Vol (15), Issue (2), 2022

Impact of Environmental, Social and Governance Practices on Firm Financial Risk in Emerging Countries

Muhammad Naeem, Hamidullah, Shahid Jan Kakakhel, Muhammad Tahir

Islamia College Peshawar

The study's main purpose is to investigate the relationship between environmental, social andgovernance (ESG) practices and firm financial risk. The study used the data of 1042 companies of 26emerging countries for the period of 2010 to 2019. The secondary data retrieved from RefinitivEikon database was used to analyze the association between ESG practices and firm financial riskby employing the Feasible Generalized Least Square (FGLS) models. In this study the aggregate ESGscores as well as pillar-wise environmental, social and governance scores were used. Moreover,three different risk proxies such as systematic, idiosyncratic and total risks were used to measurethe firm financial risk. Results showed a significant and negative relationship between aggregateESG scores and firm systematic risk, idiosyncratic risk and total risk. Similarly, pillar-wiseenvironmental, social and governance scores have also significant and negative impact on firmsystematic risk, idiosyncratic risk and total risk. The findings of the current study have provided aframework and guidance to the companies and investors of emerging countries that firm financialrisk is an essential determinant of cost of capital which reduces the firm financial risk. Moreover,the firms that are using the ESG practices can reduce their financial risk; which ultimately increasesthe firm performance/value that would attract more investors to invest in these firms. Besides thisthe current study has also useful implications for regulators, policy makers, portfolio managers andgovernment agencies in emerging countries.
Keywords: ESG Practices, Firm Financial Risk, FGLS Models, Emerging Countries.




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