The ESG Impact on Financial Stability: Evidence from China

Abstract: Systemic risk management is always of vital importance for financial stability, meanwhile Environmental (E), Social (S) and Governance (G) are a popular framework on a global scale which is used to assess business risks and opportunities. However, there is relatively little research about the relationship between ESG and systemic risk, especially in developing markets. Therefore, this study aims to analyze the joint and separate pillar effects of ESG on financial stability measured by Yuan ΔCoVaR in developing markets and selects the Chinese market as a case study. Publicly available stock price is used to estimate the value at risk (VaR) using the basic historical simulation method. After calculating the VaR, a quantile regression is applied between the systemic loss and individual loss to obtain the CoVaR and ΔCoVaR. We then obtain theYuan ΔCoVaR by making ΔCoVaR in Yuan terms. The regression of Yuan ΔCoVaR on ESG is then built by a fixed effects model. Using a sample of 20 Chinese publicly traded commercial banks over 2017-2021, we find that a higher level of ESG indicates higher systemic risk. Furthermore, the separate pillars of ESG have a significantly positive relationship with systemic risk.