ISSN: 2359-1048

Novembro 2021

Environmental, social and governance (ESG) and systematic risk: The moderating effect of
environmental innovation and analyst coverage

VICTOR DANIEL-VASCONCELOS

MAÍSA DE SOUZA RIBEIRO

FABIANO GUASTI LIMA

Introdução
ESG relates to the integration of environmental, social, and governance issues by companies and investors into their business models (Gillan et al., 2021).
Systematic risk is related to the entire market, occurring through general market movements, affecting the total price of the securities that are made available
in the financial market (Salehi et al., 2020). Environmental innovation is embedded in the business strategy, impacting production processes and products
(García?Sánchez, Gallego?Álvarez, et al., 2021).
Problema de Pesquisa e Objetivo
This paper seeks to answer three research questions with the aim of filling a gap in the literature and providing theoretical and empirical evidence to contribute
to the ESG issues and systematic risk literature. The research questions are as follows - (1) Is there any influence of ESG on firms' systematic risk? (2) Does
environmental innovation moderate ESG-systematic risk nexus? and (3) Does analyst coverage moderate the association between ESG and systematic risk?
Fundamentação Teórica
Theoretically, the effect of ESG issues on systematic risk can be explained using stakeholder theory and the resource-based view. Stakeholder is a group or
individual that affects or can be affected by the organization and stakeholder theory is a set of propositions that suggests that companies have obligations to
their stakeholders (Freeman, 2015). According to the resource-based view, company resources can only be a source of competitive advantage when they are
valuable, rare, imperfectly imitable and substitutability (Barney, 1991).
Metodologia
To test the hypotheses, we use a sample consisting of 6371 firms-year observation of 2079 firms from Argentina, Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia,
South Africa, Taiwan, Thailand, Turkey and United Arab Emirates in the period 2015-2020. We measure systematic risk by the CAPM beta and ESG by the
ESG score provided by the Refinitiv database. We use quantile regression at the 0.10, 0.25, 0.50, 0.75 and 0.90 percentiles in the study.
Análise dos Resultados
The results show that ESG negatively influences firm systematic risk at all quartiles, supporting hypothesis 1. The results also indicate that environmental
innovation and analyst coverage do not moderate the ESG-risk nexus, rejecting hypotheses 2 and 3. Finally, the results suggest that firm size and leverage
positively influence systematic risk and that profitability negatively influences systematic risk.
Conclusão
We consider ESG a valuable strategic tool that companies can use to reduce their systematic risk, so managers could invest more in ESG activities and policy
makers could support initiatives to increase companies' ESG performance. Moreover, the empirical results indicate a path for firms to decrease their
systematic risk: investment in ESG practices. The insignificant results suggest that in companies with greater environmental innovation, ESG activities do not
influence the systematic risk.
Referências Bibliográficas
Farah, T., Li, J., Li, Z., & Shamsuddin, A. (2021). The non-linear effect of CSR on firms’ systematic risk: International evidence. Journal of International
Financial Markets, Institutions and Money, 71, 101288. [Link] Shakil, M. H. (2021). Environmental,
social and governance performance and financial risk: Moderating role of ESG controversies and board gender diversity. Resources Policy, 72, 102144.

Palavras Chave
Systematic Risk, Environmental, Social and Governance, Environmental Innovation

Agradecimento a orgão de fomento

Agradecimento à Coordenação de Aperfeiçoamento de Pessoal de Nível Superior (CAPES)
Environmental, social and governance (ESG) and systematic risk: The moderating effect
of environmental innovation and analyst coverage
1 Introduction
Companies are under increasing pressure to improve their sustainability performance
and meet the needs of their stakeholders (Kalash, 2021). ESG relates to the integration of
environmental, social, and governance issues by companies and investors into their business
models (Gillan et al., 2021). ESG performance takes into account environmental, social and
governance aspects of the company and the ESG score assesses whether a company is socially
and environmentally responsible in society (Shakil, 2021). In this line, ESG performance is a
powerful instrument used to prevent damage to the company, reducing the risk of financial
crisis and litigation (Reber et al., 2021) and ESG aspects are crucial to the fulfillment of
corporate social responsibility (Qoyum et al., 2021). Integrating ESG aspects into business
decision making helps investors make decisions aimed at overall performance, not just financial
performance (Mohammad & Wasiuzzaman, 2021).
Risk began to attract interest in the economic literature, when a basic distinction
between risk and uncertainty was made; risk, as opposed to uncertainty, relates to events that
are predictable in some way and are statistically calculable (Karwowski & Raulinajtys‐
Grzybek, 2021) and the ability of managers to deal with company risk is crucial to survival and
business performance (Zou et al., 2020). In this context, risk can be considered a probability
that an action or inaction will lead to loss with all human efforts presenting some degree of risk,
and in the financial literature, risk can be defined as unexpected events that lead to changes in
the values of the company's debts or assets (Salehi et al., 2020) and there are two types of risks:
unsystematic (which are the company-specific risks that can be eliminated by diversification)
and systematic (which are the market risks) (Brealey & Myers, 2000).
Increasingly, institutional investors and stock analysts are attracted to eco-innovative
companies (Zaman et al., 2021). Environmental innovation is embedded in the business
strategy, impacting production processes and products (García‐Sánchez, Gallego‐Álvarez, et
al., 2021). Environmental innovation can be developed by companies or non-profit
organizations, can be of a social, technological, institutional or organizational nature, and may
or may not be commercialized in the market (Rennings, 2000). Scholars have found that
environmental innovation is associated with a range of benefits, including reduced CO2
emissions (Cheng et al., 2021; Töbelmann & Wendler, 2020), reduced stock price crash risk
(Zaman et al., 2021) superior economic performance (Aastvedt et al., 2021; Andries & Stephan,
2019; Liao, 2018; Long et al., 2017). Furthermore, environmental innovation enables the
efficient use of resources, employing environmental cost reduction techniques leading to the
invention of cleaner technologies (Cheng et al., 2021)
Information plays a key role in the functioning of the stock market; stock prices are
correctly priced when the relevant information is incorporated into the price and financial
analysts play a crucial role in this process by bringing new information about companies
(Farooq & Satt, 2014). In this context, valuable information is crucial for investors in this time
of information explosion (Wang et al., 2020). Analyst monitored performance motivates
managers to strive to make decisions that create value for shareholders (Shiah-Hou, 2016).
Analysts can be considered a bridge between companies and investors (Wang et al., 2020) and
companies that are followed by a large number of analysts have greater monitoring (García-
Sánchez et al., 2020).
Prior literature has examined the effect of engaging in social and environmental
activities on firm risk. Overall, studies document a negative effect of engaging in social and
environmental activities on systematic firm risk (Albuquerque et al., 2019; Hassan et al., 2021;
Rehman et al., 2020; Zou et al., 2020). Similarly, environmental innovation positively

