Exploring the relationship between ESG score and systematic risk in the European stock market

Abstract Addressing a gap in the literature, the analysis explores how ESG score relate to systematic risk over time, with particular attention to the Environmental, Social, and Governance components, which have received limited attention to date. Therefore, this study examines whether the relationship between ESG score and systematic risk has evolved over time in the broader context of the transition toward a sustainability-oriented economy, employing a market model based on the Capital Asset Pricing Model (CAPM) framework developed by Sharpe. Using a panel dataset of financial and non-financial firms included in the STOXX Europe 600 Index between 1 January 2008 and 31 December 2022, we present empirical evidence of a decline in systematic risk following the adoption of the United Nations’ 2030 Agenda in September 2015. This reduction is more pronounced among companies with higher ESG scores. Similar patterns are observed across the individual E, S, and G dimensions. The implications of these findings are twofold. Theoretically, they reinforce the expanding literature suggesting a negative correlation between ESG performance and systematic risk. Practically, they offer relevant insights for policymakers and regulators, highlighting the value of integrating ESG considerations into risk assessment, monitoring, and management frameworks to support more effective systemic risk mitigation strategies. This study contributes to the body of research analysing the relationship between ESG factors and systematic risk, which is currently not fully explored and with conflicting results. Extending previous studies, we investigate the effect of overall ESG scores together with their distinct components (E, S, and G).