Abstract
The study's main purpose is to investigate the relationship between environmental, social and governance (ESG) practices and firm financial risk. The study used the data of 1042 companies of 26 emerging countries for the period of 2010 to 2019. The secondary data retrieved from Refinitiv Eikon database was used to analyze the association between ESG practices and firm financial risk by employing the Feasible Generalized Least Square (FGLS) models. In this study the aggregate ESG scores as well as pillar-wise environmental, social and governance scores were used. Moreover, three different risk proxies such as systematic, idiosyncratic and total risks were used to measure the firm financial risk. Results showed a significant and negative relationship between aggregate ESG scores and firm systematic risk, idiosyncratic risk and total risk. Similarly, pillar-wise environmental, social and governance scores have also significant and negative impact on firm systematic risk, idiosyncratic risk and total risk. The findings of the current study have provided a framework and guidance to the companies and investors of emerging countries that firm financial risk is an essential determinant of cost of capital which reduces the firm financial risk. Moreover, the firms that are using the ESG practices can reduce their financial risk; which ultimately increases the firm performance/value that would attract more investors to invest in these firms. Besides this the current study has also useful implications for regulators, policy makers, portfolio managers and government agencies in emerging countries.
Keyword(s)
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