How to Mitigate the Impact of <scp>ESG</scp> on Beta: The Hidden Power of Internal Controls

ABSTRACT Among the various literature streams, the impact of Environmental, Social and Governance (ESG) on company's value drivers has raised importance from both stakeholders' and shareholders' perspectives. In this context, the systematic risk component (CAPM's beta) emerges as a critical factor that needs to be deeply analyzed, taking into account ESG. Since the relationship between ESG and the systematic risk is largely controversial, this study aims to explore this latter by also considering the moderating role played by two types of internal controls: the audit committee independence and the ESG‐related executive compensation. To reach the target, an analysis on a sample of 200 non‐financial European listed companies observed from 2015 to 2023 has been performed with a fixed effects estimator and random forest. Findings reveal an inverted U‐shaped relationship between ESG score and beta as well as a moderating role played by the internal controls, providing several theoretical and practical contributions.