The impact of ESG performance on firm-idiosyncratic risk in the US and Canada

Abstract

This paper aims to examine how environmental, social, and governance (ESG) performance affects the idiosyncratic risk of firms in the United States and Canada between 2007 and 2020. This study retrieves ESG scores and other factors from the Refinitiv DataStream, the firms used for analysis in this paper are 480 listed companies. Results show that ESG performance can reduce idiosyncratic risk in different firms' characteristics and periods. First, ESG performance can subdue the idiosyncratic risk in both sensitive and non-sensitive industries at the same level. Second, only the environmental pillar in the sensitive industry has an additional negative influence on idiosyncratic risk due to the concentration in environmentally sensitive industries of the samples. Third, high market value firms tend to benefit more from improving ESG performance than low market value firms. Fourth, the effect size of ESG performance on idiosyncratic risk of low leverage firms is larger than high leverage firms. Fifth, ESG practice shows a more considerable effect in times of recession periods compared to normal periods. Lastly, ESG performance can subdue idiosyncratic risk of firms in covid-19 period higher than in pre-covid-19 periods.