How does ESG affect systemic tail risk?

Abstract

In the context of sustainable development, the Environmental, Social, and Governance (ESG) terms are an important way to resist fluctuations in financial markets. This study explores the effects of ESG on systemic tail risk. This study finds that ESG can significantly decrease the level of corporate systemic tail risk. The heterogeneity analysis shows that the restraining impact is more obvious in non-state-owned enterprises, enterprises with higher financing constraints, and industries with lower levels of competition. Additionally, this study discuss the channel mechanism of ESG on systemic tail risk in enterprises from both internal and external perspectives. In terms of internal perspectives, the increase in ESG rating will inhibit agency cost and risk-taking levels. In terms of external perspectives, ESG will enhance the level of supply chain diversification and institutional investor shareholding ratio. This paper reveals the mechanism and effective path of corporate systemic tail risk in the sustainable development economy.