ESG performance and corporate risk-taking: Evidence from China

Corporate environmental, social and governance (ESG) is vital for sustainable growth, while the motivation of corporate ESG engagement could decide whether ESG participation is green or greenwashing behavior. This paper attempts to understand the motivation of corporate ESG engagement from the firm's risk-taking perspective. Using Chinese publicly listed firm data from 2010 to 2020, we find that ESG rating significantly reduces corporate risk-taking. This finding still holds after a series of robustness tests to address potential endogeneity concerns and alternative risk-taking proxies. Furthermore, the marginal inhibitory impact of ESG on corporate risk-taking is more pronounced in firms with lower information transparency, weaker corporate governance and less external monitoring pressure. Our results shed essential insight on the trade-off between sustainable growth and corporate risk-taking behavior in a relatively weak investor protection institutional environment.

Automated summary

Corporate environmental, social, and governance (ESG) is crucial for sustainable growth, and the motivation behind corporate ESG engagement determines whether it is genuine or just greenwashing. This study explores the motivation of corporate ESG engagement in terms of risk-taking. Analyzing data from Chinese publicly listed firms between 2010 and 2020, it is found that ESG rating significantly reduces corporate risk-taking, even after considering potential endogeneity concerns. The impact of ESG on risk-taking is more significant in firms with lower information transparency, weaker corporate governance, and less external monitoring pressure, highlighting the trade-off between sustainable growth and risk-taking in a weak investor protection institutional environment.