Exploring the link between ESG Scores and downside risks of stock returns during periods of negative shock : evidence in APAC

Abstract

This study investigates the empirical association between Environmental, Social, and Governance (ESG) factors and downside risks in stock returns during negative shocks focusing on 13 countries within the Asia-Pacific (APAC) region. The study assesses ESG performance using combined ESG scores, E pillar, S pillar, G pillar and controversy scores, examining their impact on downside risk measured by Value at Risk (VaR) and Maximum Drawdown (MDD). The sample includes publicly traded companies across diverse APAC countries from 2012 to 2021. The research contextualizes the global significance of ESG practices, emphasizing their role in mitigating financial risks and contributing to sustainable financial markets. The study addresses a research gap by specifically exploring the APAC region, providing insights for investors, regulators, and society. The regression results confirm the negative relationship between ESG performance and downside risk, except for the Environmental pillar is not significant. This possibly reflects regional differences in environmental standards. The study emphasizes the importance of disaggregating ESG metrics for accurate risk assessment. Results reveal the complex interplay between ESG metrics, the rule of law, and financial risk. This complexity arises because ESG may have varying impacts on financial risk depending on the strength and nature of the rule of law in different jurisdictions. The findings contribute significantly to understanding the relationship between ESG aspects, legal frameworks, and downside risk in the APAC region. Investors, governments, and policymakers can leverage these insights to manage risk exposure, strengthen legal frameworks, and promote sustainable financial markets in both developed and emerging economies.