ESGC & Downside Risk

ESG Combined Scores & Firm Downside Risk

STOXX Europe 600 | 2016 Q3 - 2025 Q4

N.R. Gogu & S.J. Rajalakshmi | Antwerp Management School | Prof. Jan Annaert

-1.73e-5

Coefficient

t = -4.97

NW Statistic

p < 0.001

Bootstrap p

23,269

Observations

927

Firms

39

Quarters

Main findingHigher ESGC predicts lower next-quarter downside volatility

DriverControversy component, not standard ESG (insignificant at p=0.054)

Effect size1 SD increase in ESGC reduces downside vol by 3.6%

PortfolioQ5-Q1 spread of -149 basis points, significant at all lags

RobustnessNegative in 30+ specifications across DVs, betas, and sub-periods

CausalityDSV Granger-causes ESGC (p=0.03) but not vice versa

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Controversy Decomposition

Pillar Decomposition

ESGC at fixed ESG

-2.93e-5

t=-5.88 | Signal strengthens

ESG at fixed ESGC

+1.78e-5

t=+3.22 | Reverses sign

Controversy Gap

+2.59e-5

t=+4.79 | Risk-increasing

Environmental

-9.39e-6

t=-3.05 | Strongest pillar

Social

-1.87e-6

t=-0.56 | Not significant

Gap + Quality Ctrl

+3.39e-5

t=+5.04 | Strengthens

49/68 specifications negative

Strategy	Sharpe	Max DD	Avg DSV	D.Beta
Clean	0.221	32.9%	0.01243	1.24
Mid	0.296	35.6%	0.01230	1.36
Top Decile	0.318	42.8%	0.01262	1.49
Unscreened	0.253	30.9%	0.01240	1.27

Lag	ESGC -> DSV	DSV -> ESGC
1Q	F=0.45 p=0.501	F=4.77 p=0.029
2Q	F=1.30 p=0.273	F=2.49 p=0.083
3Q	F=0.94 p=0.419	F=3.37 p=0.018

01

Main EffectESGC negatively predicts next-quarter downside volatility (t = -4.97, p < 0.001)

02

RobustnessStable across 30+ specifications, sub-periods, sectors, and alternative risk measures

03

Economic SizeMonotonic quintile sorts: Q5-Q1 spread of -149 basis points (p < 0.001)

04

MechanismDriven by controversy component, not standard ESG (insignificant at p = 0.054)

05

EndogeneityReverse causality (DSV -> ESGC) exists but does not invalidate cross-sectional prediction