Does corporate sustainability mitigate firm risk? An empirical analysis on S&P 500 controversial companies

Abstract

Purpose This study aims to explore the impact of controversial firms’ corporate sustainability assessments on their risk exposure according to the environmental, social and governance (ESG) paradigm. Design/methodology/approach This study conducts a cross-sectional study using the ordinary least squares approach to test how corporate social responsibility practices affect firms’ risk exposure, testing the three single impacts of ESG components and the impact of an overall ESG assessment. This study considers the largest Standard & Poor’s (S&P) 500 stock market index companies and focus on a double-risk measurement – systematic and idiosyncratic – developing an empirical study on 132 controversial companies listed on the S&P index. Findings Empirical findings indicate that the overall ESG assessment and the environmental and social sub-dimensions decrease idiosyncratic firm risk. At the same time, no significant results are found according to the systematic risk component. Originality/value This study fits into the domain of risk management research, investigating whether additional and non-financial disclosures regarding sustainability issues decrease information asymmetries, improving investors’ decision-making and stakeholders’ relations. Prior literature has shown limited evidence on the relationship between corporate social performance (CSP) and firm risk based on controversial companies. The main contribution is to consider the controversy as an independent factor from the industry sector, given that the implications of CSP actions and practices are mainly firm-specific.

Sustainability, Uncertainty, and Risk: Time-Frequency Relationships

“…The second research trend examines the topic concerning corporate sustainability and risk management [20][21][22][23]. For example, reference [21] is essential for understanding the drivers of corporate sustainability within South African organizations and how they intersect with risk management.…”

“…It highlights the link between sustainability and long-term organizational performance, indicating that sustainability and risk management should not be treated as separate entities. Finally, reference [23] reiterates the aim of exploring the impact of controversial firms' corporate sustainability assessments on risk exposure, specifically focusing on the environmental, social, and governance (ESG) paradigm. By considering controversy as an independent factor from the industry sector, the study provides insights into the implications of corporate social performance on firm-specific risk.…”

Environmental, Social, and Governance (ESG) Fraud: A bibliometric study and systematic literature review

“…The rapid development of ESG puts enormous pressure on companies [28]. This pressure makes many * Corresponding author: tarjo@trunojoyo.ac.id companies use various methods to implement ESG even though they contain controversial actions in their implementation [29]. The ESG controversy can increase employee rights problems, environmental damage, and damage to corporate order [30].…”