1
influences financial performance (Aastvedt et al., 2021; Long et al., 2017) and negatively
influences CO2 emissions (Cheng et al., 2021; Töbelmann & Wendler, 2020), however, there
are no studies that address the moderating role of environmental innovation in the relationship
between ESG performance and systematic risk. Studies have also found that analyst coverage
is positively related to CSR (Chun & Shin, 2018; Dhaliwal et al., 2012; Jo & Harjoto, 2014)
and external assurance (García‐Sánchez, Hussain, et al., 2021), in addition, it reduces CSR
decoupling (García-Sánchez et al., 2020) and the devaluation of equity (Li, 2020), however,
there are no studies that address the moderating role of analyst coverage on the relationship
between ESG performance and systematic risk. Therefore, to the best of our knowledge, this is
the first paper to address the impact of ESG performance on firm systematic risk and analyze
the moderating role of environmental innovation and analyst coverage in this association.
This paper seeks to answer three research questions with the aim of filling a gap in the
literature and providing theoretical and empirical evidence to contribute to the ESG issues and
systematic risk literature. The research questions are as follows - (1) Is there any influence of
ESG on firms' systematic risk? (2) Does environmental innovation moderate ESG-systematic
risk nexus? and (3) Does analyst coverage moderate the association between ESG and
systematic risk? Theoretically, the effect of ESG issues on systematic risk can be explained
using stakeholder theory and the resource-based view. Stakeholder is a group or individual that
affects or can be affected by the organization and stakeholder theory is a set of propositions that
suggests that companies have obligations to their stakeholders (Freeman, 2015). According to
the resource-based view, company resources can only be a source of competitive advantage
when they are valuable, rare, imperfectly imitable and substitutability (Barney, 1991). The
unified approach of stakeholder theory and the resource-based view can explain why a firm
exists (Freeman et al., 2021).
The study has several contributions. First, most CSR studies occur in developed
countries and focus only on analyzing firms in a particular country, in that the factors that lead
a firm to undertake ESG activities in developed and emerging economy countries are different
(Aqif & Wahab, 2021), Thus, the study contributes by examining the systematic risk nexus of
ESG in emerging countries. Second, the study contributes by using quantile regression on the
ESG-systematic risk nexus. quantile regression examines the effect of predictors on the
quartiles of the dependent variable, providing a more complete view than average regression
on possible causal relationships between the dependent variable and explanatory variables
(Liang et al., 2021). Third, the study extends the literature by quantitatively examining the
influence of ESG on systematic risk and the moderating role of environmental innovation and
analyst coverage in this relationship. Finally, COVID-19 pushed companies to seek better
environmental and social behaviors (Popkova et al., 2021), the study contributes by assisting
managers on environmental and social issues in the post-pandemic world.
The rest of the paper is organized as follows. Section 2 discusses the relevant literature
and presents the hypotheses. Section 3 describes the sample, the data and the methodology.
Section 4 presents and discusses the results, and section 5 concludes the study.

2 Literature review and hypothesis development

2.1 Environmental, social and governance and systematic risk
Firm risk can be viewed as the fluctuations in the firm's performance over time (Zou et
al., 2020). The risks are classified into systematic risk (general market risks) and non-systematic
or idiosyncratic risk (risk related to a specific company) (Lueg et al., 2019). Systematic risk is
related to the entire market, occurring through general market movements, affecting the total
price of the securities that are made available in the financial market (Salehi et al., 2020) and
systematic risks are difficult to protect against or eliminate completely, but can be managed or

