Companies that invest heavily in environmental, social, and governance (ESG) practices are less likely to face corporate failure or unstable earnings, according to new academic research by Durham University Business School.
The study also found that this direct link between corporate risk and ESG investment is even more pronounced when an organization’s primary stakeholder is its pension fund. While the study was carried out on the tourism sector, the findings are also relevant to other sectors.
Conducted by Omneya Abdelsalam and Antonios Chantziaras – both professors of accounting and finance at Durham University Business School – alongside colleagues from the University of Bristol, the International Hellenic University, the University of Macedonia, and Hamad Bin Khalifa University, the study sought to identify the impact that investing in ESG performance had on corporate risk in tourism firms.
To do so, they studied an international sample of tourism firms – spread across 26 different countries – between 2002 and 2018, tracking their survival status as well as their focus on ESG performance.
They found that those with higher ESG scores had a 1.22% lower risk of volatile earnings and a 12.4% lower probability of failure compared with those with weaker ESG performance.
The reason, the researchers say, is because ESG practices strengthen stakeholder relationships and governance, creating resilience in a sector highly exposed to global shocks.
“Investing in sustainability is becoming increasingly important for firms – especially in the tourism sector – as they work to reduce carbon emissions, demonstrate ethical practices, and strengthen their reputation,” says Professor Omneya Abdelsalam.
“But while these reasons are valuable in their own right, our research highlights another benefit: a strong ESG score can act as a safety net for a firm, helping to lower risk and improve its chances of survival.”
The findings carry important implications across the tourism sector. For managers, ESG can be used strategically to attract investment, build lender confidence, and strengthen governance, helping firms better withstand shocks in a volatile industry.
The research was first published in the ‘International Journal of Finance and Economics’ and is now available on an Open Access basis.
