The U-shaped link between ESG performance and corporate risk-taking

Research background: Risk-taking has long been considered fundamental to sustainable firm growth and performance. Environmental, social, and governance (ESG) is crucial to aligning risk-taking decisions with sustainable development goals and enhancing long-term value and stakeholder trust; however, ESG commitments can potentially become a financial burden. Purpose of the article: This study examines the impact of ESG practices on corporate risk-taking (CRT), examining the underlying mechanisms and the U-shaped relationship that suggests the potential drawbacks of excessive ESG commitments. Methods: Using a panel fixed-effect model for Chinese publicly listed firms disclosing ESG data from 2010 to 2023, this study empirically examines the curvilinear relationship between ESG and CRT, validated by the three-step U-test, instrumental variables analysis, and propensity score matching. A panel mediation effect model and moderating effect model for the U-shaped channels are also applied. Findings & value-added: The findings confirm a robust U-shaped curve across multiple sensitivity tests. On disaggregating the ESG components, environmental and social exhibit similar U-shaped curves, whereas governance has an inverted U-shaped relationship with CRT. The mechanism tests reveal the corporate innovation level is a crucial transmission channel for the U-shaped effect, and institutional ownership acts as a moderator influencing CRT through ESG. The heterogeneity analysis further demonstrates the U-shaped effect of ESG performance on CRT is more consequential in non-environmentally sensitive industries and non-state-owned enterprises. These findings demonstrate ESG practices, while motivated by ethical intention, can have a double-edged effect. The research provides novel insights and practical recommendations for policymakers, managers, and stakeholders, aiding in the development of effective ESG policies and strategies.