Does ESG investment influence firm risk during the COVID-19 pandemic? : evidence from European markets

Corporate social performance (CSP) has gained in importance in recent decades. To satisfy the concerns raised by con- sumers, investors, fund providers, and governmental organizations about sustainability, businesses stick to working for a more sustainable environment. This paper examines the nexus between environmental, social, and governance factors (ESG) and various risk types, including market and accounting-based risk, using a data set consisting of 175 firms from European countries which covers the period from 2015 to 2022. In this study, we examine both aggregated and disag- gregated ESG scores and their associations with accounting-based default risk, measured by Altman's Z'' and Zmijewski's ZM-scores, as well as market risk proxied by beta. To explore the nexus between ESG and risk factors, panel data analysis with both time and unit effects was used and considered with cluster robust standard errors. We find that economic cycles have an impact on the relationship between CSP and risk. While ESG factors demonstrate a risk-mitigating effect during the COVID-19 pandemic, it has no impact before the COVID-19 pandemic. We also find that market-based risk as- sessment is more informative than accounting-based risk assessment.