation and increase the trust of all parties involved. Robustness tests were carried out on the alternative risk measure Z-score and stock volatility, as well as on lagged ESG variables, and it was found that the main results remained the same. This paper offers new ideas on the impact of ESG on a company's financial health and can help managers of listed companies take some measures.