While academic research has not reached a consensus on the direct relationship between environmental, social, and governance (ESG) performance and stock returns, it generally indicates that enterprises with strong ESG performance tend to exhibit a reduced risk profile (e.g., Orlitzky & Benjamin, 2001, Lee & Faff, 2009, Ortiz-de-Mandojana & Bansal, 2016). This negative association between ESG performance and company risk arises from several underlying mechanisms. Here are a few examples of these mechanisms in action:

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References:

Bouslah, K., Kryzanowski, L., & M, Z. B. (2013). The impact of the dimensions of social performance on firm risk. Journal of Banking & Finance, 37(4), 1258–1273. https://doi.org/10.1016/j.jbankfin.2012.12.004

Godfrey, P. C., Merrill, C., & Hansen, J. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30(4), 425–445. https://doi.org/10.1002/smj.750

Lee, D. D., & Faff, R. W. (2009). Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective. Financial Review, 44(2), 213–237. https://doi.org/10.1111/j.1540-6288.2009.00216.x

Orlitzky, M., & Benjamin, J. D. (2001). Corporate Social Performance and Firm Risk: A Meta-Analytic Review. Business & Society, 40(4), 369–396. https://doi.org/10.1177/000765030104000402

Ortiz, de‐Mandojana, N., & Bansal, P. (2016). The Long-Term Benefits of Organizational Resilience through Sustainable Business Practices. Strategic Management Journal (John Wiley & Sons, Inc.), 37(8), 1615–1631. https://doi.org/10.1002/smj.2410

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