ESG as protection against downside risk

  • We examine whether the uncertainty related to environmental, social, and governance (ESG) regulation developments is reflected in asset prices. We proxy the sensitivity of firms to ESG regulation uncertainty by the disparity across the components of their ESG ratings. Firms with high ESG disparity have a higher option-implied cost of protection against downside tail risk. The impact of the misalignment across the different dimensions of the ESG score is distinct from that of ESG score level itself. Aggregate downside risk bears a negative price for firms with low ESG disparity.

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Author:Roman KräusslORCiDGND, Tobi Oladiran, Denitsa StefanovaORCiD
Series (Serial Number):CFS working paper series (No. 708)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2023
Year of first Publication:2023
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/08/08
Tag:ESG; downside risk; options; rating; regulation; risk premium
Edition:January 2023
Page Number:56
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates
G Financial Economics / G1 General Financial Markets / G18 Government Policy and Regulation
G Financial Economics / G3 Corporate Finance and Governance / G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Licence (German):License LogoDeutsches Urheberrecht