2
minimized, because they are risks associated with political, economic, and social events (Garcia
et al., 2017). Thus, systematic risk is more associated with industry-specific characteristics and
unsystematic risk (idiosyncratic risk) is associated with company-specific characteristics
(Shakil, 2021).
Currently over 3000 institutional investors and service providers have signed the
Principles of Responsible Investment (PRI), an agreement to incorporate ESG aspects into their
decision-making and investments (Gillan et al., 2021) and socially responsible companies have
higher customer loyalty and higher investor preference, and are less price sensitive; this makes
the shares of socially responsible companies more resilient to market shocks and less exposed
to risk (Salehi et al., 2020). Environmental and social performance helps companies to be
socially responsible to all their stakeholders (Ullah & Nasim, 2021). Social performance can be
considered a risk management mechanism with investors considering the commitment to
environmental and social issues as a sign of lower risk for the company (Kalash, 2021). In this
line, involvement in social and environmental activities leads to an improvement in the
organization's image, helping to reduce financial risk and improving credit ratings, as well as
lowering the cost of capital (Rehman et al., 2020). Companies with good environmental and
social performance have stakeholders less likely to impose sanctions after negative events
(Hassan et al., 2021) and investors penalize companies that have poor ESG performance
(Shakil, 2021). Engaging in social and environmental activities contributes to a sustainable
competitive advantage by mitigating the risks of additional costs (Gangi et al., 2020). Thus,
investment in social and environmental activities can increase the corporate profitability and
reduce firm risk (Xue et al., 2020).
According to stakeholder theory, carefully managed and trusted stakeholder
relationships are difficult to imitate and valuable, being a source of competitive advantage
(Freeman et al., 2021). Stakeholder theory asserts that involvement in environmental activities
can improve relationships with stakeholders, benefiting the company in the long run and
consequently reducing financial risk (Xue et al., 2020). Companies with higher ESG
performance have greater legitimacy with their external stakeholders, decreasing the risk of
negative company incidents (Reber et al., 2021) and negligence regarding ESG can cause the
company to suffer reputational damage in the financial markets, causing stock volatility (Shakil,
2021). According to stakeholder theory, protecting the environment is beneficial for the
company as a whole (Djoutsa Wamba et al., 2020). Furthermore, engaging in social and
environmental activities can be useful when the company needs the support of its stakeholders
and reduces financial risk by improving credit ratings and thus reducing the cost of capital
(Rehman et al., 2020).
Resource is anything that can be seen as a strength or weakness of a firm (Wernerfelt,
1984). In this line, firms can structure their resources aiming at building organizational capacity
to gain competitive advantage and one of these resources is corporate social responsibility (Ho
et al., 2021). According to the resource-based view, the difference in the firm's performance are
mainly the result of the existing heterogeneity of resources (Christmann, 2000) and a good
reputation provides firms with more stable resources on more favorable terms, leading to a
decrease in financial risk (Brahmana et al., 2020) and ESG performance can be a measure of
the firm's intangible resources being seen as a form of respect and reputation, so investing in
ESG aspects can be the same as investing in the firm's reputation (Sharma et al., 2019).
Albuquerque et al., (2019) examined the relationship between CSR and firms'
systematic risk from a sample of 28578 annual observations of United States companies over
the period 2003-2015. The authors found that the level of systematic risk is lower for companies
with better CSR performance. Similarly, Shakil (2021) analyzed the relationship between ESG
performance and company financial risk in 70 oil and gas companies over the period 2010-2018
and concluded that ESG performance has a negative relationship with total risk and a non-
3
significant relationship with systematic risk. Rehman et al., (2020) took a stakeholder theory
approach and analyzed the impact of corporate responsibility on firm performance and firm risk
using a sample of 1193 companies during the period 2014-2018 collected from MSCI's ESG
database and Fortune's Global 500 database and found a positive relationship between corporate
social responsibility and financial performance and that corporate social responsibility
negatively influences firms' systematic risk.
Following the stakeholder theory, Hassan et al., (2021) analyzed the relationship
between ESG scores and firm risk from 4624 non-financial firms from Africa, Asia, Europe,
Latin America, North America, and Oceania over the period 2002-2018 collected from the
Thomson Reuters database and found that ESG score reduces firms' systematic risk for all firms.
Mohanty et al., (2021) used MSCI All Country World Index data over the period December
2007 to August 2020 and found that companies that follow stricter ESG principles are more
resilient to systematic market shocks. Zou et al., (2020) indicated a negative relationship
between corporate social responsibility and firm risk, from a sample of 6720 firm year
observations of Chinese firms over the period 2009-2014. Based on the theoretical framework
and the relationships found in previous studies, we propose the following hypotheses:
Hypothesis 1: ESG performance is negatively related to systematic risk
2.2 The moderating effect of environmental innovation on the relationship between ESG
performance and systematic risk
Eco-innovative companies have more transparency and are less likely to withhold bad
news, carrying a lower risk of falling share prices (Zaman et al., 2021). Moreover,
environmental innovation can also be associated with greenhouse gas emission reductions and
environmental relief (Töbelmann & Wendler, 2020). Environmental innovation improves the
efficiency of the production process by reducing resource consumption (García‐Sánchez,
Gallego‐Álvarez, et al., 2021). (Rennings, 2000) addresses that environmental innovation needs
specific legislation to be implemented, because technological and market push factors alone do
not seem to be strong enough. Moreover, environmental innovation can also be seen as an
important means of gaining competitive advantage (Liao, 2018)
Resource-based view asserts that companies must develop internal capabilities to gain
competitive advantage (Barney, 1991). Firms are made up of resources that can be a source of
competitive advantage, because the fact that a firm owns a resource adversely affects the costs
of subsequent acquirers (Wernerfelt, 1984). According to the resource-based view there is a
relationship between company resources and the ability of companies to manage environmental
innovation projects (Portillo-Tarragona et al., 2018) and the adoption of environmental
innovation can promote financial benefits for the firm, because environmental innovation can
generate cost reduction in the production process and the technology used in environmental
innovation processes, such as internal innovation of pollution prevention technologies can be a
source of competitive advantage (Christmann, 2000).
According to stakeholder theory, building and maintaining sustainable relationships
with your stakeholders is crucial to firm performance (Freeman et al., 2021). Stakeholder theory
covers the ethical, moral, and social values in the company's management of environmental and
social activities and companies have internal stakeholders (employees, managers, and
shareholders) and external stakeholders (suppliers, customers, creditors, and government)
(Shakil, 2021). Stakeholder theory takes a holistic view of the company's objectives, proposing
an accountability of the company's activities to its internal and external stakeholders (Ullah &
Nasim, 2021). According to stakeholder theory, in the context of environmental innovation, a
firm's good relationship with its stakeholders can lead to better financial performance, with this,
firms proactively engage in environmental innovation to satisfy their stakeholders and increase
their financial performance (Andries & Stephan, 2019).
4
 Cheng et al., 2021) found a negative relationship between environmental innovation and
CO2 emissions. Similarly, Töbelmann and Wendler (2020) examined the relationship between
environmental innovation and carbon dioxide emissions in 27 European Union countries over
the period 1992-2014 and found that environmental innovation contributes to reduced carbon
dioxide emissions. Zaman et al., (2021) found a negative relationship between eco-innovation
and stock price crash risk. Aastvedt et al., (2021) used a 44 sample of US and European oil and
gas companies over the period 2010-2018 and found that environmental innovation has a
positive effect on financial performance. Similarly, Andries and Stephan (2019) based on the
resource-based view and stakeholder theory and found that environmental innovation relates
positively to financial performance. Long et al., (2017) revealed that environmental innovation
has a statistically positive effect of 0.781 and 0.549 on environmental performance and
economic performance, respectively. Thus, in line with stakeholder theory and resource-based
view and prior empirical findings, the following hypothesis is proposed:
Hypothesis 2: Environmental innovation has a negative moderating effect on the relationship between
ESG and systematic risk
2.3 The moderating effect of analyst coverage on the relationship between ESG
performance and systematic risk
Analyst coverage acts as an information bridge between the external and internal parts
of the company (Naqvi et al., 2021). Analysts interact with managers during the release of the
results and express their opinions through research reports or through the media, as when they
appear in television interviews (Chun & Shin, 2018) and analysts can be considered an
alternative to the firms' external governance mechanisms (Shiah-Hou, 2016). In this line,
increased analyst coverage reduces informational asymmetry, giving investors more accurate
information, decreasing equity devaluation (Li, 2020), financial analysts influence investors'
decisions by being active participants in the disclosure of information (Li, 2020) and more
analysts can provide more information to investors and improve firm value (García-Sánchez et
al., 2020).
Analyst investment recommendations published as buy, sell or hold recommendations
are useful advice to investors (García-Sánchez et al., 2020). Greater analyst coverage causes
companies to become more involved in social and environmental activities, increasing their
reputation in the public eye (Chun & Shin, 2018). Companies with greater analyst coverage
often receive greater attention from society and are more likely to be evaluated positively by
stakeholders by achieving good environmental and social performance (Chun & Shin, 2018).
Analysts are information intermediaries, who evaluate the credibility of information (Lu &
Abeysekera, 2021). Thus, analysts can help companies realize the economic benefits of
adopting ethical business conduct (García-Sánchez et al., 2020).
García-Sánchez et al., (2020) from a sample of 7681 annual observations for the period
2006-2015 found that higher analyst coverage, reduces CSR decoupling. Dhaliwal et al., (2012)
based on stakeholder theory and found analyst accuracy to be positively associated with CSR.
Jo and Harjoto (2014) examined the relationship between analyst coverage, CSR and firm risk
from a sample of 14482 annual observations (3079 firms), the results showed that increasing
analyst coverage reduces firm risk (except for CSR strengths) and that analyst coverage is
positively associated with CSR. García‐Sánchez, Hussain, et al., (2021) used a sample of 10819
observations from 1588 companies located in 59 countries for the period 2009-2017 and found
that analyst coverage positively impacts companies' decision to purchase external assurance,
increasing the credibility and reliability of environmental and social performance information.
Chun and Shin (2018) analyzed the association between analyst coverage and corporate social
performance, from 3146 annual observations of Korean companies over the period 2002-2015
and found that analyst coverage positively influences corporate social performance.
5
 Farooq and Satt (2014) examined the association between governance mechanisms and
firm performance from a sample of companies in Morocco, Egypt, Saudi Arabia, United Arab
Emirates, Jordan, Kuwait, and Bahrain and found that analyst coverage positively influences
firm performance. Mouselli and Hussainey (2014) found that analyst coverage has no
significant effect on firm value. Yang et al., (2020) used a 20650 sample of annual observations
from 2009 to 2017 and found that companies with analyst coverage are less likely to engage in
corporate misconduct, reduce informational asymmetry, and provide quality information. Li,
(2020) found that analyst coverage negatively influences the devaluation of equity. Therefore,
Thus, in line with prior empirical findings, the following hypothesis is proposed:
Hypothesis 3: Analyst coverage has a negative moderating effect on the relationship between ESG and
systematic risk
3 Data and methodology
3.1 Sample selection
To test the hypotheses, we use a sample consisting of 6371 firms-year observation of
2079 firms from Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece,
Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines,
Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab
Emirates in the period 2015-2020. These countries were selected because they belong to the
Morgan Stanley Capital International (MSCI) Emerging Markets Index, which captures large
and mid-cap representation in 27 Emerging Market countries, the index has 1407 constituents
and covers approximately 85% of the free float-adjusted market capitalization in each country
(MSCI, 2021). Our data set is made up of information from the Refinitiv database, which has
the most comprehensive ESG database in the industry, covering more than 70% of the global
market, with more than 500 different ESG metrics (Refinitiv, 2021). Table 1 presents the
composition of the sample studied by sector, based on the Global Industry Classification
Standard (GICS) and country.

