ESG as a mitigator of oil volatility risk

ESG activities are a forward-looking measure to prevent risks from negative externalities. Linking ESG scores with the crude oil market, we assess their mitigating effect on returns during periods of rising oil price volatility. We examine the interplay between ESG scores and crude oil volatility's impact on returns. Interestingly, this interaction transforms ESG into an insurance-like hedge, protecting returns as volatility increases. Notably, we identify a pivotal turning point at relatively low volatility levels. Below this threshold, ESG activities lack effectiveness, but when volatility surpasses it, their hedging power becomes pronounced. This effect intensifies as volatility rises, rewarding ESG leaders more significantly. Our sectoral and quantile analyses corroborate these findings. Overall, our findings support the role of ESG activities as a "safe haven" in times of financial turmoil, focusing its contribution to the interplay between ESG and oil volatility on periods of heightened uncertainty in the crude oil market.