Does ESG impact systemic risk? Evidencing an inverted U-shape relationship for major energy firms

Following recent financial, health, and geopolitical events, concerns are growing regarding the\r\nsystemic risk of global energy companies. We assess the impact of environmental, social, and\r\ngovernance (ESG) performance on the systemic risk of leading energy firms. For 158 energy firms\r\nfrom 16 countries for 2010–2021, we evidence that while ESG shows positive association with\r\ndefault risk, squared values of ESG performance are negatively significant, consistent with an\r\ninverted U-shaped association. Moreover, better ESG disclosure and carbon performance also\r\nreduce default risk. We interpret our results as the beneficial impact of ESG on lowering default\r\nrisk depends on the threshold level of ESG investment. Results, holding only for the post GFC\r\nperiod, for firms with more than one environmental controversy, and for countries with higher\r\nlevels of education, are consistent with an evolving need for energy firms to employ genuine ESG\r\ncommitment to establish reputational capital towards enhancing resiliency.