Table 1
Sample composition by industry and country
Panel A – Composition by industry
Industry Observations % Industry Observations %
Communication Industrials
472 7.42 1123 17.65
Services
Consumer Information
808 12.70 641 10.08
Discretionary Technology
Consumer Staples 658 10.34 Materials 899 14.13
Energy 370 5.82 Real State 394 6.19
Financials 167 2.62 Utilities 449 7.06
Health Care 381 5.99
Panel B – Composition by country
Country Observations % Country Observations %
Argentina 148 2.32 Mexico 193 3.03
Brazil 424 6.66 Pakistan 6 0.09
Chile 161 2.53 Peru 107 1.68
China 1686 26.46 Philippines 107 1.68
Colombia 57 0.89 Poland 116 1.82
Czech Republic 10 0.16 Qatar 33 0.52
Egypt 34 0.53 Russia 171 2.68
Greece 83 1.30 Saudi Arabia 69 1.08
Hungary 17 0.27 South Africa 479 7.52
India 451 7.08 Taiwan 598 9.39
Indonesia 181 2.84 Thailand 218 3.42
Korea Republic 560 8.79 Turkey 152 2.39
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 Kuwait United Arab
25 0.39 42 0.66
Emirates
Malaysia 243 3.81
The results in Table 1 indicate that the sample is divided into 11 sectors (Panel A) and
27 countries (Panel B). The most representative sector in the sample is Industrials with 1123
observations (17.65%), followed by Materials (14.13%) and Consumer Staples (10.34%). In
terms of countries, the most represented are China, Taiwan, Korea Republic and South Africa
with 1686 (26.46%), 598 (9.39%), 560 (8.79%) and 479 (7.52%), respectively.

