Green Choices, Grey Areas: Risk Management and Investor Behavior in the ESG Landscape [védés előtt]

Higher corporate responsibility can mitigate risk. However, the specific channels through which this occurs are not yet clear. Operational risk can serve as the root cause for risks through the frequency and severity of operational risk events. The dissertation explores using fixed effect panel regressions and Heckman selection, how ESG scores correlate with the severity and frequency of operational loss events. Here, we seek to understand if companies with better ESG scores are more resilient when faced with operational challenges. We find no evidence for the effects of ESG performance on the frequency of corporate misconducts. However, we conclude that a one-unit of improvement in the ESG, E, or S scores decreases the severity of corporate misconducts by 3.55%, 2.85%, and 3.57% respectively. Consequently, one standard deviation (19.42) higher ESG score decreases loss severity by 50-58%, which is a significant effect also in economic terms. The aggregate effect can be attributed to pillars E and S, because G scores are not significant in most of the specifications, which is consistent with findings in the empirical literature. We also dig into the relationship between ESG scores and various operational risk events in detail. The examination is essential given the various types of operational risk events, which often occur independently, sometimes influenced by external factors. Thus, it is beneficial to analyze these events individually. Based on the findings, only events leading to physical damages occur with a higher likelihood in companies with elevated ESG scores. However, the severity of damages can be significantly mitigated by companies with strong ESG performance, especially those damages arising from improper business practices. The dissertation later shifts the lens to the investors, exploring how their past financial experiences influence their decisions regarding ESG investments. Motivated by the literature of behavioral economics and finance, we study with a portfolio approach, whether investors ...