Does ESG impact systemic risk? Evidencing an inverted U-shape relationship for major energy firms

Abstract

Following recent financial, health, and geopolitical events, concerns are growing regarding the systemic risk of global energy companies. We assess the impact of environmental, social, and governance (ESG) performance on the systemic risk of leading energy firms. For 158 energy firms from 16 countries for 2010–2021, we evidence that while ESG shows positive association with default risk, squared values of ESG performance are negatively significant, consistent with an inverted U-shaped association. Moreover, better ESG disclosure and carbon performance also reduce default risk. We interpret our results as the beneficial impact of ESG on lowering default risk depends on the threshold level of ESG investment. Results, holding only for the post GFC period, for firms with more than one environmental controversy, and for countries with higher levels of education, are consistent with an evolving need for energy firms to employ genuine ESG commitment to establish reputational capital towards enhancing resiliency.