3.2 Variables
3.2.1 Dependent variable
This study employs a firm systematic risk measure (beta index) as the dependent
variable of the research. Beta index is estimated by CAPM beta and is calculated by the
covariance of the security's price movement relative to the market price movement. Based on
data availability, various look back periods can be used to calculate it and are used in the
calculation Beta 5Y monthly, Beta 3Y weekly, Beta 2Y weekly, Beta 180D daily, Beta 90D, in
order of preference. Beta index measures systematic risk because it measures the compliance
of the movement of a company and the entire market (Salehi et al., 2020), i.e., lower beta
represents lower systematic risk, with investors presenting lower return than the return expected
by the market (Mohanty et al., 2021) and systematic risk is applied to all companies in a given
industry (Lueg et al., 2019).

3.2.2 Independent variables and moderating variables

Our independent variable is ESG score. ESG score is an overall company score based
on the self-reported information in the environmental, social and corporate governance pillars
(Refinitiv, 2021) and is based on reported information from the environmental, social, and
governance pillars, and is an overall company score ranging from 0 to 100 (Barros et al., 2021).
See the variables description in Table 2.

Table 2
Variables description
Variable Variable name Model Proxy
name name
Dependent Beta index BETA Covariance of the security's price movement relative to the
market price movement.
Independent ESG score ESG Environmental, Social and Governance score, which ranges
from 0 to 100, based on the Environmental, Social and
Governance performance of the firm.
Moderator Environmental EINOV Environmental innovation score, which ranges from 0 to
innovation score 100, based on the environmental innovation performance of
the firm.
Moderator Analyst coverage ANCOV Total number of analysts covering a company in a given
year
Control Board size BSIZE Total number of directors in a company’s board
Control Profitability ROA Earnings before interest, tax, depreciation, and amortization
(EBITDA)/Total assets.
Control Leverage LEV Total debt/Total assets
Control Firm size FSIZE Natural logarithm of total assets
Two moderating variables, namely environmental innovation score and analyst
coverage were used in the present study. Environmental innovation score reflects a company’s
capacity to reduce the environmental costs and burdens for its customers, thereby creating new
market opportunities through new environmental technologies and processes, or eco-designed
products (Refinitiv, 2021) and environmental innovation score is adjusted from the industry
7
weighted average on a scale of 0-100, covering twenty variables related to organizational
environmental innovation and eco-processes, where 100 reflects a high level of company
commitment to environmental innovation (Zaman et al., 2021). The analyst coverage variable
is measured by the total number of analysts covering a company in a given year (Farooq et al.,
2021; Martins & de Campos Barros, 2021).

