ESG and Firm Risk: Evidence in Korea

Abstract

This study examines the intricate relationship between ESG considerations and risk profiles of firms by presenting a comprehensive analysis of total, systematic, and idiosyncratic risks. Using 7834 firm-year observations from 2011 to 2022 in the Korean market, the findings reveal that ESG engagement effectively reduces total, systematic, and idiosyncratic risks. Especially noteworthy is the fact that the reduction in systematic risk, a discovery associated with ESG engagement in medium-sized firms, remains concealed when examining only the total risk. During the COVID-19 crisis, ESG remained valuable in lowering total and idiosyncratic risks but paradoxically increased systematic risk in certain circumstances. These findings emphasize the risk-mitigating potential of ESG, advocating customized strategies based on firm size. They also underscore the resilience of firms that are dedicated to ESG practices during a crisis. Investors may enhance risk-adjusted returns and mitigate overall portfolio risk by integrating ESG factors into their investment strategies, with the importance of tailoring such strategies emphasized, while governments should develop policies incentivizing ESG engagement and allocating resources for ESG-related initiatives.