The impact of ESG risks on corporate value

Abstract

The following research has analyzed the linkage between ESG sustainability scores to the firm’s valuations. We provide evidence that the total ESG score is diminishing for the S & P500 firms from 2019 till 2021 meaning that these risks factors take their rightful place in the global economy. We find that the impact of environmental risks on the firm’s valuation is not significant enough. Moreover, we found that while the “Beta” risk factor of the S & P500 carries environmental risks, it does not hold such risks for Nasdaq100 stocks, and therefore, we recommend strengthening the environmental education to investors and other financial industry participants. This research also provides evidence that social risk impact negatively the simple excess return for both the S & P500 and nasdaq100 stocks indicating that social issues must be mitigated in order to maximize a firm value. Moreover, we find that the traditional CAPM “Beta” carries environmental and corporate governance risks for the S & P500 stocks. However, it totally neglects social risks and therefore it can not be used in modern ages where social risk are very important to all participants of the global economic environment.

The Moderating Role of Technological Innovation on Environment, Social, and Governance (ESG) Performance and Firm Value: Evidence from Developing and Least-Developed Countries

“…This was supported further by [10], who discovered that there is a greater link between governance investment and corporate financial performance in developing and least-developed countries compared to industrialized countries, suggesting that the effect of governance investment on business performance may vary depending on the kind of economic environment. Conversely, Cohen [32] also discovered an insignificant link between governance disclosure and firm profitability, suggesting that the impact of governance disclosure on business profitability varies according to the environment and sector.…”

“…This phenomenon, known as a pervasive cross-sectional dependency, can introduce biases and impact the accuracy of estimations [45]. The extent and nature of cross-sectional correlations among the variables play a vital influence in evaluating the presence and magnitude of cross-sectional dependence [32]. Ignoring cross-sectional dependence can lead to imprecise estimations, compromising the reliability of the results.…”

Building a Better Future with Sustainable Investments: Insights from Recent Research

“…Additionally, securities with the highest ESG scores show the lowest residual volatility, whereas stocks with a poor ESG evaluation have greater unknown risk (Boffo & Patalano, 2020). Cohen, (2023), found that traditional Capital Asset Pricing Model ‘beta’ carries environmental and corporate governance risks for the S&P 500 stocks. The literature on equity portfolios’ risk-return performance based on ESG scores is not unanimous.…”

“…Investment opportunities are increasing in sustainable alternatives such as renewable energy, clean transportation and green building solutions, as the demand for environmentally conscious solutions rises (Mckinsey, 2021). The integration of digital technologies such as artificial intelligence, blockchain and the Internet of Things has created new opportunities for ESG investment by improving the tracking and monitoring of ESG performance and creating more transparent and efficient processes (Cohen, 2023; Li et al, 2017).…”

Inversión socialmente responsable: selección y administración de portafolios con criterios medioambientales, sociales y de gobierno corporativo (ESG)

“…• ecoeficiencia • impacto y administración medioambientales • uso de agua y energía El riesgo ESG se puede definir como el impacto potencial que problemáticas medioambientales, sociales o de gobierno corporativo podrían tener sobre los resultados financieros, el desempeño operacional, el cumplimiento regulatorio o la reputación de una organización (Cohen, 2023;Palmer, 2022). En años recientes, diversas autoridades financieras alrededor del mundo han fomentado la inclusión de aspectos ESG en la administración de riesgos y los esquemas de gobernanza, al tiempo que la evidencia empírica demuestra el peligro de prácticas sociales y medioambientales inadecuadas, por lo que los riesgos ESG son considerados hoy una categoría adicional de riesgos materiales a tener en cuenta dentro de las medidas financieras tradicionales, convirtiéndose en un elemento crítico de la administración corporativa (Antunes et.…”