This paper investigates the relationship between sustainability and market risk using a Markov-switching CAPM with endogenous transition probabilities. Using a panel of 2881 U.S.-listed firms over the period 2005–2024, we show that improvements in ESG scores increase the likelihood of transitioning to, or remaining in, a low-beta regime, and in some cases even a negative-beta regime. We further document that, during periods of pronounced market drawdowns, the probability of being in a low-beta state is higher for firms with stronger ESG performance. Overall, our findings support a defensive, and at times safe-haven, role for high-ESG assets.
Tracking risk transitions: ESG scores and market beta dynamics / Morelli, F., Nicolosi, M.. - In: FINANCE RESEARCH LETTERS. - ISSN 1544-6123. - 103:(2026). [10.1016/j.frl.2026.110183]
Tracking risk transitions: ESG scores and market beta dynamics
Nicolosi M.
2026
Abstract
This paper investigates the relationship between sustainability and market risk using a Markov-switching CAPM with endogenous transition probabilities. Using a panel of 2881 U.S.-listed firms over the period 2005–2024, we show that improvements in ESG scores increase the likelihood of transitioning to, or remaining in, a low-beta regime, and in some cases even a negative-beta regime. We further document that, during periods of pronounced market drawdowns, the probability of being in a low-beta state is higher for firms with stronger ESG performance. Overall, our findings support a defensive, and at times safe-haven, role for high-ESG assets.| File | Dimensione | Formato | |
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