The impact of environmental, social and governance scores on corporate risk: evidence from Chinese listed companies

Jing Huang, Zhuoran Zhang, Shih-tse Lo and Yihong Huang

Abstract

The existing literature provides limited evidence on how environmental, social and governance (ESG) performance relates to corporate risk (in particular, total risk and systemic risk) in China. Using a comprehensive panel of companies listed on China’s A-share market (45 850 firm-year observations, and volatility-based risk measures constructed from 1 025 106 firm-day return records), this study examines whether changes in ESG performance are associated with firms’ market-based risk exposure. The results show that ESG score upgrades are significantly associated with higher total risk (𝛽 0:1868, 𝑝 < 0:001) and higher systemic risk, whereas ESG downgrades are associated with reduced risk exposure. The ESG–risk association is more pronounced in environmentally sensitive industries. In dimension-level analyses, environmental and social improvements are positively associated with risk, while governance exhibits a modest negative association. Mediation analyses further indicate that stock price volatility partially transmits the relationship between ESG changes and risk outcomes.