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ESG and volatility risk: International evidence

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  • Omid Sabbaghi

Abstract

This study examines the volatility risk for firms that are rated high on environmental, social, and governance (ESG) dimensions in emerging markets and developed markets outside the United States and Canada. Employing the Morgan Stanley Capital International (MSCI) ESG Leader indices, this study investigates the impact of good news and bad news on the volatility risk for the highest ESG‐rated firms through multivariate DCC‐EGARCH modeling. This study finds that the impact of a negative news shock of size 2 standard deviations is approximately 45% higher than that of a positive news shock of the same size for the case of the developed markets under interest. With respect to emerging markets, this study reports that the impact of a negative news shock of size 2 standard deviations is 41% higher than that of a positive news shock of the same size. The results provide empirical evidence in support of the hypothesis that the volatility impact of news for high ESG‐rated firms in developed markets and emerging markets is larger for bad news compared to good news, and the results are robust across time. The empirical findings underline the importance of reporting‐related disclosures of ESG initiatives, and provide seminal evidence of a slow response to news by high ESG‐rated firms in emerging markets.

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  • Omid Sabbaghi, 2023. "ESG and volatility risk: International evidence," Business Ethics, the Environment & Responsibility, John Wiley & Sons, Ltd., vol. 32(2), pages 802-818, April.
    • Handle: RePEc:wly:buseth:v:32:y:2023:i:2:p:802-818
    DOI: 10.1111/beer.12512
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    2. Rami Salem & Musa Ghazwani & Waleed Alshaer, 2025. "ESG Performance–Stock Price Volatility Nexus: The Moderating Effect of Board Cultural Diversity in G20 Markets," Business Strategy and the Environment, Wiley Blackwell, vol. 34(7), pages 8172-8193, November.
    3. Shakil, Mohammad Hassan & Pollestad, Arne Johan & Kyaw, Khine, 2025. "Environmental, social and governance controversies and systematic risk: A machine learning approach," Finance Research Letters, Elsevier, vol. 75(C).
    4. Tao, Miaomiao & Lin, Boqiang & Poletti, Stephen & Roubaud, David, 2025. "Greener pastures, steadier returns: ESG ratings and idiosyncratic risk management," International Review of Economics & Finance, Elsevier, vol. 100(C).
    5. Petcu Alma Maria, 2025. "Does ESG Assumption Improve Financial Performance?," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 19(1), pages 3267-3278.
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