Ups and Downs on the ESG Journey

This thesis is presented in the form of three studies addressing the impact of ESG activities on firm risk and value. Each study explores both the downside risk and upside potential of ESG activities. As part of ESG, this thesis also examines exposure by firms to the physical and transitional aspects of climate change and climate risk. The results show that ESG activities overall, and especially social activities in S&P 500 firms, reduce downside risk and upside reward, resulting in increased firm value. Examining the physical and transitional aspects of climate change exposure, the results show that increases in these forms of risk encourage environmental innovation in firms, leading to decreases in downside risk although upside rewards are limited. However, this relationship weakens when climate policy uncertainty is high. The physical risk of extreme heat events brought about by climate change leads to changes in operational performance by reducing labour productivity and increasing electricity expenses. For depreciation, the results contradict with the arguments. However, engaging in environmentally innovative activities, such as building green buildings or acquiring clean technology, counters the negative effect of extreme heat exposure for firms. The findings from this thesis provide important evidence for managers, policy makers, and governments to consider when supporting and funding green investments to maintain firm value, employment, and economic growth.