3.2.3 Control variables

We include control variables at the board and company level that can affect the firm
systematic risk. At the board level, we included board size which is the total number of directors
in a company’s board. Companies with a larger board of directors present a lower systematic
risk during crisis periods (Chintrakarn et al., 2021) and are more likely to have individuals who
monitor the behavior of managers effectively (Baulkaran & Bhattarai, 2020). At the firm level,
profitability is included as a control variable. Profitability is the return on assets ratio (ROA),
computed as Earnings before interest, tax, depreciation, and amortization (EBITDA) divided
by total assets. Companies with better financial performance have greater access to resources,
reducing their risks (Biswas, 2021) and tend to have lower systematic risk (Maxfield & Wang,
2020). We also included leverage. Leverage is measured by dividing total debt over total assets
and a higher percentage of financial leverage can affect the firm risk, having a positive effect
on the firm systematic risk (Shakil, 2021) and greater leverage can make directors more diligent
in their duties (Baulkaran & Bhattarai, 2020). Finally, firm size is measured by the logarithm
of total assets. Large companies are financially stable with resources to increase their
operational efficiency (Shakil, 2021) Salehi et al., (2021) asserts that by increasing the size of
the company, the company's risk decreases. All variables are measured using fiscal-year-end
values and are winsorized at the 1% and 99% levels.

3.2.4 Model specification

In order to address the variability of the systematic risk-environmental innovation
nexus, we employ quantile regression. Quantile regression is able to detect more effects than
conventional procedures, and does not restrict the conditional mean, thus allowing you to
approximate the entire conditional distribution of the response variable (Davino et al., 2013)
and in quantile regression, "the quantiles of the conditional distribution of the response variable
are expressed as functions of observed covariates" (Koenker & Hallock, 2001). Quantile
regression is an extension of classical regression that provides information about the entire
conditional distribution of the response variable (Kim et al., 2020). Quantile regression is an
improvement on conditional mean regression and estimates in quartiles (for example, 25%,
50%, and 75%) that the estimation is unable to reach (Oware & Mallikarjunappa, 2021). Thus,
in order to verify the influence of ESG performance on systematic risk and the moderating
effect of environmental innovation score and analyst coverage, the following model is
estimated:

Qτ (Risk i|αi, εit, xit) = ατ + β1τ ESG + β2τ EINOV + β3τ ANCOV + + β4τ ESG * EINOV + β5τ ESG
* ANCOV + β6τ BSIZE + β7τ ROA + β8τ LEV + β9 FSIZE + εit (1)

Where, Qτ is the conditional quantile of τ (Koenker & Bassett Jr, 1978) and the value of τ varies
between 0 and 1. α(τ) is related by the unobserved effect in the quantile model (Sardaro et al.,
2021). βτ is coefficient estimates corresponding to each quantile. We assign the values 0.10,
0.25, 0.5, 0.75, and 0.90 to the quartiles of τ. ESG is the ESG score. EINOV is the
environmental innovation score. ANCOV is the analyst coverage. BSIZE is the board size.
ROA is the profitability. LEV is the leverage. FSIZE is the firm size.

8
4 Results and discussion
4.1 Descriptive statics
Table 3 provides descriptive statistics for the variables. The average beta index is 1.010,
similar to the studies (Farah et al., 2021; Shakil, 2021), which have values of 0.978 and 1.215,
respectively. The maximum value of the beta index is 2.499 and the minimum value is -0.074.
The higher the beta index, the higher the systematic risk.
Table 3
Descriptive statics
Variables N Mean SD Minimum Maximum
BETA 6282 1.010 0.503 -0.074 2.499
ESG 6371 41.95 20.86 2.685 86.29
EINOV 6369 21.37 28.89 0 95.16
ANCOV 6371 11.31 9.522 0 41
BSIZE 6363 9.798 3.047 4 19
ROA 6371 0.247 0.292 -0.365 1.563
LEV 6371 1.069 1.462 0 9.484
FSIZE 6371 21.09 1.442 17.38 24.91
ESG score has an average of 41.95, which is similar to the studies of (Shakil, 2021)
(49.45) and (Chiaramonte et al., 2021) (59.90). The mean for the environmental innovation
score is 21.37, which is lower than the findings of previous studies (de Lucia et al., 2020;
Burkhardt et al., 2020) , which found 61 and 67.782, respectively. The results can be explained
by the reason that the previous studies analyzed companies from Europe (de Lucia et al., 2020)
and France (Burkhardt et al., 2020). All continuous variables are winsorized at the 1st and 99th
percentiles.

4.2 Correlation matrix

Table 4 presents the correlation matrix. We use the correlation matrix in our study in
order to measure the strength and direction of the linear relationship between our dependent
variable and the independent, moderator, and control variables. The highest reported Variance
Inflation Factor (VIF) is 1.43 for the ROA variable and the lowest is 1.06 for board size. Beta
index has a significantly positive correlation with environmental innovation and firm size and
a significantly negative correlation with ESG, board size, ROA and leverage.

Table 4
Correlation matrix and variance inflation factor (VIF)
(1) (2) (3) (4) (5) (6) (7) (8) VIF
(1) BETA 1.000
(2) EINOV 0.034* 1.000 1.30
(3) ESG -0.034* 0.461* 1.000 1.41
(4) ANCOV 0.051 0.169* 0.280* 1.000 1.28
(5) BSIZE -0.419* 0.107* 0.193* 0.058* 1.000 1.06
(6) ROA -0.250* -0.036* 0.096* 0.0406* 0.067* 1.000 1.43
(7) LEV -0.048* 0.004 0.041* -0.117* 0.093* 0.463* 1.000 1.32
(8) FSIZE 0.213* 0.222* 0.248* 0.386* 0.131* -0.272* -0.191* 1.000 1.39
* Symbolizes significance at 5%, respectively.

