ABSTRACT This study investigates the effect of environmental, social, and governance performance (ESGP) on corporate risk‐taking (CRT) in a sample of 8492 firms from 52 countries over the period 2011–2023. Using a robust methodology comprising high‐dimensional fixed effects, propensity score matching, generalised method of moments, and instrumental variables, our results show the following. Firstly, firms with higher environmental, social, and governance (ESG) standards are less inclined to take excessive business risks, and this association strengthens through strong internal and external corporate governance mechanisms. Secondly, ESGP alleviates financing constraints and improves audit reputation and transparency, enhancing ESGP's impact on CRT. Thirdly, regional and country‐specific factors such as ESG disparities, institutional quality, ownership structures, ESG readiness, and levels of development play an important role in shaping the effectiveness of ESG across diverse contexts. The study further decomposes total firm risk into systematic and idiosyncratic components using asset pricing models, revealing that firms with high ESGP exhibit lower beta, reduced idiosyncratic risk, and lower Fama–French three‐factor idiosyncratic risk levels. This supports the view that ESGP enhances corporate resilience, reduces uncertainty, and serves as an effective tool for managing both market‐wide and firm‐specific risks. Our study extends the corporate sustainable finance, governance, and risk management literature, offering crucial policy insights aligned with the global sustainable development agenda.
Bagh et al. (Tue,) studied this question.