Environmental, social, and governance (ESG) on firm risk : evidence from Asean and GCC countries

Abstract

Despite the increasing focus on Environmental, Social, and Governance (ESG) practices worldwide, the complex interplay between ESG and firm risk remains insufficiently examined, particularly within the emerging markets of the ASEAN and GCC regions. This thesis seeks to fill this gap by investigating how ESG practices influence different aspects of firm risk and by evaluating the moderating effect of country ESG scores on this relationship. Utilising a comprehensive dataset that encompasses 643 firms, resulting in 2,898 firm-year observations across 12 countries within these regions from 2011 to 2021, this research further dissects the distinct impacts of the individual ESG components on firm risk (systematic, total, default, and credit risk). Furthermore, this study reveals a compelling similarity between Shariah-compliant and ethically oriented companies that adhere to ESG principles, both emphasising ethical investment and risk mitigation as core business strategies. This convergence highlights how ethical frameworks, driven by Shariah compliance or broader ESG commitments, align business practices with risk management objectives. This study uses a panel regression analysis to examine the study hypotheses and achieve the study aims. Rooted in stakeholder theory, the results indicate that ESG practices, particularly those related to the environment (ENV), significantly reduce systematic and credit risks, echoing the principles of risk mitigation theory by highlighting the role of ESG in protecting against market volatility and bolstering creditor confidence. However, through the lens of managerial opportunism theory, the study also suggests that ESG engagements could be motivated by managerial self-interest, affecting the firm's risk profile. Crucially, the research highlights the significance of the institutional context, as posited by institutional theory, in amplifying the efficacy of ESG practices in risk reduction. In jurisdictions with robust sustainability regulations, ESG practices exert a more pronounced influence in curbing risks, particularly regarding total risk. The findings offer valuable implications for policymakers, investors, and corporate leaders in the ASEAN and GCC regions, underlining the importance of integrating ESG into risk management strategies and the significant role of institutional contexts in shaping these dynamics. The study also adds to the literature on the effects of ESG practice on risk within the specific context of ASEAN and GCC markets, contributing novel insights to the body of knowledge. Contributing novel insights into the effects of ESG practices on firm risk within specific emerging markets, this research offers a solid foundation for strategic policy development and further academic exploration.