4.3 Quantile regression

Tests were performed to verify underlying assumptions of regression (collinearity,
normality, and heteroscedasticity). VIF test was performed to verify the collinearity problem,
the results showed were below 10, indicating absence of multicollinearity. Shapiro-Francia test
was performed to check the normality of the residuals and the results rejected the null

9
hypothesis (p<0.000), detecting the non-normality of the residuals. To verify the
heteroscedasticity problem, Breusch-Pagan test was reality and the results found indicate the
rejection of the null hypothesis (13.55; p<0.000) and this suggests the presence of
heteroscedasticity. Quantile regression is robust to normality, heteroscedasticity and outliers
(Xiao et al., 2019). We apply quantile regression tests at the 0.25, 0.50, 0.75 and 0.99 percentiles
of the dataset based on our focused variables.
Table 5 shows the results of the quantile regression. Hypothesis 1 states that ESG has
negative relationship with systematic risk. Table 5 suggests that ESG has a negative effect on
systematic risk at all five quantiles (0.10, 0.25, 0.50, 0.75, and 0.90), supporting Hypothesis 1.
The results meet stakeholder theory, confirming that engaging in environmental, social, and
governance activities improves stakeholder relationships, reducing systematic risk, and that
higher ESG performance increases firm legitimacy, decreasing systematic risk. The results also
meet the resource-based view, reiterating that ESG performance can be seen as a measure of
intangible resources, with ESG investment being a form of investment in the company's
reputation, which decreases its systematic risk. The results are in line with (Albuquerque et al.,
2019; Hassan et al., 2021; Rehman et al., 2020; Zou et al., 2020), indicating a significant
adverse outcome of ESG on systematic risk. The results can be explained, because companies
with higher ESG performance may have a greater competitive market advantage and
environmental degradation may hinder economic growth, forcing companies to participate in
environmental protection programs (Chen & Ma, 2021) and companies that invest in ESG
issues have a greater connection with their stakeholders and increase their reputation, thus
decreasing systematic risk.

Table 5
Quantile regression
0.10 0.25 0.50 0.75 0.90
Coef p-value Coef p-value Coef p-value Coef p-value Coef p-value
ESG -0.01 0.045** -0.001 0.006*** -0.001 0.010*** -0.001 0.044** -0.002 0.073*
EINOV 0.001 0.198 0.001 0.098* 0.001 0.788 0.001 0.768 0.001 0.211
ANCOV -0.002 0.275 0.001 0.005** -0.04 0.002*** 0.001 0.691 -0.005 0.114
ESG*EINOV -0.001 0.114 -0.001 0.202 -0.001 0.986 0.001 0.573 -0.001 0.270
ESG*ANCOV -0.001 0.909 0.001 0.276 0.001 0.065* 0.001 0.373 0.001 0.177
BSIZE 0.006 0.0029*** -0.001 0.423 -0.008 0.000*** -0.014 0.000*** -0.017 0.000***
ROA -1.695 0.000*** -0.269 0.000*** -0.371 0.000*** -0.497 0.000*** -0.585 0.000***
LEV 0.019 0.003*** 0.023 0.000*** 0.024 0.000*** 0.039 0.000*** 0.038 0.001***
FSIZE 0.101 0.000*** 0.086 0.000*** 0.059 0.000*** 0.058 0.000*** 0.048 0.000***
Constant -1.644 0.000*** -0.970 0.000*** -0.109 0.535 0.327 0.040** -0.981 0.000***
Observations 6274 6274 6274 6274 6274
Pseudo R2 0.0737 0.0575 0.0515 0.0584 0.0605
Note: ***p < 0.01, **p < 0.05, *p < 0.1. We assign the values 0.10, 0.25, 0.5, 0.75, and 0.90 to the quartiles of τ. ESG is the
ESG score. EINOV is the environmental innovation score. ANCOV is the analyst coverage. BSIZE is the board size. ROA is
the profitability. LEV is the leverage. FSIZE is the firm size. All continuous variables are winsorized at the 1st and 99th
percentiles. The sample period observed is 2015–2020.
The results show that environmental innovation does not moderate the relationship
between ESG and systematic risk at any of the five quantiles (0.10, 0.25, 0.50, 0.75, and 0.90),
going against the idea that environmental innovation can be a source of competitive advantage
(resource-based view) and that it satisfies the interests of the company's stakeholders
(stakeholder theory). Thus, the results did not lend support to the acceptance of Hypothesis 2
concerning the moderating role of environmental innovation between ESG and systematic risk.
The results can be explained by the fact that environmental innovation can generate additional
costs for companies, especially for companies that do not have as many resources available
(Liao et al., 2021), because the costs are higher in the short term (Hizarci-Payne et al., 2021),
decreasing the company's profits (Rennings & Rammer, 2011). In this line, in more
10
environmentally innovative firms, ESG does not influence systematic risk, indicating that in
environmentally innovative firms, financial performance is not influenced, in line with (Duque-
Grisales et al., 2020; Weche, 2015). Weche (2015) found that higher volume in green
investment decreases other business investments, indicating that environmental investments do
not bring financial returns. Duque-Grisales et al., (2020) examined the effect of green
innovation on the financial performance of 86 Latin American companies over the period 2013-
2017. The results show there is no significant relationship between green innovation and
financial performance.
Finally, the results indicate that analyst coverage only moderates the relationship
between ESG and systematic risk by one quartile (0.50), i.e., in firms with higher analyst
coverage ESG does not influence systematic risk, not supporting hypothesis 3. Analyst
coverage is related to the number of analysts who follow a company and regularly issue
publications of forecasts and recommendations (Hinze & Sump, 2019). This result can be
explained, because a higher number of analysts may restrict spending on CSR, disciplining
managers (Adhikari, 2016) and because analysts put pressure on managers to meet short-term
targets, causing managers to stop investing in ESG aspects (Qian et al., 2019).
In relation to control variables, board size has a negative and significant relationship
with systematic risk, at quartiles (0.50,0.75 and 0.90), suggesting that in higher risk firms, larger
boards monitor managers better, however, board size has a negative and insignificant at
quartiles 0.10 and 0.25, respectively, indicating that in lower risk firms, board size does not
negatively influence systematic risk, thus board size does not influence systematic risk.
Profitability negatively influences systematic risk in all quartiles (0.10, 0.25, 0.50, 0.75, 0.90),
suggesting that more profitable firms have more resources and stability, thus decreasing
systematic risk (Hassan et al., 2021; Rehman et al., 2020; Xue et al., 2020). Leverage has a
positive and significant relationship with systematic risk, showing that more leveraged (more
indebted) firms have higher systematic risk because it increases the firm's financing costs
(Albuquerque et al., 2019; Rehman et al., 2020; Zeng et al., 2020). Finally, the results showed
a positive relationship between firm size and systematic risk, suggesting that larger firms seem
to think they can take more risk (Farah et al., 2021). Table 6 summarizes the acceptance or
rejection of all hypotheses.

