Navigating Downside Risk: The Impact of ESG Across Sectors

Sammanfattning

This study investigates the relationship between ESG scores and downside risk across various sectors in the Nordic markets from 2018 to 2022. ESG, a widely recognized concept in finance, evaluates companies’ performance based on their environmental, social, and governance practices. We examine how both the overall ESG scores and the individual pillars influence downside risk in 11 different sectors using panel regression analysis. Our findings reveal a consistent trend across the majority of sectors in the Nordics: higher ESG scores are associated with reduced downside risk. Moreover, we identify the environmental pillar as the most influential in mitigating downside risk. Interestingly, our results indicate that firms with lower ESG scores face greater penalization in terms of downside risk compared to the reduction experienced by top performers. This suggests a pronounced effect of ESG ratings on risk management practices within Nordic markets.