Impact of E, S, and G Pillar scores on idiosyncratic risk during times of crisis

Abstract

This study examines the impact of individual environmental (E), social (S), and governance (G) pillar scores on the idiosyncratic risk of 929 European and 2,450 US firms in a period between Q1 2000 and Q1 2023, determining if high ratings lead to lower idiosyncratic risk in times of crisis. Additionally, it demonstrates how the degree of firm-specific volatility varies depending on the industry a company operates in. To determine idiosyncratic risk, the Carhart (1997) four factor model and additionally for robustness, the Fama and French (1993) three-factor model are applied. For the analysis, a panel regression is performed, controlling for size, return-on assets (ROA), leverage, market-to-book value (MBV), and changes in the volatility index (VIX). Due to the difference in economic circumstances, policies, and locations in Europe and the US, the individual pillar scores show different impacts. On the one hand, the S pillar score exhibits a negative relationship with idiosyncratic risk in Europe. In contrast, the quality of governance is more important in the US. However, the overall level of the ESG scores did not significantly affect idiosyncratic risk during the period of 23 years. In addition, high-tech companies are most affected by high idiosyncratic risk due to their innovative company structure. In times of crisis, ESG scores are showing a significantly negative impact on firm specific risk.

Date of Award	26 Jun 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Zoe Venter (Supervisor)