Table 6
Acceptance or rejection of the hypotheses
Hypothesis Level of
support
Hypothesis 1: ESG performance is negatively related to systematic risk Accepted
Hypothesis 2: Environmental innovation has a negative moderating effect on the relationship between Rejected
ESG and systematic risk
Hypothesis 3: Analyst coverage has a negative moderating effect on the relationship between ESG and Rejected
systematic risk
In sum, the empirical results show that ESG negatively influences firms' systematic risk,
supporting hypothesis 1. However, the results indicate that environmental innovation does not
moderate the ESG - systematic risk nexus, rejecting hypothesis 2. Finally, we conclude that
analyst coverage does not moderate the relationship between ESG and systematic risk, rejecting
hypothesis 3.
5 Concluding remarks
This study examined the relationship between ESG and systematic risk of firms. Using
data from 6371 annual observations of 2079 emerging country firms that make up the Morgan
Stanley Capital International (MSCI) Emerging Markets Index over the period 2015-2020. We
measure systematic risk by the CAPM beta and ESG by the ESG score provided by the Refinitiv
11
database. We use quantile regression at the 0.10, 0.25, 0.50, 0.75 and 0.90 percentiles in the
study. The results show that ESG negatively influences firm systematic risk at all quartiles,
supporting hypothesis 1. The results also indicate that environmental innovation and analyst
coverage do not moderate the ESG-risk nexus, rejecting hypotheses 2 and 3. Finally, the results
suggest that firm size and leverage positively influence systematic risk and that profitability
negatively influences systematic risk.
We consider ESG a valuable strategic tool that companies can use to reduce their
systematic risk, so managers could invest more in ESG activities and policy makers could
support initiatives to increase companies' ESG performance. Moreover, the empirical results
indicate a path for firms to decrease their systematic risk: investment in ESG practices. The
insignificant results suggest that in companies with greater environmental innovation, ESG
activities do not influence the systematic risk, this may be the effect of the high initial costs in
environmental innovation, thus, it would be prudent that managers make an analysis of the
economic situation of the company before investing in environmental innovation. The
insignificant results indicate that in companies with a higher number of analysts, ESG
investment does not influence systematic risk, this can be explained by the pressure exerted by
analysts for companies to have short-term profits, this way, it would be advisable that managers
have a greater balance when making decisions based on analysts' opinions, attending to short-
term and long-term interests.
The insignificant results show that larger boards do not seem to influence systematic
risk. It would be advisable for companies with large boards to focus on developing measures to
decrease their systematic risk, it may be that the large number of individuals on the board are
decreasing the effectiveness of board decisions. The positive results suggest that firm size
positively influences systematic risk, in this sense, larger firms tend to think that because they
have more assets they can run more systematic risk, thus, it would be advisable for managers
of large firms to pay more attention to the systematic risk of the firms and that they take actions
to change this reality.
Theoretically, the results imply that companies with higher ESG performance have
unique resources and meet stakeholder needs, contributing new insights into the resource-based
view and stakeholder theory. The results also indicate that in firms with lower systematic risk
(quartiles 0.10, 0.25 and 0.50), better ESG performance influences more significantly the
decrease in systematic risk, suggesting that in these firms higher ESG investment brings more
results. Given this finding, policymakers could develop regulations to increase ESG investment
in firms with lower systematic risk.
The study suffers from limitations. First, few companies made ESG information
available. Second, the study only takes a quantitative approach. Third, we used only systematic
risk. Finally, other countries could be used in the sample, so future research could use ESG
information from other bases, such as Bloomberg, future studies could conduct an in-depth
qualitative approach to understand the ESG - systematic risk relationship, as well as future
research could use other types of risk, such as total market risk (stock volatility) and
idiosyncratic risk (firm specific risk) and finally, other countries could be analyzed to
understand the institutional characteristics of each country.
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