TY - JOUR

T1 - Corporate Sustainability and Risk Management—The U‐Shaped Relationships of Disaggregated ESG Rating Scores and Risk in the German Capital Market

AU - Korinth, Fabio

AU - Lueg, Rainer

N1 - Copyright: © 2022 by the authors. Licensee MDPI, Basel, Switzerland.

PY - 2022/5/9

Y1 - 2022/5/9

N2 - This study addresses the relationship between the (dis)aggregated ESG rating and different types of risk (i.e., market risk, idiosyncratic risk, total risk) in the German stock market. We investigate not only the overall ESG rating and the E, S, and G pillar scores but also all the underly-ing category scores. Thereby, we provide in‐depth insight into diverse CS operations. We cover 454 firm years (2012–2019) using ordinary least squares regression with firm and year fixed effects. Our main insights are the U‐shaped relationships between CS and risk: Ecological investments first decrease systematic risk (beta), while overinvestment increases systematic risk again. Likewise, social investments initially decrease idiosyncratic risk, while overinvestment increases idiosyncratic risk again. Further findings suggest only one linkage between systematic risk and the social pillar score. In the category scores, a few more relevant linkages were identified, which indicates that disaggre-gation of the ESG ratings increases the explanatory power of models. In respect to findings from other capital markets, it appears that the effects of the ESG ratings on risk may depend on the exist-ing level of sustainability in the capital market. Last, our study provides insights into the nonline-arity of the CS–risk relationships.

AB - This study addresses the relationship between the (dis)aggregated ESG rating and different types of risk (i.e., market risk, idiosyncratic risk, total risk) in the German stock market. We investigate not only the overall ESG rating and the E, S, and G pillar scores but also all the underly-ing category scores. Thereby, we provide in‐depth insight into diverse CS operations. We cover 454 firm years (2012–2019) using ordinary least squares regression with firm and year fixed effects. Our main insights are the U‐shaped relationships between CS and risk: Ecological investments first decrease systematic risk (beta), while overinvestment increases systematic risk again. Likewise, social investments initially decrease idiosyncratic risk, while overinvestment increases idiosyncratic risk again. Further findings suggest only one linkage between systematic risk and the social pillar score. In the category scores, a few more relevant linkages were identified, which indicates that disaggre-gation of the ESG ratings increases the explanatory power of models. In respect to findings from other capital markets, it appears that the effects of the ESG ratings on risk may depend on the exist-ing level of sustainability in the capital market. Last, our study provides insights into the nonline-arity of the CS–risk relationships.

KW - corporate sustainability

KW - ESG rating

KW - Germany

KW - idiosyncratic risk

KW - market risk

KW - nonlinearity

KW - sustainability disclosure

KW - systematic risk

KW - total risk

KW - volatility

KW - Management studies

UR - http://www.scopus.com/inward/record.url?scp=85130304366&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/7c535f07-bb9f-366c-83b4-8b47e0eb83d5/

U2 - 10.3390/su14095735

DO - 10.3390/su14095735

M3 - Journal articles

AN - SCOPUS:85130304366

VL - 14

JO - Sustainability

JF - Sustainability

SN - 2071-1050

IS - 9

M1 - 5735

ER -