The Impact of ESG Risk Management from a Financial Perspective

This chapter explores the financial implications of Environmental, Social, and Governance (ESG) factors by conducting an analysis of their impact on market dynamics. In particular, the study focuses on environmental risk, measured by an environmental pillar disaggregated into three sub-pillars – emissions management, resource efficiency, and environmental innovation – to better capture their distinct effect on stock price volatility. Utilizing a comprehensive dataset encompassing 600 European firms across all sectors, the study classifies companies into ‘green’ and ‘brown’ categories based on environmental performance metrics and employs econometric modeling to assess the relationship between environmental performance and price volatility. The study aims to contribute to the growing debate on the integration of ESG criteria, especially environmental ones, into investment strategies and risk management.